In the previous blog entry of this series, I have outlined a customer centric business model, which is also captured in my book The 5-Star Business Network. Now let us delve into the evolution of supply chain models, or how Supply Chain 3.0 came about.
The customer centric model mentioned in the previous post is still a model of last decade and later in this piece we will see the reasons for this assertion. First, let us examine the impact of this model in practice of the commerce as conducted by many companies today. Due to persistence of traditional supplier-buyer relationships, when this model is applied across multiple organisations it morphs into an unworkable hierarchical structure shown in Figure 1 below.
Imagine if 5 of more organisations are linked in a multi-layer structure shown above. Unfortunately, that happens to be the case with many large organisations that compete with Apple in the market-place today. While such a structure minimises cost and responds predictably to all external stimuli, it is not suitable for the world of rapid change we live in today.
Today, businesses collaborate in a robust network
Success of Apple has shown that in the next decade this model needs to be supplemented by an even more evolved model which we have called Efficient Global Leadership model (EGL model for short). In this model we recognise that no single organisation by itself is in a position to service all the needs of a customer relating to even a single product. The fact is that two or more, in general three organisations come together as a supply chain, work together collaboratively, to fulfil the customer’s need.
As shown in Figure 2, each one of these organisations work in close harmony with each other, where the research & development teams of each organisation work together as do marketing teams and even sales teams of these organisations.
To create products, and then to manufacture those products, the production teams and the procurement teams work together to put those products in customer’s hands. In such a model, close collaboration is required among the supply chain partners to create market and sell the products.
Similarly, close cooperation is also required to produce the products, move the products and store the products in such a way that highly innovative products are produced in shortest period of time at a fraction of the cost of traditional products and put in customers’ hands extremely quickly.
Needless to say, when Apple manages to put out one innovative product after another in the market place, it is not only its own innovation but also an innovation of all its partners, which is at play here. Only when companies work together in such an efficient leadership model, do they achieve the level of success which Apple has achieved over the last 5 to 10 years. Figure 3 reminds one of the team huddles as shown below:
When an individual works on his own he is neither very efficient, nor very effective. That is the key reason, from early civilisations, humans have created organisations that give them the benefit of either effectiveness, or efficiency, or a bit of both. Figure 4, on the other hand reminds one of camel trains or dog sleds – where one animal is closely following another as shown in the picture below. Now imagine what would happen to the whole camel train, if the first beast lost its way!
Naturally, the question is why is this important? Think about it for a minute. In fact, stop reading and just reflect on the metaphors. A camel train was a great technology – but is now largely redundant. Moreover, with a limited room to collaborate, it is essentially a command and control organisation. In periods of rapid development, if such organisations stick to the tried and tested, they get left behind by their more innovative peers.
If you would like to see how Supply Chain 3.0 differ vastly from its predecessors, please read the next blog entry of this series.
Why do companies achieve far worse performance than what could be feasible with their superior hiring and training capabilities? It appears as if there are some invisible chains that are constantly pulling these companies back all the time. Something significant yet intangible is acting as a brake that inhibits the functionality of the business, causing each component to operate at less than its full value. Everyone is doing their best under the circumstances and their personal and departmental priorities, yet there is always a gap in the inter-functional integration.
What is this gap, and how does it happen? How does this gap harm you and your company? In my newest book, Unchain Your Corporation, I explore these questions in greater detail.
Businesses are gradually being chained by a number of forces so ubiquitous and accepted by all of us, that we fail to notice their impact on businesses, economies, and people. Today, most organizations become veritable bureaucracies as they grow bigger. Every person sits inside his/her own department and is very careful about making sure that their department doesn’t carry the blame if there is a mix-up. Covering the tracks becomes the norm. The resulting departmental silos create stilted communication.
Interviewer: Ric Bratton of This Week In America
Interviewee: Vivek Sood of Global Supply Chain Group (author of The 5-STAR Business Networks)
Here is the entire transcript of the interview:
Ric Bratton: Welcome back everybody! This Week In America, thank you for joining us! Our website is www.thisweekinamerica.us. As promised, coming up in a program an interview with the man who has the world’s most interesting job. He once was a ship captain like Captain Phillips, had a real-life fight with pirates at sea and now he helps CEOs and their companies with business transformation to boost profits and do it rapidly. He has more than 400 projects, they’ve spent approximately 84 countries and 5 continents with clients ranging from Fortune-500 companies to innovative green-technology companies. And he says he has more fun every day at work than he could ever imagine. Vivek Sood – our guest back on the program, representing “The 5‑Star Business Network” – that’s his book. Vivek, welcome to the program, it’s great to have you with us!
Vivek Sood: Thank you, Ric! It’s a pleasure every time to talk to you.
Ric Bratton: Oh, it is! Are you still having fun every day?
Vivek Sood: Oh, yes! The fun never stops, this is a beautiful job. Like I said last time, doctors save lives and we save livelihoods.
Ric Bratton: That is so true. When you go in and you are able to offer a lifeline to some of these companies, it really has to mean so much to them. Vivek’s website is www.5starbusinessnetwork.com. The book is called “The 5‑Star Business Network”. Information, of course, is on our website www.thisweekinamerica.us. Let’s start off by talking about something very important, we touched it last time. You said that the world economy is changing forever. It should get people’s attention, that is now changing forever. Talk about that. Why all of a sudden we are seeing this shift?
Vivek Sood: Ric, there are many factors. I guess the biggest factor really is Internet or connectivity. Global connectivity has made services and knowledge available to people, that was never available before. In a way, basically, you cannot trade on information asymmetry or, in other words, the arbitrage opportunity. The ability to fool somebody, because you have more information than them, does not exist anymore. That is probably one of the biggest shifts that has happened on a global level. Along with that, of course, China and India, two very big nations, each one of them is 1.3 billion people or so, they are now finally joining up the global economy after about 150-200 years of being in hiatus. Such a massive shift is definitely going to cause an upheaval in the global economy, there are no two ways about it.
Ric Bratton: I mentioned that you’ve worked in a number of countries, I think you visited and traveled to 150, you have clients in 80-85 countries. And looking at what we are in the United States, Vivek is coming to us from Australia as we are doing this. As for the Unites States and out companies, are we positioned in a good shape or are we playing catch-up with this?
Vivek Sood: Ric, the best US companies are still the best in the world, there is no doubt about that. You look at companies like Amazon or Apple, they are definitely some of the best companies on earth. But there is also another hard fact, that US being a very large country of nearly 300 million people, as well as a very rich country, has never had to look outside its shores for business. Small to mid-sized enterprise, even a large enterprise really looks outside US almost as an addendum to its core business. So US is seen as the core business and the rest of the world are seen almost like incidental business. That is probably one of the biggest problems that a shift to globalization hasn’t happened in the minds of many large companies, let alone small or mid-sized companies.
Ric Bratton: Our guest on This Week in America is Vivek Sood. His website is www.5starbusinessnetwork.com and his book is called “The 5‑Star Business Network”. World’s foremost authority in global supply chains. And let’s talk about that. Exactly what are we talking about when we are talking about global supply chains?
Vivek Sood: OK, global supply chains are very easy. You look at an iPhone, iPhone 6, for example, which has just been released by Apply. Obviously, one of the biggest markets for their product is the United States of America, but when you look at the product itself, well, it is designed in California. The parts come from all over the world, there are companies in Taiwan, in China, in Malaysia and many other locations, which are manufacturing parts, which finally are assembled in a place in China. And that’s how this product is being made, and then it is being sold all over the world. Now that is a massive shift from how computers were manufactured when Apple first started manufacturing the computers in California. So that’s what I mean by globalization of supply chains.
Ric Bratton: How are businesses responding to the shift? Are most of them on top of this?
Vivek Sood: Some are, definitely, like Apple, the example I just gave you. They are totally on top of it. They are not only using global enterprises to manufacture, they are also using the global enterprises to design, in fact, even understand the consumer preferences around the world and create products that are acceptable to consumers around the world. Others are still thinking of it in a very narrow way, where people inside the company are telling the CEOs. I can even give you an example of a Korean company, which is one of the biggest competitors to Apple, they are still thinking in a very narrow way. They want to do everything in house, perhaps just within a small national boundary. And the more they are trying to do that, the more they fall behind their competitors.
Ric Bratton: Vivek Sood is our guest on the program on This Week in America. We are talking about his book “The 5‑Star Business Network”. Business-to-business network, something that we talked about on the last program, you talked about in the book and something you stress as being really important. Explain exactly, how that is. It sounds very simple, and some businesses go “yeah, I’ll get a Facebook page and I’m part of this new wave, this new phenomenon”. Talk about business-to-business networking and how it’s done right.
Vivek Sood: OK, so what people think of LinkedIn or Facebook as very large networks, which they are and they are very useful as well. But when you look at business-to-business networks, the scale is absolutely staggering, it’s mind-boggling. Facebook is about, let’s say, a hundred billion dollars. But when you look at just one industry – let’s say, automobile industry, the global supply chain of automobile industry runs into trillions of dollars. So all the ancillary unit providers, which are based in Far East, for example, combine that with all the assemblers and designers, and suddenly you have a global supply chain, which is worth trillions of dollars and works like a clockwork to put the next model of automobile out in the market place. This is just one example, you can think of chemicals industry, you can think about pharmaceutical industries, you can think about retail industry, – each one of them has a very diverse, a very widespread, very tightly neat global business-to-business network, a global supply chain, where the enterprises are working together with each other to put the final product in the hands of the consumer.
Ric Bratton: You’ve said that most miss the network that is hidden in plain sight. When you think about it, it’s sometimes too obvious, you are trying to make it more complicated than what it is.
Vivek Sood: I’m actually trying to make it simpler than what it is, Ric. In the end, they are actually very complicated networks. Think about it this way: today, if you wear a leather jacket, the cow comes from somewhere, the leather is tanned somewhere else, after that it is cut in another place, perhaps 2 thousand miles away from there. Then it is stitched into a jacket in another place, and finally it is packaged and sold in totally different place. It is far more complicated than most people actually think. And management of that global scale as well as scope of business-to-business network, and actually extract profits out of it, it is an art and it is a science, it doesn’t happen just by coincidence.
Ric Bratton: Vivek Sood, our guest on the program. His book is called “The 5‑Star Business Network”, his website is www.5starbusinessnetwork.com. Of course, this information is available on our website www.thisweekinamerica.us and you can link on directly to Vivek’s website and get information. Why do so many companies seem to get it wrong and struggle?
Vivek Sood: Ric, look at what is happening inside the companies. If you look at the senior executives or CEOs, they have come through the ranks in pyramid structure and they are used to work in a particular way. They face very intense pressure, by the way from their investors, from the Wall Street, who want the profits, who want to take advantage of the shift in the global business scenario. However, when they go internally to talk to their own teams, the internal teams basically have done business in only one way in the past, and that is the only way the know of doing business. So what they see around them, if you are a C-level executive, you see a massive waste around you, you see a massive loss of opportunity. And you just don’t know how to wrap your arm around it, and how to actually squeeze the waste out of the system, and how to actually get rid of the confusion and complexity. That is perhaps their biggest blocker, in my mind.
Ric Bratton: When you go in and you deal with companies, – and I mentioned at the beginning that you deal with companies of all sizes, all around the world, – when you go in and start laying out your ideas, and again, you mentioned that sometimes the corporate culture is very slow to respond, what kind of response do you get when you go in and you say: “OK, here’s what I think you should be going, here are the changes that really need to be made to be competitive on a market place today”? What kind of response do you get?
Vivek Sood: Ric, the most important thing we do for our clients is basically get rid of the complexity. So what we do is very clearly, we lay out the supply chain in a very systematic manner as it exists right now, and then we look at several different models of supply chain within their industry, but also outside the industry and we have now a track record of 50 years of doing this in our company for a variety of industries. We have these models in our mind, but we also work with the internal teams to create this permutations and combinations. And finally we choose the best model that works for this particular company. In each case, inevitably we end up saving humongous amount of money for the C-level executives and their companies.
Ric Bratton: You know, what’s interesting is, so often you hear of companies and when they decide to go through a transformation, it’s downsizing, it’s reducing force, it’s redundancies, things like that. Can you downsize your way to success?
Vivek Sood: Never, very rarely. In fact, in my view, if you have come to a point where you have to go through mass redundancies and just last week a very large IT company had to declare mass redundancies again, in my view, it’s already too late. Somebody has missed the obvious writing on the wall, the massive waste within the company was overlooked for long enough, so that the situation has come to a point where the knee-jerk reaction is that the Wall Street or the investors want results. And what’s the quickest way to get results? Let’s do downsizing. But that’s a very temporary solution. In the end, that will end in eroding the core competency of the business itself.
Ric Bratton: We talked about the companies, which are getting it wrong and struggling. Let’s talk about some of the companies, that you could say they are doing it right, and how they are doing it, because they are thriving and they are positioned to take advantage of this global economy.
Vivek Sood: Oh yes, there are lots and lots of companies that are doing it, and I continue to have this conversation with companies and work with them. Yesterday I had a very interesting conversation with three different companies, each one of them is a massive company, and each one of them is actually on the path upwards! Yes, many of them are sort of trying to stumble their way into that kind of new paradigm with new supply chains, but many others have become very systematic about it. How to take a supply chain, from supply chain 0.0 to supply chain 1.0, to supply chain 2.0 and then further on to supply chain 3.0. Now these are all a little bit technical terms, I understand that, but there is a massive difference between these. It’s almost like three different models of an aircraft.
Ric Bratton: Interesting! Vivek Sood, our guest on the program, his book is called “The 5‑Star Business Network”, it’s available on Amazon, all across the country, all the places where books are sold, and at his website, which is www.5starbusinessnetwork.com. Information available, of course, at our website. Vivek is a supply chain corporate strategist, managing director of the Global Supply Chain Group. A couple of minutes left of the program, let’s talk about some of the benefits of business-to-business networks. We’ve talked about the role it’s going to play in this transformation, it’s a network that’s there for you. Let’s talk about some of the benefits, tangible benefits that businesses will see, trying to engage their business-to-business network.
Vivek Sood: Absolutely. So, Ric, first thing is of course, as you cut out the complexity, you create much better understanding of the very complex business-to-business networks and supply chains in the business. With this understanding comes the ability to manage, the ability to control, ability to actually have much more influence that you ever had before. That’s probably the first benefit. Once you have an influence, you can actually start moving the ship in the right direction. I used to work in a ship, so imagine, if every time you turn the radar, you don’t know which way the ship is going to turn, just because you don’t have the control. Once you have that kind of control, you can actually start taking ship in the right direction. And, of course, with that comes higher profitability, much happier customers, for example, because your service levels are much better. More innovation, creating better products faster, working with your suppliers and suppliers’ suppliers, as well as working with your customers to create products that the consumers actually want, to get higher margins on those products, to actually customize the supply chain in a highly segmented manner, where each supply chain is structured for a particular customer segment and getting the maximum profitability out of the segment, because now they’re much happier with what they’re getting than they were ever in the past. I see this on a daily basis, by the way.
Ric Bratton: Yeah, and this is not theory that you’re dealing with, you had over 400 business transformation projects and the success rate of 100%. So you are actually able to take this into the market place and literally turn businesses around. I’m sure, keep some businesses fluid and allowing them to hire people, to keep the business going.
Vivek Sood: Absolutely, that’s what gets us out of bed every morning. It’s like a doctor who is very happy about saving lives as we’re saving livelihoods! In the end, having that kind of impact on businesses and creating much more effective as well as efficient businesses is rewarding itself.
Ric Bratton: Well, it’s a pleasure to have you back on the program. Vivek Sood, the book is called “The 5‑Star Business Network”, his website is www.5starbusinessnetwork.com. Information, of course, at our website www.thisweekinamerica.us. The book’s available at Amazon, all across the country and you can order the book by going to the website www.5starbusinessnetwork.com. Vivek, it is always a pleasure! Thank you so much for joining us, look forward to having you back on the program. Thank you and keep smiling!
Vivek Sood: Thank you, Ric! Very nice to talk to you again! And have a very good day!
Ric Bratton: Thank you! I love the passion for what you are doing, it’s a pleasure to have you on the program!
Every time I fly out of Australia to Europe, I face a choice – whether to fly the national airlines Qantas, or another airline such as Singapore Airline or Emirates.
However, when it comes to its alliance partners, Qantas leaves a lot to be desired.
Most of the time I choose Qantas because of my long association with the airline, and the trust it has built with me over those 25 years. However, when it comes to its alliance partners, Qantas leaves a lot to be desired. Iberia managed to lose my baggage and left me with no clothes to wear to an important meeting.
British Airways and Heathrow almost always continue to amaze me with how low a company can fall in short space of time – and then continue to fall further almost on every experience.
I wonder how many other passengers – especially frequent business travelers – feel the same way about their preferred airline where they dislike the alliance partners so much that they are switching loyalties just for that reason.
On the other hand, the rival alliance has some strong airlines – Singapore Airlines, Lufthansa to name a couple – that will beat any of Qantas alliance partners hands down. This creates dilemma for me every time I fly internationally out of Australia. My latest experience with British Airways and Heathrow Airport has convinced me that no matter how much I love Qantas, I have to stop allowing that to interfere with my comfort, safety and convenience in other locations where Qantas hands over the relationship to its alliance partners – who do have to keep the same standards.
Most industries have now morphed into business networks of supply chains that compete with other business networks of supply chains for customer dollars.
But the airlines are not the only companies that lose customers, or suppliers because of their partners.
Most industries have now morphed into business networks of supply chains that compete with other business networks of supply chains for customer dollars. This transformation in business world is best highlighted by my using the sports of soccer and hockey as an example.
While many companies are still grasping the full implications of this massive shift in the business landscape, others have already adjusted to the new reality where A-team players only play the game A-team while the others are left to play with the rest. This not only applies to your supply chain partners, but also to the knowledge intermediaries such as the universities, consultants and brokers.
They used to say that a person is known by the company s/he keeps.
I think, in the modern commercial world of networked businesses, we have come to a stage where a company is known by the company it keeps.
All the attempts at social media corporate manipulations are futile if your business network and supply chain partners carry a millstone of bad reputation around their neck.
Some of that bad reputation will rub off on to your business – no matter how much you try the social media management.
I came across the following picture on the blog of Thaku Huni and the thought struck me about a situation I encounter quite frequently:
If you asked any objective person about the KPIs of the group of six men above – most people will agree that at least on quality (meeting customer specifications about the rails) this team will rate 0%.
Yet, if you asked this team, they might in all honesty, claim that at least one rail is meeting the opposite side – so their quality rating should be 50%.
Time and time again I encounter this situation. Let me give you one example. I have to fly frequently for client assigments, and Qantas our national carrier rates its on time performance quite highly. Yet, numerous times they have just cancelled my flight and moved me to the next flight, or done many similar things to meet their publicly declared on time performance targets.
And, Qantas is not the only airlines to do this. Over the years, I have noticed that the tricks employed by airlines have included blaming mechanical failures, blaming weather, moving the departure times in case of delay, coming up with a plethora of ‘exclusions’ to maintain their impeccable on-time departure record.
Almost all KPIs are suspect till you get to the depth of how they are defined, how they are calculated, how the data is collected and analysed. A quick example to make it real.
A large logistics company was the preferred supplier for our clients – a multi-billion dollar fast moving consumer goods company. The logistics company would every month send reports proudly claiming on-time delivery track record of close to 100%. When our team delved into the details it because clear that the due dates/times for any deliveries likely to not meet the target would be quietly changed to indicate the new delivery times. Voila – near 100% track record.
Obviously, the deliverables must be pre-agreed and held firm barring exceptional circumstances. KPIs must not be allowed to be doctored to shore up the numbers, lest they become meaningless exercise in data collection and analysis.
BAD KPIs are WORSE than no KPIs. I would rather navigate a ship without a gyro compass, than with a faulty gyro compass – because I can do better with a reasonable magnetic compass than with a faulty gyro.
Now, I am sure that I am not the only one who has come across these type of incidents. In fact most experienced business people will have their own experiences – some more colourful than others. If you want, share your favourite tricks in the comments section below. You might even win the best entry get a prize – my latest book.
Now that all the factories have moved to China (or some such places as Vietnam, Bangladesh, Taiwan), and all the customers have moved to the PC (or some such places as mobile phones or tablets) what will happen to all the middlemen?
The retailers, the wholesalers, the shopping centres, the warehouse parks, the dealers, the brands, the long established cosy relationships, the long martini lunches, the twice weekly afternoon golf games and the executive chefs in the board rooms?
Many people are asking this question in many different ways. While the scenario above has not fully transpired yet, and, may indeed never transpire in such a stark detail, many companies are starting to ask “what if that happens”.
Consider, for instance, all the happenings at Alibaba. The Chinese e-commerce giant went public in the US with an IPO that stirred the world at large and the online retailing world in particular. If you are wondering about the reason, then look at the numbers below. As per Wall Street Journal
In 2013, the combined transaction volume of Taobao and another Alibaba-run shopping site called Tmall reached $240 billion, says a person with knowledge of the figure.
The total is more than double the size of Amazon.com Inc, triple the size of eBay and one-third larger than the value of all the transactions last year at the two U.S.-based e-commerce giants combined.
People stood up to take notice only when there were widely reported news reports that just in one day (the Chinese version of Black Friday), Alibaba achieved nearly $5.75 billion in sales (on just one of its website), which was three times more sales than the entire country of USA achieved on Black Friday.
Reportedly, almost the entire valuation of Yahoo is based on the value of the shares it holds in Alibaba.com.
More such amazing facts are available from this report on Business Insider. As per The Economist, analysts predict that the Alibaba IPO will value the company somewhere between $55 billion and more than $120 billion.
That would make it the most valuable 5-STAR Business Network on earth – with transactions reportedly surpassing $1 Trillion a year soon.
Lately, Alibaba has partnered with US company ShopRunner to bring American goods to China. It has also been active in “shopping” for lucrative relationships with retailers, buying shares instead of acquiring the whole business.
This is obviously only the beginning of its full potential – although B2B exchanges have been in the offing for nearly 15 years now. Many are warning that as B2B exchanges mature into adulthood, they could easily start to restructure the whole global supply chains. No wonder the entire media world is going gaga over Alibaba’s prospects.
Even those who recognise the hype cannot help but wonder if the sad state of retail is somehow connected to the seemingly unstoppable Alibaba force and the trend it heralds. For example, one highly respected fellow blogger (Steven Dennis) recently stated in his blog,
As a former Sears senior executive I’ve followed the once mighty brand’s journey from mediocrity to bad to just plain sad. What a long strange trip it’s been.
When I left in late 2003 we were gaining traction in our core full-line department store business and piloting several important growth initiatives. To be fair, whether we could pull off the necessary transformation was highly questionable. But one thing is now certain. The subsequent actions taken under a decade of Eddie Lampert’s leadership have assured the retailer’s demise.
So, what will happen to the retailers, the shopping malls, the brands and the dealers? Will Alibaba, and its Chinese direct suppliers kill all these? Not so fast! While e-commerce is changing the face of corporate America, there are many reasons Alibaba will not be as successful as projected by the alarmists.
Firstly, there is another company to think about – a home-grown version of it. A yet unknown part of Amazon is AmazonSupply.
Predictive shipping and unmanned drones are made more prominent in the news agenda.
Meanwhile, Amazon’s “unsexy” B2B business, a “$8 trillion bet”, has been growing silently in the background, perhaps making it eight times bigger than Alibaba and the biggest 5-STAR Business Network on earth.
AmazonSupply, a wholesale and distribution hub, started in 2005 and has grown to carry 2.2 million products, ranging from office equipment to industrial components, materials and more.
After nearly 15 years of languishing on the wayside, the B2B exchanges are finally coming true, slowly. Already, wholesalers are whispering about the threats from AmazonSupply; although many specialty wholesalers and distributors are somewhat confident that their turf is safe from the giant’s claws due to their highly segmented market.
Nonetheless, nobody knows what will happen in future.
AmazonSupply, Alibaba, or B2B exchanges, could become so powerful that they will suck small players into their enormous vacuum of suppliers. The process can even accelerate if trust keeping mechanisms are built into B2B exchanges. Seller and buyer ratings, as well as seller/buyer protection seen on sites such as eBay and PayPal are not enough to cover the sheer size of B2B transactions.
Even the current rating system on Alibaba will not suffice, should this attractive market grow in the years to come.
The current trust keeping mechanism in international trade is Letter of Credits, which has been around for hundreds of years.
It is defined by Investopedia as: “A letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase.”
To keep up with the pace of change, new supply chain finance mechanisms must evolve, something that can deal with the increasingly globalised supply chains. Only with sustained focus on supply chain finance, can B2B exchanges morph into true 5-STAR Business Networks.
While traditional sources of supply chain finance have a vested interest in keeping the status quo, new supply chain finance mechanisms have been slow to emerge and remain an opportunity for the likes of Amazon, PayPal and Alibaba. If they crack that nut, the rest is open slather.
Once these mechanisms break through, the face of global supply chains and global commerce will change for good.
I hope by now you have grasped the business model in which Supply Chain 3.0 resides. Before we examine all the concrete benefits of Supply Chain 3.0, let us briefly differentiate it from its predecessors. Table 1 sets out to do that:
Table 1 – Supply Chain Metaphors
|Supply Chain 0.0||Supply Chain 1.0||Supply Chain 2.0||Supply Chain 3.0|
|Mathematical Principle||2+2 ???||2+2=4||2 & 2 = 5||2 & 2 is 22|
|Physical Metaphor||Folk lore||Mechanical (Newton)||Quantum (Max Planck)||Relativity (Einstein)|
|Organisational Metaphor||Brownian motion (Chaos)||Chronometer||Orchestra (feel the well-arranged and rehearsed music)||Schools of fish (see the spontaneous music in action, changing every second)|
|Key Co-operation Mechanism||None||Control (Forced)||Co-ordinate (Labored)||Co-create (Spontaneous)|
|Economic Metaphor||Barter – primitive economy||Free Markets – Invisible hand||Managed Markets – Firm hand||Networks – joined hands|
|Key Actors||Gangs (Tribes)||Individuals||Organisations||Networks|
|EconomicGuru||None||Adam Smith||J. M. Keynes||Barry Nalebuff|
|Management Guru||None||Peter Drucker||Alfred Chandler||C.K. Prahalad|
I must add here that this is yet a preliminary table; many of the concepts being presented here are still being explored. To the best of my knowledge they are articulated for the first time in The 5-STAR Business Network. I am leaving the full discussion of this table to future blogs because it will take a lot of time to explore the fundamental differences between each generation of supply chain and the triggers that launched the next generation.
Whether you are a small, mid-market or large corporation, whether the economic volatility is high or low, whether the economic growth environment is high or low – in almost all situations for every company, supply chain 3.0 provides outstanding benefits over and above its predecessors.
Because it helps leverage the power of business networks with external partners. Let me explain further.
Who says Elephants cannot dance – all you need is good music
Large businesses are notorious for moving too slowly and being less nimble than their smaller counterparts. Layers of management, volumes of policy and procedures, risk management protocols are all designed with good intent. However, over a period of time as the intention becomes blurred and the link between the purpose and edict becomes more and more tenuous. In other words, old companies just get old and sclerotic, and lose their suppleness.
Dozens of large companies are discovering that the best way of retaining nimbleness in face of above situation is to formulate tight-lose supply chain relationships with other, more nimble companies. This is not restricted to business process outsourcing arrangements, or Japanese style Kieretsu structures. Almost all companies try and keep their labour force numbers flexible by using some form of sub-contracting, for example. At a higher level of value added, collaboration between entities for research, new product development and customer solutions creation increases the nimbleness and responsiveness of old age corporations.
If the impression so far is that supply chain 3.0 is only for larger, more established companies, it could not be more wrong. In fact, supply chain 3.0 is even more useful for smaller companies who can project their strengths and best attributes on a far wider scale using their 5-STAR Business Networks.
Now Red Bull is a large company, but cast your mind back a few decades when it was a small start-up competing in the global beverages industry against much larger giants. Gaining traction in more than 100 markets in a matter of 2 decades against the formidable competition who took nearly 7 decades to do that was no small feat. It would have been next to impossible without due regard to a close network of business partners and service providers.
But Red Bull is not the only example of a smaller player running rings around their much larger competition by configuring their 5-STAR Business Network.
We have helped a number of our client corporations achieve similar results in industries as diverse as solar energy, retail, chemicals, heavy engineering, machine tools and FMCG. More pertinently, we have used the same concepts in our own business to help our clients create results far superior than our top-tier strategy consulting competitors could. Most clients are surprised when they come to our office when they see how small our core operations is – because based on our results and global reach, they expect our company to have a much larger regular payroll.
Find out the concrete benefits of Supply Chain 3.0 in the next blog entry of this series.
As you can see, supply chain 3.0 is for everyone, small and big companies. Now let me demonstrate the concrete benefits of having supply chain 3.0 and I promise these are not dull or irrelevant stories.
Over the past several decades, both the global economy as well as the business structures have evolved dramatically to such an extent that now most businesses have no recourse but to strive and create business networks using unique custom designed supply chain 3.0.
Because no company – not even a company as big as Boeing – has all the resources necessary to create next generation products in shortening product development cycle times.
Faced with competition from A380s and the next generation Airbus planes, Boeing set out to reconfigure a business network of infrastructure to develop, design and build the 787s in record time. Despite the usual development hiccups – trials and tribulations – this drive towards supply chain 3.0 saved tremendous infrastructure costs for Boeing, and created goodwill around the world.
In my book The 5-STAR Business Network I quote the incident that when the Tsunami flooded the eastern coastal stretch of Japan in March 2011, the ensuing nuclear disaster combined with the devastation caused by the tsunami to disrupt businesses around the world. Japanese economy sits right in the middle of the global business network and it was natural for businesses as diverse as auto manufacturing, electronics, chemicals, petroleum products, computers, metals to experience the disruptive shock.
For example, the price of the Toyota Prius went up by nearly $2,400 due to rumours of shortages. While it is natural for a variety of businesses to experience the disruption, it was remarkable to note that those businesses which had the most responsive and resilient supply chains were the ones to recover from this catastrophe the quickest.
Another stark example of the power of supply chain 3.0 is that of the fire which tipped the balance within an industry. Two stalwarts in the mobile phone industry in March 2000 were equally impacted by the same event – a lightening fire in the chip manufacturing plant of their common supplier, Philips, in New Mexico.
Both Nokia and Ericsson experienced the business disruption to an equal extent as a result. Fire damage to the stocks was extensive. More importantly, the manufacturing capacity was damaged and it was difficult to estimate the time for repairs. Nokia has invested months, if not years, in creating and perfecting a robust and responsive supply chain, while Ericsson’s supply chain was relatively a middle-of-the-line affair that worked well when things were good.
After the fire, Nokia was able to see the full impact of the chip shortage on its own business, as well as the entire industry with a lot more clarity than Ericsson, and even Philips. Moving quickly, it activated other parts of its supply chain to shore up supplies, to redesign some of the chips to manufacture them in other plants, and to take other pre-emptive steps. Ericsson let the situation evolve at its own pace and made decisions more reactively. The resulting gain in profitability and market share for Nokia, and the loss of these for Ericsson tipped the balance of the industry to an extent where within a few years Nokia pulled far ahead of the Ericsson which never caught up with its erstwhile equal rival.
Find out how Supply Chain 3.0 can improve your cash position, help you gain speed and smooth out volatility in the last blog entry of this series.
I have set the scene in the first entry of this blog series. Things are changing, moving, and old business models are not working anymore. That is why I proposed even a new organisational model in my book The 5-STAR Business Network from which some of the following excerpts are taken with modifications.
It is a well-known aphorism in the circles of architecture that form follows function. In other words, the structure of a particular unit, in general, evolves to facilitate the functioning of that unit. Moreover, if the form does not match the function, the structure will change or the function changes over a period of time.
While conducting research, we examined the organisational structure of more than 50 companies; almost all of them looked variations of the generic structure given in the figure below:
The titles in the boxes, as well as placement of the boxes, vary quite a bit; however, most companies still agree this is the best way to look at how they are organised to serve their customers’ needs.
At the same time, most of these companies have evolved within the last 2 decades; their functioning has become almost entirely customer centric with their customers’ priorities driving most of the business workings.
In our work with corporations, I have frequently found that the supply chain structure frequently results in limiting the effectiveness of the organisation. The traditional structure of the organisation shown above frequently stifles customer responsiveness and innovation. In the modern outsourced-globalised world, a traditional structure with very strict hierarchies and internal walls between departments is a hindrance rather than an aid for achieving success in business.
In today’s hypercompetitive world of consumer electronics, Apple is a standout among peers as great as Sony, Samsung, Panasonic, Motorola, Nokia and Dell. With convergence, all of these companies are vying for their share of consumer wallets with increasingly similar looking products which do similar things. What did Apple do that its market value now nearly surpasses Microsoft’s? How did it manage to get over entrenched competitive advantage of companies such as Sony, Motorola or Nokia?
Our work in global supply network strategies and supply network design has convinced us that a modern distributed organisation needs to look at redesigning its explicit structure to keep up with the realities of the modern world. The business world has changed tremendously in the last 20 years.
A typical supply chain now runs across multiple continents seamlessly, through boundaries of several organisations, to finally serve a customer with a unique product. To do so, organisations have created de facto structures, which are far different from the traditional structures that they have put in their organisation charts.
The purists might argue that this does not really matter if the organisations are already acting in accordance with a de facto structure – an argument which holds some merit. However, people who make up an organisation respond to the explicitly shown structure with much more enthusiasm and clarity that to a de facto or mutually understood structure.
I believe that organisations should formalise their de facto structures and use them to gain further competitive advantage. For this purpose, we have created the following model:
The customer centric model shown in Figure 2 starts with customers at the apex of the organisation. Clearly, it is the customer’s need which the organisation is trying to serve and aligned to this customer is the sales team, which is in direct contact with the customer all the time.
The function of the sales team is to have intimate understanding of the customer needs, customers’ usage of its products and their demographics, psychographics and profile. Only then can an organisation create successful products, which will gain wider acceptance in its customer base.
An organisation can outsource almost everything it does, but it can never outsource its sales. Sales are a fundamentally, integral part of an organisation’s structure. Virtually everything else but sales, could be done outside the organisation. However, two other key functions which are equally important and support the sales teams and also customer phasing are marketing and research & development. Between them, these three – sales, marketing and research & development – form the top tier of the modern organisation’s structure. However, both research & development and marketing can be outsourced, so long as the company and its core team control the outsourced entities.
Forming the second tier is the foundation of the organisation – the supply chain, which incorporates procurement, production and logistics. They are the support base or the backbone of the organisation, which are frequently outsourced either to single provider or to a multitude of ‘best-of-breed’ providers around the world in such a way that the customers’ needs are met seamlessly without any visibility of where any of these activities are actually carried out. It is interesting to note that this customer centric model merely illustrates the actual structure that most modern organisations have evolved into.
What’s surprising is that most business schools and management theories are still persisting with outdated organisational models of 80s and 90s, which bear no resemblance to the actual way businesses are choosing to structure their organisations. Please read the next entry in the series to find out how models of supply chains have evolved.