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How to Turn Your Supply Chain into an Innovation Engine

Dec. 13, 2014
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.

Tune the Supply Chain to the Demand

Many companies worry about keeping a steady supply of inventory on the shelves instead of better understanding the ebb and flow of demand. Conventional wisdom suggests inventory placed closest to the customer will help meet demand. But what if inventory was replaced with information?

With the right data, organizations can ensure that product is not only available when the customer wants it, but also at the right time, in the right quantity and at the right price, giving the organization a competitive advantage.

Two key supply chain factors can make the difference: forecasting and lead time. Forecasting, coupled with product segmentation, can predict which product meets customer demand. Reducing lead time for the right products can allow for quicker response time to meet customer demand.

But just as the paint industry evolved from forecasting individual buckets of green, blue and yellow paint, to reacting to current demand by mixing paints in the store, a demand-driven supply chain could mean cornering the market for a new product introduction.

A supply chain that helps its business react to real demand helps build game changing products and business models.

Analytics is the Answer

Over the past few years, analytics has become an increasingly prominent term in the C-suite’s vocabulary. Most business leaders, however, have not figured out how to integrate analytics into their operations and how it can be a driver for innovation. Turning data into meaningful insights is a challenge, but one which can lead to new business ideas and processes.

For many companies, the simplest form of analytics is looking at customer demands and patterns; then leveraging the gathered insights to build innovative and differentiated services—delivering greater value to the consumer and the businesses bottom-line.

A wireless networking company, for example, used segmentation analysis to provide them with insights into market behavior for different customer channels. With the proliferation of new products and configurations, they had lost sight of the subtle market dynamics that were influencing their demand. Through segmentation and forecast analytics, they were better prepared to have the right inventory closer to the market segment with high demand for certain products and configurations.

The supply chain is an untapped source of this crucial business data.

How to Take an Idea into Practice

To look at how the supply chain can be a differentiator, organizations need to ask themselves a variety of questions:

  • What’s our new big idea?
  • How does our supply chain influence those big ideas?
  • What are the drivers behind customer behaviour that are being enabled by the supply chain?
  • How can our supply chain strengths be exploited to bring a new product or service to market?

To answer these questions, organizations need to start looking at their supply chain through the lens of the marketing and product management teams.

In general, the supply chain is an afterthought, brought into the fold late in the product design and manufacturing stage. Bringing marketing, product managers and even engineering teams into the supply chain fold can help enable big, creative ideas. When the supply chain is brought into the early ideation and design process, it can truly function as a hub for growth and innovation.

Going back to the paint example, when a hardware store sets a goal to deliver any color of paint to their customer within 30 minutes, it forces them to think about meeting that goal in a completely different way than simply shaving a day or two off of their product delivery times. Integrating a manufacturing process that takes advantage of the supply chain to customize paints in the store created a key differentiator.

Setting “Big Goals” will force that type of out-of-the-box thinking. Harnessing the power of the supply chain can help be the key differentiator to meet those goals and approaching the supply chain with an open mind can open up new markets and product lines.

To keep with the theme of paint, when looking at a piece of art, it is important to take a step back, and not focus on any individual color or stroke, but rather see the bigger picture of how all the elements work together.

Erwin Hermans is vice president of supply chain services at Celestica, a provider of electronics manufacturing services (EMS), including design, prototyping, assembly, testing, product assurance and supply chain management.

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