Disruptions are all around us and supply chain has a critical role in making companies successful in the new environment. For example - Globalization, which started earnestly in the 1990s, is getting disrupted. Many multinational corporations are struggling to compete in developing countries.
Look at Amazon’s struggle in China. Market research firm Euromonitor estimated that Amazon had a 1.3% share of China’s online retail market in 2016, a decline from its highest point of 2.1% in 2011. How is a formidable company, that is credited for changing the whole U.S. retail landscape, barely making a dent in China? Most executives in the western world confuse this with nationalism. However, it is not. Amazon is finding the competition from local incumbents such as Alibaba and JD.com intense, membership programs are not popular, and some of their technology is lagging behind the competition. The bigger challenge is that Amazon’s global offering does not attract Chinese consumers. Alibaba is now planning to enter the U.S., challenging Amazon in its home turf.
The same goes for companies across industries whether it is Apple, McDonald’s, KFC, Unilever, GE, PepsiCo, Procter & Gamble, AT&T, and others.
Most CEOs do not associate supply chain with helping companies be successful in disruptive markets. They feel that traditional strategies of incremental product innovation, more marketing dollars, and M&As will solve their problems. Unfortunately, that is not sufficient. Here’s how the supply chain can help companies in the changing global environment.
Globalization and Challenges
Trade agreements such as WTO, NAFTA, and others in the 1990s allowed western companies to take their products and services to untapped developing countries. The products in these markets in the early days were so far behind that the multinationals just copied their global products and business models in these markets. However, things have changed.
First – the local populations are demanding products that are more suited to their taste. For example, consumers in developing countries like handsets with two SIM cards to avoid making out of network calls, and like cameras that optimize for their skin tones. Unfortunately, iPhone is still tuned to western taste and doesn't provide these features. Chinese smart phone companies are making products that are suited to local requirements and have already captured 40% of global market.
Second – centralized production (regional or global) is not helping companies win. It is limiting choices to consumers and increasing the cost of products with features that nobody wants. A recent analysis of the auto industry shows that businesses that have targeted product offerings such as Maruti Suzuki, Great Wall, and Subaru are likely to be more profitable than companies that have generic offerings such as Volkswagen, Toyota, GM, and others.
Supply Chain can make customization a reality.
To win in developing markets, companies need to develop products and solutions that suit local markets. It is not possible with the current thinking on supply chain where centralized production and lower production cost is given more importance than customization. To introduce customization in the current supply chain thinking of centralized production will be a disaster. I already hear supply chain leaders starting to complain that they cannot handle complexity. Their supply chains are getting overwhelmed.
Companies will have to start an entirely new way of thinking about their supply chain where customization for local markets will drive success.
How can companies make customization work?
Think distributed manufacturing – This would mean having smaller production sites that cater to local demand and can quickly respond to market changes. It is similar to the concept used by Zara – produce as close to the demand as possible. Unit cost trade-offs will have to be made at the design stage instead of expecting supply chain to produce a fully loaded product at a cost lower than optimized product from local companies.
Segment supply chain by demand pattern – Most companies have single “do-it-all” supply chains, which, like most do-it-all concepts, do not do anything very well and can get bogged down. Now imagine supply chains that cater to disparate demand patterns differently. It is about breaking the supply chain into multiple parallel flows, so that each flow can be optimized for the type of demand. Think of car manufacturing: GM, Ford, and others have factories for their fast-moving products, which use robots that are laid out along an assembly line. It is highly cost efficient, and throughput focused. For slow-moving items (such as snap-in upgrades), it makes sense to have a modular design. So, depending on what's ordered, the manufacturer can switch the modules to create the finished product. The approach avoids holding up the manufacturing line if a module is not in inventory and completes the order when modules become available.
Benefits of Separated vs. “One Size Fits All” Supply Chain
Develop local suppliers and talent – To make distributed manufacturing work, companies should also take advantage of local knowledge by actively using local vendors and talents supported by global centers of excellence. Local vendors and talent will bring a host of knowledge about local conditions that may not be available to folks working at other geographies.
Of course, the incentives and organizational structures will have to support the new way of doing things. A challenge that leaders have failed to pay adequate attention.
Suman Sarkar is a Partner with Three S Consulting. His mission is to deliver business excellence through supply chain and sourcing to help clients achieve a competitive edge in the marketplace. With more than 20 years of international consulting experience, Suman has a proven track record delivering an innovative and strategic approach to the Supply Chain and Sourcing practice with outstanding results. His most recent book, The Supply Chain Revolution (AMACOM), is available on Amazon. It has more details on the topics covered in the article.