What is in this article?:
- How to Turn Your Supply Chain into an Innovation Engine
- Tune the Supply Chain to the Demand
A manufacturer's supply chain can deliver value that goes well beyond cost, quality and efficiency.
Highest quality. Lowest cost. On-time delivery. That's how companies typically view an effective supply chain.
But what if that thinking was replaced with a new vision of supply chain? What if business leaders start to view it as an engine for growth and innovation, a differentiator, and an enabler of product realization and marketing strategies?
Today’s modern supply chains are more than just a back-end conduit to deliver products on time. An organization’s supply chain can deliver value that goes well beyond cost, quality and efficiency.
Let’s look at how the old way of thinking can change.
An Enabler for New Business Models
To look at how the supply chain can be an enabler, business leaders need to shift away from looking at it as a back-end operations function and instead, as a front-end enabler.
Companies like Apple and Amazon have built their businesses by thinking differently. Apple has cornered the market in its supply chain to gain an edge in volume and scale, while Amazon has made supply chain its core business. Apple leverages its scale to lock up supply of key components, thereby shutting out its competitors and shaping demand by constraining supply.
Let’s look at another example, one from the painting industry, where constraints in the supply chain forced different thinking.
In the past, stores had to supply a wide variety of paint colors and finishes based on consumer demand estimates, building inventory and tying up working capital. Today, stores are able to mix and create paint colors on the spot, allowing them to easily respond to changing consumer demands.
The innovation which allows this instant paint mixing to occur is enabled by a supply chain working together with the product management and marketing teams toward a unified goal, reducing the theoretical lead time of paint from weeks to minutes.
Embracing customization within the supply chain is not just confined to paint stores. Dramatic changes to business models through supply chain innovation can be seen in several industries, such as same day/next day delivery in the parcel industry, mass customization in the consumer PC market and a rapid cycle of new product introductions in the retail clothing space.
To replicate this model, organizations should ask themselves how the supply chain can be a catalyst for innovation in their supply chain by delaying product customization to the last possible stage, customizing at the warehouse instead of the factory. And if so, they must determine how the supply chain can help to facilitate the new process and be a differentiator.
Having an open mind when examining a supply chain can turn an entire go-to-market strategy on its head—launching new products and services, and opening up new markets for the business.
Another area to explore is how collaborating with key partners can help build a unique business model. One example is Best Buy, which enabled a services business, Geek Squad, to complement its retail business.
Let’s look at a few opportunities where supply chain can act as a catalyst for growth and innovation.
Finding the Real Cost of the Supply Chain and Optimizing
Simply looking at supply chain costs will not show you the big picture. Developing a total landed cost model that looks at all price elements of a product will unearth insights about the supply chain that can be a platform for growth.
For example, let’s look at a cloud-based infrastructure company that outsources its manufacturing to two contract manufacturers. The current market for their products is heavily centered in the U.S., while growth is expected in Asia. The company’s product is highly configurable with long lead time components sourced from suppliers in Asia. In addition, demand is highly variable resulting in adequate, but not great, on-time delivery performance.
The primary contract manufacturer builds their product in Mexico, within a one- to two-day delivery interval to customers in the U.S., while the second contract manufacturer builds in Asia, with a three- to five-day delivery interval to the U.S. In this scenario, which contract manufacturing model is preferred?
Only a data-driven optimization model can provide enough insight for a rational answer. In this scenario, the contract manufacturer with operations in Asia proved to be the right model due to an Asia-based supply base. Additionally, high variability in demand and proximity as a result of long lead-time components allows for a better response time to customer changes at a lower total cost.
Assessing total landed cost can also serve as the foundation for product and category managers to lead product segmentation and portfolio optimization strategies, and at a tactical level, it can lead to increased profitability and target price competitiveness. Organizations need to determine the total landed cost of its products, which includes many different variables and is not limited to manufacturing and transportation to successfully optimize product portfolio. If a company has a six month oversupply of product, this will factor into the total cost as well. Similarly, opportunity cost of perishable demand is another element that needs to be included to get the whole picture. Tying front-end and market information to the supply chain can help gain these insights.