Your Supply Chain is Obsolete

Today's supply chains aren't ready for the emerging demand economy


Similar to the revolutionary factory within a factory concept developed by Professors Bob Hays and Steve Wheelwright of the Harvard Business School, we must now develop multiple value-focused, customer-centric agencies within one over-arching enterprise. The multiple customer intelligent agency organization structure implements the critical customer-centric design elements of orchestration of demand, collaboration of suppliers, and adaptable operations built to enabled complexity and use demand pull balancing to create value. Knowledge workers will be pulled out of functional silos and into the new customer intelligent agencies which are positioned very close to the customers with full functional capability, including marketing, manufacturing, quality, planning, procurement, logistics, finance and human resources. Enterprise-level executives will continue to set overall policy and implement controls to ensure continuity and to provide special technical support such as legal and treasury functions.

Can't Do It Down the Same Chain

In the new customer-centric environment, producers will be meeting a more diverse set of value propositions for a more diverse customer group. In general all of a producer's products will go down one of two routes: commodity or custom. Producers who adopt customer-centric strategies will have U.S.-based production for the U.S. market in either fully automated or highly flexible/adaptable factories.

The value proposition for commodity products is of lesser importance. Products have less variability, usage is standard and the supply chain can be longer. Producers must be willing to compete against the Chinese. As the demand economy evolves, the number of commodity products will decrease from an estimated 60 percent of all products today to around 40 percent in five years. For example, General Electric built a fully automated plant for light bulbs after faced with competitors from Eastern Europe selling bulbs for less than the costs of component raw materials, owing to government subsidies. In response GE removed all direct labor from the manufacture of GE's bulbs, which are now untouched by human hands until the delivery truck door closes. GE kept its high market share.

Products with non-standard usage will travel down the custom route. As the discerning customer moves toward sophistication, under the current system the supply chain lengthens, increasing time. The more demanding the customer is, the more personalization is desired. The new economy will bring products with customer-determined features and an instantaneous fulfillment model, dealing with days, not much longer.

The supply chain for customized products needs to be more adaptable and shorter. For example, Best Buy now boasts a video games center in its A stores, at which customers can configure and order electronic products for delivery in a few days and bundled with appropriate software and service support by the Geek Squad.

Supply management best practices are dramatically different between custom and commodity, and the transition from one to another approach is very tricky and dangerous. Two typical reactions occur: One is to increase stocks of finished goods to be able to respond to variability in demand, which will take an enormous amount of working capital. The other is to outsource to reduce costs, compete on price and ignore the complexity, which will cause lost sales and share. Both will fail.

Companies that stick with the old supply economy structures based on cost and supply will lose market share to ultra-low-cost Chinese manufacturers, as has occurred with PC boards, electronic assembly, knocked-down (KD) furniture, barbeque grills, clothing and very soon auto parts. If the Chinese decide to take a market, it will be done within two years. U.S. producers can control their futures, rather than allow the Chinese to dictate the terms. But companies who move manufacturing to China or other third-world locations — then decide to transition to the demand economy — will be unable to make the transition back to the United States and time advantages, as the infrastructure will have been disabled. The best strategy is to change the rules of market engagement to a time-advantaged strategy based on value creation within a well defined space.

Dynamic Tools to Deal with a Dynamic Economy

To meet the demand economy's needs for flexibility and speed, producers must employ two major strategic actions:

  • Restructure the supply chain into a demand network

  • Reposition the customer value proposition

Restructuring the supply chain into a demand network. A chain is defined by linkage and dependency; if one link of a chain is pulled, all of them move. Conversely, a network is defined by independent movement and action. It is a more dynamic system to deal with a more dynamic economy. A network represents a different mindset about collaboration and cooperation. Networked people and companies can respond flexibly to opportunities and challenges. Suppliers are brought into the planning process at each level to reduce overall costs, improve supplier economies and reduce actual purchase pricing. The keys are greatly improved supplier communication and data timeliness, sensitivity and accuracy using private information networks, which are far superior to generic electronic data interface (EDI) communications.

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