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Merging physical and digital tools to build resilient supply chains

Using unique product identifiers and universal standards in the supply chain journey, the whole enterprise can unlock extended value

In partnership withGS1 US

Organizations are building resilient supply chains with a “phygital” approach, a blend of digital and physical tools. In recent years, the global supply chain has been disrupted due to the covid-19 pandemic, geopolitical volatility, overwhelmed legacy systems, and labor shortages. The National Association of Manufacturers (NAM), an industrial advocacy group, warns the disruption isn’t over—NAM’s spring 2023 survey found 90% of respondents saw significant (52.5%) or partial (39%) supply chain disruption during the past two years. Just 0.5% of respondents reported no disruption at all. Digitization presents an opportunity to overcome supply chain disruption by making data flow more efficiently, using technology and data standards to break barriers between disparate systems.

“Phygital merges two worlds together, where standards provide an interoperable system of defined data structures,” says Melanie Nuce-Hilton, senior vice president of innovation and partnerships at GS1 US, a member of GS1, a global not-for-profit supply chain standards organization. “The approach is intended to deliver multiple benefits—improved supply chain visibility for traceability and inventory management, better customer experiences across online and offline interactions, and the potential for better circularity and waste reduction by maintaining linkages between products and their data throughout their lifecycle,” she says.

Unlocking data value

Phygital systems blend digital tools and data standards with physical data carriers, such as barcodes. These tie products, assets, logistics units, and locations within a supply chain to digital information for enhanced accuracy and consistency. This capability, especially with more advanced data carriers, can help automate data flows and boost supply-chain visibility.

Newer barcode iterations such as the increasingly common QR codes (quick-response codes) or Data Matrix barcodes (codes with a black-and-white grid pattern), store more information—up to 7,000 characters, compared to about 20 characters for conventional bar codes. The technology is growing alongside its use in the supply chain. Grand View Research data measured the global barcode reader market at $7.3 billion in 2022, and projects it will maintain a 7% CAGR from 2023 to 2030.

By uniquely identifying products and tracking their supply chain journey with universal standards, Nuce-Hilton says, organizations can unlock extended value for the whole enterprise. This can lead to raising operational efficiencies, improving safety, attracting consumers, advancing energy efficiency, and decreasing waste. “Supply chain resilience isn’t just about the supply chain,” she says. “It’s about the whole enterprise coming together from a data, product, and execution point of view to create an immersive experience.”

The best of both worlds

Several industries have explored phygital connections to enhance user experience or speed up processes. There are multiple ways to connect physical objects to technology and standardized data; all can help make data accessible, sharable, and useful. These phygital connections of product data, financial facts, and information to real-world activity can lead to a more resilient supply chain, Nuce-Hilton says.

For example, retailer Pacsun launched a phygital venture—Pacsun Los Angeles Tycoon—in early 2023 with platform provider Roblox. This metaverse experience uses avatars so participants can connect and play games while viewing Pacsun’s 2023 summer clothing collection, bridging physical and virtual experiences. Nike also used phygital tools in 2022 in its Cryptokicks digital sneaker campaign with Roblox. Avid sneaker collectors can buy virtual sneakers as non-fungible tokens (NFT). Each unique digital pair is one of 20,000 customizable NFTs, some of which trade for hundreds—or thousands—of dollars.

Healthcare companies have invested in phygital track-and-trace technology like barcodes and RFID tags for patient safety: Global healthcare company Fresenius Kabi relies on GS1 DataMatrix, a two-dimensional barcode carrying drug information, for its product portfolio. German consultancy Roland Berger said in its 2021 Future of Health 3 study that such digital health care technologies are reaching maturity, pointing to not just tracking but digital patient monitoring, early detection devices, and using data for AI for diagnostics and therapies.

Phygital technology also helps the food industry keep food safer, while ensuring trading partners and consumers can get the products they want. Imagine, Nuce-Hilton says, a frozen pizza manufacturer whose products, with various expiration dates included in 2D barcodes, ship to hundreds of retailers from dozens of plants. With machine-readable expiration data, the manufacturer and retailer can know which products will expire and when, avoiding delays, inventory gaps, and empty shelves. A 2023 Zebra Technologies annual survey found nearly half of retail shoppers who left stores emptyhanded did so because their item was out of stock, an experience increasingly commonplace during the past two years, having increased by 26% since the 2019 survey.

Examining the business benefits

Phygital tools, with data standards and technology, deliver broad benefits to the enterprise, Nuce-Hilton says. These are some of the ways businesses can benefit.

Supply-chain traceability: Produce grower Ocean Mist Farms encodes traceability data, such as which crew picked the produce, the farm location, and packaging methods, in barcodes on case labels to enhance inventory management and order optimization. The grower calculates that barcodes, digital tools, and data standards help them achieve up to 35% in time savings compared to their former system.

Safety and quality assurance: Fast-food restauranteur Subway relies on barcodes for product data, which identify product expiration dates, best-before guidelines, and sell-by data. Traceability means faster and more accurate inventory management, and cuts down on human error. Data standards and technology empower them to quickly apply safety practices to protect consumers.

Improved sustainability posture: Consumers and investors increasingly want to see environmental, social, and governance (ESG) data. Companies can build trust by increasing availability of ESG data, providing accountability. Phygital ESG data can include such things has product origin, ingredients, biodegradability, production processes, and energy use.

More connected consumers: When customers scan object identifiers, they establish a phygital connection. This can provide customers with information such as how an item is made, ingredients, or geographical origin. Customers are interested: McKinsey 2022 data says customers who buy using omnichannel methods (a combination of physical, digital, and other experiences) shop 1.7 times more than consumers who don’t—and they also spend more.

Building for phygital success

Organizations can benefit—using standards, technology, and data—by putting their data to work more broadly, says Nuce-Hilton. She suggests the following:

Deploy the right technology tools: Advanced data carriers hold a large amount of information, so it’s critical to use appropriate analytics tools and IT resources to analyze and convert data into business insights. Throughout the supply chain, these tools can enhance inventory management, streamline logistics, and support traceability and sustainability.

Look to AI for speed: As phygital systems make it easier to collect product data, innovative technologies such as generative AI promise to up the ante by accelerating tasks, such as creating code and analyzing supply chain data to detect anomalies and recommend corrections.

Shape behavior around standards and collaboration: Increasingly complex supply chain ecosystems make collaboration and communication critical. “You can deploy any technology you want and call it what you want, but until the behaviors associated between trading partners change, you won’t be successful,” says Nuce-Hilton. Processes and underlying data structures are a common language for supply-chain partners.

Supply chain resilience is needed to meet fluctuating consumer demands, respond to unanticipated roadblocks, and satisfy ESG goals. Today’s business environment makes that a challenge, says Nuce-Hilton. “But we could change that, if we empower organizations with the data to make better decisions further upstream in the supply chain,” she says.

This content was produced by Insights, the custom content arm of MIT Technology Review. It was not written by MIT Technology Review’s editorial staff.

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