Supply Chain

Supply Chains Break Out

Shedding an obsession with costs, supply chains embrace new operating models and high-quality service.
David McCannNovember 29, 2017
Supply Chains Break Out

Since the notion of supply chain management emerged in the 1800s, the focus has been on transporting parts, materials, and finished goods from point to point at the lowest cost. Companies are still trying hard to do that today, of course. But increasingly, other objectives are taking priority.

In particular, companies are using various digital technologies that, among other effects, eliminate certain supply chain activities and players. These steps may reduce costs, but their underlying purpose is to facilitate the creation of new business models based on other motivations, such as leveraging contemporary consumer buying preferences.

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As a domino effect, such macro changes are pressuring business-to-business suppliers to refine their own business models. In so doing, one eye may be trained on taking advantage of the altered environment, the other on plain survival. At the same time, some companies are taking a hard turn toward using quality as a competitive weapon. That can result in lowered costs but it also can mean actually adding costs to achieve the improvements.

“Cost is not the hottest topic in supply chain today,” says Matthew Lekstutis, supply chain consulting lead for Tata Consultancy Services. “Instead, you see many new kinds of supply-chain models.”

Even where squeezing costs out of the supply chain remains a key goal, there’s less effort devoted to it. That’s because it’s becoming more difficult to do, notes Rick Pay, principal of supply chain consulting firm R. Pay Co. Today, an increasing portion of supply-chain activity is accomplished under multiyear contracts with software-as-a-service vendors, third-party logistics firms, and other service providers. “That turns them into fixed costs over the life of the contract,” Pay says. “Companies negotiate the terms up front, of course, but once they sign, they’re locked.”

Any Way You Want It

One of the most impactful changes for supply chains stems from retail’s broad, ongoing shift to omnichannel distribution. “Omnichannel” means companies provide customers with multiple ways to purchase and receive products. The trend has resulted in vastly increased direct-to-customer shipments, which carry exponentially higher costs than sending pallets of products to stores.

Nike is among a number of companies building online infrastructure that allows consumers to design their own products. In Nike’s case, customers select options from menus of shoe fit, color, style, and performance characteristics. “It’s called customization of scale,” says Lekstutis. “It changes the entire economics of the supply chain.”

Rick Pay

Rick Pay

The direct-to-consumer trend is not cost conscious — it’s driving a surge in product returns, imposing additional costs for repackaging, repairing, storing, reselling, and perhaps discarding returned items. “Many consumers are buying online with the idea that if the item doesn’t fit or isn’t the right color, they can just return it,” notes Pay.

But while it may seem impossibly inefficient to essentially create a different product for each customer, that’s only the case if a company tries to do it within its existing manufacturing and supply-chain structure, according to Lekstutis.

Nike and other companies are supporting the direct-to-consumer model through the use of “additive manufacturing,” otherwise known as 3D printing. Manufacturers and wholesale distributors are considering or actually starting to install banks of printers in factories and warehouses to print products or parts on demand. “3D printing is a disruptive digital technology that enables significantly shorter lead times,” Lekstutis says.

Additive manufacturing mitigates some of the increased costs imposed by omnichannel distribution, by reducing shipments from factories to distribution centers and lowering inventory-management costs. If 3D printing of products were to achieve a critical mass, Pay observes, “the way companies would manage their inventory is that they wouldn’t have any.”

And manufacturing quality wouldn’t necessarily suffer, especially if 3D printing technology continues to improve. Already, many 3D-printed parts are at least as accurate as machined ones, according to Pay.

Doing It Better

On the quality front, the fact that purchasing departments are creating more-detailed requests for proposals (RFPs) is telling, according to Bryan Eaves, a partner at Sourcing Business Solutions, a provider of supply chain process-improvement services.

A company looking for a logistics provider to handle customer returns is now interested in more than just cost, Eaves says. It will typically ask more questions related to quality: How will the vendor get products fixed before they go back to customers? What kinds of innovative ideas has the service provider generated to improve quality?

Breaking with a longtime norm, companies are trying to position supply-chain quality as a differentiator, says Patrick Van den Bossche, a partner and board member of management consulting firm A.T. Kearney. Van den Bossche says he’s working with several companies that are heavily promoting their delivery speed, visibility into their supply chains, and proactive risk management.

“In every industry there’s a role for a company that’s the early mover and one that’s the cost champion,” he says. “Now companies are emerging that want to be seen as the high-quality, low-risk option.” That orientation has been triggered in large part by all the supply disruptions in recent years, including tsunamis, hurricanes, and West Coast port strikes, Van den Bossche explains.

To enhance delivery speed, companies are switching from reliance on electronic data interchange to cloud-based application programming interfaces for accepting and processing many orders. That reduces processing time from hours to minutes, he says.

For boosting supply-chain visibility, suppliers are using a new generation of cellular-based shipment tracking technology featuring improved battery life. The most advanced tracking systems transmit real-time information on a shipment’s location as well as factors that could affect product quality like temperature, humidity, vibration, shock, air pressure, and light.

Such changes allow a supplier to demonstrate confidence in its distribution network by, for example, contractually agreeing to larger penalties for breaching service terms.

“If a supplier can guarantee it will always provide customers with the raw materials they need, no matter what, that’s a pretty powerful commercial advantage,” says Van den Bossche. “That’s quite exciting for supply chain professionals, because they’ve typically been stuck on cost.”

Existential Threats

Many companies, of course, both manage their own supply chains and play a role in the supply chains of other companies. In the latter context, strategies are increasingly about how to survive and thrive in an environment where virtual marketplaces are displacing physical ones.

The ripple effects from the business models of Alibaba and Amazon can weaken traditional suppliers or eliminate them, and often those suppliers aren’t replaced. Now, both Internet retail giants are working to build technology-enhanced package-delivery services that promise to undercut long-entrenched market leaders Fedex and UPS. Uber and Lyft are cutting heavily into the businesses of other transportation providers and their suppliers. And, in many markets, Airbnb is besieging the businesses of lodging providers.

“If technology exists that may make a company’s role within a supply chain obsolete, then that company needs to look at the collective ‘cradle-to-grave’ activities that go into the procurement, development, and final sale of any particular product or service,” says supply chain consultant Alex Calderone. “It needs to figure out where there may be opportunity to make up for anticipated losses in market share that could stem from emerging technologies and changing business models.

“Where the company positions itself within a supply chain is going to be far more important than how it manages the costs of its own supply chain,” Calderone continues. Moreover, it’s clear that the era of new technologies and business models disrupting supply chains is only beginning.

For example, says Calderone, the expected wide-scale deployment of autonomous cars means that auto manufacturers will develop self-driving fleets that allow them to “sell” the same car thousands of times by providing a type of on-demand taxi service (which may itself threaten Uber and Lyft).

Infrequent, high-priced transactions (auto purchases) will be replaced by soaring volumes of low-priced transactions. That means consumers’ demand for car ownership will decline. Companies that supply auto manufacturers with metal and other materials face a dire future unless they find ways to disrupt their own business models.

Other industries that could become collateral damage, according to a recent CNBC report, include insurance and auto repair, as accidents decline; commercial parking, as driverless fleets remain on the road most of the time; and urban real estate, as easier commuting shifts residences to suburban areas.

Lasso Your Data

The need to keep pace with changing markets poses a significant quandary for many companies. IT analyst firm Gartner coined the term “bimodal capability,” referring to a company’s ability to tend to its existing business while exploring opportunities centered on leveraging new technologies.

But while Gartner has presented bimodal capability as a golden fleece of sorts, the need to stay on target regarding current goals while also getting ready to withstand — or trigger — industry disruption is a significant quandary for some companies.

To establish the type of bimodal supply chain envisioned by Gartner, a company first must recognize that industry disruption is imminent, says Tata’s Lekstutis. Next, it should create an environment that prioritizes capturing data on a ubiquitous basis across the business. That should pave the way to begin using that information to define all of the business’s product characteristics, bills of materials, transportation modes and lanes, lead times, quality specifications, and network, supplier, and customer characteristics. “It sounds daunting, but most of the data exists — it just needs to be connected,” Lekstutis says.

The next task, he adds, is cleansing the data to avoid things like inconsistency. For example, a company almost surely will use different numbers to refer to products or parts than some of its customers or suppliers do. A similar problem could arise from freight carriers having different tracking numbers for parts or products. Global standards body GS1 is developing data standards designed to overcome some of those issues, Lekstutis notes.

Such activities can drive robust value from a supply chain, value that enables no less than a reinvention of a company. “If you want to tap into some leading-edge thinking in business, supply chain is really where it’s happening,” says Pay.