Here is a story of the fire than tipped the balance within an industry.
Two stalwarts in the mobile phone industry in March 2000 were equally impacted by the same event – a lightning 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 business network, while Ericsson’s business network 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 business network to shore up supplies, to redesign some of the chips to manufacture them in other plants, and to take pre-emptive steps in the network.
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.
Source: The 5-STAR Business Network http://www.5starbusinessnetwork.com
I write about The Supply Chain CEOs, The 5-STAR Business Networks and Unchain Your Corporations. My website is at http://viveksood.com
This is a million dollar question for most companies – start-ups or conglomerates. A lot of time and money is wasted either because the companies do not bother to ask this question in time, or try to answer it in the wrong way.
“What Comes First – Make, or Sell?” – this is a conundrum from
Here is my answer to a similar sounding question on a popular forum.
Let me tell you a story from my book The 5-Star Business Network – Vivek Sood | Global Supply Chain Group :
One of our large corporate clients faced exactly this dilemma when investing in the renewable energies sector.
In simple words, the dilemma was whether or not an entrepreneur with a good idea should go looking for customers or go looking for the ability to build the product/deliver the service.
Depending on the choice made at this point in time, the two models of innovation will look very different as shown in the figure below:
Alternate models of innovation
There are enough proponents for both types of models. In our work with clients, this conundrum has frequently surfaced and is always argued quite passionately by different senior executives in either of the two camps.
On one hand, there are the proponents of the Reaganomics supply-side theory – arguing ‘if you build it, they will come’. On the other hand are the more traditional thinkers arguing unless we have the customers and services pre-defined, how can we build anything?
In this story, as a way out of this dilemma, we listed the factors on which the decision was dependent. Among the factors were questions related to the certainty of the customer demand, such as:
• Are the real customers properly identified?
• Do the real customers know exactly what they want?
• Have the real customers communicated their demand to the market explicitly?
• How likely are real customers to change their minds?
• How easy is it for real customers to change their preferences?
On the other hand, there were several factors related to the level of innovation itself – whether it was just an incremental innovation or a giant leap. Key questions in this realm were:
• By what factor (multiplier) does this product/service improve the customer life?
• What are the existing means of getting the same value in use?
• What makes the new product better than the existing product?
• What tangible measures can be used to measure the superiority of the new offering?
• Do the real customer really value the new offering as superior as the provider does?
Based on these factors we developed the following matrix to enable answering the question:
Figure: Innovation Drivers and Supply Networks
In box 1 (red colour) – in a situation where the level of innovation is only incremental and the certainty of customer demand is very low – massive investments are required for customer education as well as for building a viable supply network.
This is because most potential supplier will see the situation as high risk and will only respond to monetary inducements to buy co-operation. A very high percentage of innovative efforts are in this square and, as a result, fail because of lack of deep enough pockets and difficulty of fighting the battle on two fronts simultaneously.
A basic supply chain would be the only possibility in this instance – where the organization has to move on two different fronts to build demand and supply simultaneously. This is shown in figure 8.3 (of the book mentioned above).
The key lesson for the players in the red box is that you need very deep pockets to fight the battle on both fronts – demand and supply.
If you lack that financing ability, try and move up or right – either find a niche of customers with pent-up demand looking for the right product/service by moving up, or move right in the matrix by creating a step change in the users’ lives by creating a product that far surpasses anything else available in the market place in terms of the customer experience.
If you cannot do either of these two things, keep looking for ways to make one of these two moves; or, consider scrapping the idea altogether.
Recall our client case study; the company, in this case, was in box 2 (light green colour) – with massive innovation but uncertain customer demand due to competing technologies promising similar magnitude of innovations.
In such a case, the business suffers from a chicken and egg situation. The customers do not buy because of some uncertainty, perhaps regarding which technology will ultimately win the battle; after all, no one wants to be stuck with a Betamax VCR and find that VHS standard has won the battle.
At the same time, the company is not in a position to invest too much in production capacity unless the customer demand is certain. Most businesses in this type of situation try and work with customers on a conditional basis – promising to build capacity if the orders are placed.
However, customers are not inclined to place orders because of the factors driving uncertainty in their own world. A way out of this situation then is to work with the supply network on a conditional basis – promising and delivering massive returns as the demand materializes.
The key is to find the right suppliers with the superior world-class capability and flexible capacity who are willing and able to understand the situation and work in it.
At the same time, flexible product design and investment in customer education to reduce demand uncertainty and increase buy-in also yield good results.
The need for flexibility, adaptability, ability to hold supply in readiness for the demand that builds up through education, clarity and events results in an adaptive supply chain that looks like alternative number 2 in the round figure above.
The key strategy is to make sure that suppliers and co-developers of technology and production capacity are fully on board with the plan and work alongside your business – as part of your 5 STAR Network.
If you have any doubts about any of the co-developers or suppliers, it is better to continue looking, negotiating and influencing till all the members of the 5 STAR Network are fully on board with you.
Consultants, think tanks, industry organizations, academia, research laboratories, brokers play a critical role in bringing together businesses that could form part of the same 5 STAR Network.
They play an even more important role in keeping the network humming smoothly, ironing out any wrinkles in the relationships. Such an adaptive supply chain is shown in Figure 8.4 of the book.
We have already seen how, in such an adaptive model, several organizations work together in an adaptive network to think and solve problems of their common customer/s.
Our client, an entrepreneur with massive innovation, used this model to work alongside some of the largest and best heavy machinery and engineering corporations in the world in order to bring their technology to the market successfully.
This was also a good example of the Fire-Aim-Ready (FAR) Innovation, but we will use yet another case example – of a much more ubiquitous product, an iPhone – later in this chapter to illustrate that effect.
In box 3 (dark green) above the situation is exactly the reverse. Imagine a pharmaceutical company trying to find a cure for cancer or a number of other old age infirmities.
As the population ages, the demand is already present and growing. However, on the supply side of the equation, the research and development are being carried out in the laboratories of large pharmaceutical companies and their collaborating partners in academia, scientific establishments, consultancies and other organizations.
The patent system, to some extent, restricts the collaboration – barring this anomaly every company would be keen to collaborate much more openly to gain part of the returns of a first mover advantage in a blockbuster product.
However, in any scenario, an adaptive supply chain similar to the figure above will result in far quicker and more effective innovation at a much lower cost. In fact, that is the reason for collaboration, despite the patent laws.
Successful strategies in this scenario will hold demand in Supply Chains till supply eventuates. At the same time, the business will make massive R & D investments to build further product innovation and sell limited quantities to early adopters under limited conditions – which is indeed the case in the pharmaceutical industries.
We will not discuss the box 4 (yellow box) in this article because such a scenario, where demand is highly certain and the level of innovation is mammoth, is rarely encountered in real life. Such opportunities are snapped up in a jiffy.
We have seen how the super-networked businesses use their 5 STAR Business networks to build adaptive supply chains and gain a massive advantage in the field of innovation. But this does not happen only in the fields of pharmaceuticals or high technology.
Apple, Amazon, Inditex and many other case studies dispersed throughout this book demonstrate clearly how super-networked businesses innovate better than the rest of the businesses in their industry.
Consider the case of Apple once more. Whether it is iPads or Apple TV, the company has never shied from firing first and then taking aim towards the target.
For example, the much maligned and a total flop Apple Newton, released around 1995, served as the key platform for the eventual success of iPads. Just because the technology or the public was not ready for the product, Apple did not shy away from testing, learning, improving, testing again, learning more and eventually succeeding.
As it succeeded with other products and learned the lessons (get the iTunes and iPod ready before launching iPhone) it has had less number of flops along the way.
Eventually, Apple will be ready with a unique, highly personalized and anticipated experience for each customer – which is the holy grail of the modern era. Most successful companies have followed similar Fire-Aim-Ready (FAR) trajectory to innovation, and examples abound.
If you have questions about your own company’s innovation strategy, send me an email on email@example.com or take our diagnostic survey. The results are always enlightening for senior executives, as they always bring up some blind spots. Covering these spots will save you a lot of heartache, time and money.
I write about The Supply Chain CEOs, The 5-STAR Business Networks and Unchain Your Corporations. My website is at http://viveksood.com
When I explain to people that supply chain 3.0 is real, in general, I get three type of responses.
In this blog I will address the first question. I will leave for later blogs the remaining two questions and other arising questions such as: how does supply chain 3.0 differ from the previous versions of supply chains, and, why it was even necessary to ‘invent’ supply chains in the first place.
The data driven crowd has a legitimate concern lest a couple of isolated examples be seen as heralding a trend. Having trained at a similar top-tier consulting house during my formative years in consulting, I fully understand and endorse their questions.
Because all of us have seen people taking isolated instances and exceptions and making them so big in their own and others’ perceptions that these appear to be the predominant trends. Nay-sayers will take a few stray instances of setbacks, blow them out proportion to support their naysaying.
On the other hand, almost all investment projects also have their share of overly optimistic projectionists.
For this reason, when I wrote the book “The 5-STAR Business Network“, our team did a 6 year longitudinal study of the top 1200 corporations around the world.
There were other reasons why this study was conducted – which are given in Chapter 14 of the book.
The full research methodology and the resulting ranking of the companies is also given in the book, but for our purpose here it is interesting to note that 62 companies out of the entire starting sample of the top 1200 companies in the world scored 20 points out of 25, which is our cut-off for the Supply Chain 3.0.
Interesting to note is that Apple – the darling of supply chain crowd – is only ranked #60 in the rankings.
And, due to its low margins, Amazon – just missed the cut.
So, apparently, the winners may not yet be as big as Apple and Amazon – yet they use their capital much more effectively.
So who are the top 35 companies in these rankings? You can see them in figure 1 below.
For the time being ignore the 5 colour coding, as well as funny three-letter acronyms (TLAs) in the figure. I am absolutely sure, that this figure is unlike any other figure you might have seen before. Note a few things below:
Firstly, the companies themselves come from around the globe – Novo Nordisk is from Denmark while Fanuc is from Japan and Falabella is from Chile.
That was to be expected – if you make your research wide and deep enough you will find good companies everywhere. No country, or continent has monopoly on excellence.
So much for all the hype about the Asian century. Sure, development in Asia is creating unprecedented opportunities – but good companies around the globe are using that trend to their benefit. You do not need to be an Asian company to be excellent, but neither are all non-Asian companies uniformly good.
Secondly, because this ranking is based on study conducted over 5 years (not at a single point in time) the standards of excellence are much higher. Also, this is a global study hence the sample base was much wider.
For this reason many of the usual suspects that you might have seen elsewhere in magic circles and quadrants etc. are missing.
Another reason, the usual suspects might be missing is because we looked far beyond tactical operations into the strategic contribution of supply chains to corporate results. For example, rarely has anyone tried to gauge the impact of supply chain collaboration on innovation, new product development, pipeline of products, product phasing etc.
But in our research, we took these into account. For details of the research methodology, caveats, cautions and warnings about not applying these results for investment decision making please read Chapter 14 of the book “The 5-STAR Business Network“. This is critical because I do not want you to take the results out of context and make decision based on flawed assumptions.
Time has come to talk about the 5 funny acronyms in the figure. This is because we want to see how these are linked to the strategic contribution of supply chain management to overall corporate results.
So, what do these TLAs stand for?
Figure 2 below shows the details: Figure 2: Five cornerstones of Supply Chain 3.0
Each of these names are quite self-explanatory and most people reading this blog will not need too much explanation. I will only briefly outline them here, because detailed explanation and examples mean that I will be recreating the book “The 5-STAR Business Network“ or a version of it in this blog. One more important conclusion needs to be drawn from the data presented in Figure 1.
You will notice that rarely is there a company which ranks high on each of the five key cornerstones of supply chain 3.0.
Yet, all the 62 excellent companies that meet our criteria for supply chain 3.0 excel in at least three of the five key cornerstones.
That shows you do not have to perfect to arrive at supply chain 3.0 – you only need spikes of excellence in at least three of the five key areas.
In the next two entries, I will write about each of these five pillars in more details.
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.
Supply Chain Management (SCM) is an essential element of operational efficiency. SCM is critical to business operations, therefore it is clearly important for a company to know, understand and master the supply chain.
Supply chain’s evolution can be break down into three generations. That is an easy way for companies to understand how to be more efficient and maximize the benefits of a good supply chain. The three generations of supply chain go from supply chain 0.0 to supply chain 1.0, then to supply chain 2.0 and eventually reach supply chain 3.0.
Now, an important question should cross your mind: What are the differences between supply chain 0.0, 1.0, 2.0 and 3.0?
Supply chain evolution is quite logical. The generation 0.0 represents the absence of supply chain. Business act is then individualistic, each group is on its side working without or with very weak cross-functional communication and relationship. A company which is intending to be a well-established player in its field cannot stay at this stage.
The first main change brought by supply chain 1.0 is communication. Communication channels at horizontal level between different departments are created which is break down the silos. In order to be more efficient, people talk with each other across the departmental line and planning and scheduling become a team work. An ERP System is put into place to formalize communication.
But such a supply chain can become a little bit inflexible. If a company wants to overcome this difficulty, it has to expand its circle of collaborators. All the groups of the company have to take part in brainstorming and collaborate for the creation of a more structured planning environment. That is the aim of supply chain 2.0: Helping the finance to work together with operations and sales in order to establish a coherent set of integrated business plans to shape one single business outlook that can be agreed on and actionable by everybody.
The next step is to go beyond this to an attractive flexible and structured plan. How can we do it? It is time for the company to reach the supply chain 3.0 and stop taking its positions for granted. The solution is called the flywheel of supply chain 3.0: create collaboration with suppliers and customers in order to create products at lower cost and higher degree of matching with consumers’ expectations.
Many years ago, I was engaged in a strategic transformation project in a mid-size airlines. For some curious reasons the airline was of critical importance to the national economy and occupied a very high position in the national political totem pole. Thus, almost every occurrence, every AOG (aircraft-on-ground, an emergency) and every ATB (air-turn-back, a bigger emergency) was part of the national TV and financial journal news. These AOGs and ATBs were so numerous that under pressure from the political masters who called the shots, the company had to start a full-fledged strategic transformation project. While conducting the initial diagnostic, I was intrigued to notice an extremely low morale within the engineering department. Despite very high quality of training, and abundance of very expensive tooling and parts, most of these highly qualified aircraft engineers were almost constantly running from AOG to AOG (one emergency to next). Even the corridors were gloomy, poorly lit and had oil residues. Yet, whenever I crossed over from the engineering department to the flying staff, the mood changed diametrically. Most of the pilots were very upbeat, the corridors were luxurious, well lit and thickly carpeted. It appeared as if the airline had two type of citizens – first class citizens who were the pilots and the second class citizens who were the engineers and the rest. Over time, the resentment to this class structure had built up to an extent where the second-class citizens were either apathetic, or perhaps even somewhat antipathetic. Today, while reading Ed Catmull’s book Creativity, Inc: Overcoming the Unseen Forces That Stand in the Way of True Inspiration about the story of startup of Pixar (the maker of Toy Story and many other blockbusters, which was sold by Steve Jobs to Disney for around $4Billion), I came across a similar theme. Here is how Ed describes it:
” Now, though, as we assembled the crew to work on A Bug’s Life, I discovered we’d completely missed a serious, ongoing rift between our creative and production departments. In short, production managers told me that working on Toy Story had been a nightmare. They felt disrespected and marginalized—like second-class citizens. And while they were gratified by Toy Story’s success, they were very reluctant to sign on to work on another film at Pixar.
I was already captivated by idea – I had noticed it earlier too, in many other companies though not to such a stark extent as the airlines example quoted above. In a hospital, I had observed that doctors were the first class citizens and the rest of the staff were second class citizens. In a steel manufacturing company, I had noticed that metallurgical engineers were the first class citizens. In a chemical company, the sales engineers who worked closely with the customers’ engineers had the most say. In one mid-size meat and livestock company, five out of top seven positions were occupied by people holding a PhD in veterinary sciences. I could probably recall dozens (or more) of such examples in a great deal of detail. In fact, coming from a prior background in the shipping industry, I could relate to this syndrome. In most shipping companies, Marine Engineers (not the Captains) carried most of the weight; they were responsible for spending (or saving) the most money on parts and maintenance. Thus, owners were always very focused on working closely with the engineers to minimize the costs. Interestingly, most airlines have not yet cottoned on to this fact, or the pilots’ unions are far too strong to do anything about it. To a large extent these biases are only natural, and to be expected. Yet, in many places they get excessive and dysfunctional. In many of the instances quoted above, the companies were a victim of such an occurrence (because that is why they were so easy to recall).Here is how Ed describes the situation in him company:
” If there was one thing we prided ourselves on at Pixar, it was making sure that Pixar’s artists and technical people treated each other as equals, and I had assumed that same mutual respect would be afforded to those who managed the productions. I had assumed wrong. Sure enough, when I checked with the artists and technical staff, they did believe that production managers were second class and that they impeded—not facilitated—good filmmaking by overcontrolling the process, by micromanaging. Production managers, the folks I consulted told me, were just sand in the gears.
Ed’s book is a good story, and worth reading. He describes in detail how he got these problems ‘sorted-out’ and got the team for the second film organized. And, the rest is history. Slight adjustment of the balance, in most of the cases here, changed the entire organizational dynamics to a very large extent. In the case of the airlines quoted at the beginning, a new role of Chief Operations Officer who was responsible for both the flying staff, and the engineering staff managed to create that balance. Without such a re-balancing act (by whatever means), all the rest of process re-engineering, planning, control, cost management and six-sigma etc. may not have yielded meaningful results. Similar slight re-balancing achieved the end goals in most other such cases too. In order to keep this blog post short, I will not go in my views on how these biases (or imbalances) build up, and remain unrecognized despite leading to massive dysfunction (consider the airlines story above); as well as how to know when they are becoming excessive and how to achieve a harmonious re-balancing. Suffice it to say here that one should keep an eye on them, lest the company, blinded by its own single-minded brilliance, goes the way of Enron. Notes:
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.
In this series, I will address the second question raised at the start of the previous blog series – “What are the benefits of supply chain 3.0?” Before answering that question, let me go over the three type of responses I generally get when I explain to people that supply chain 3.0 is real.
Most of the McKinsey (or their clone) trained strategists ask me to show data to back up this assertion. On the other hand, more intuitive executives (mainly from sales and marketing background, as I observe) ask me to explain the benefits of supply chain 3.0. Finally, the third group – those who I call the transformational leaders ask a simple question – how can we use the power of supply chain 3.0 in effecting beneficial business transformations.
First a caveat – no benefit accrues to those who do not act. And, not just any random action will suffice (though, in most cases, any action is better than no action); you need action based on cohesive, strategic thinking. That is the reason for the word “can” in the title of this post – all benefits are just potential energy till converted into reality by your kinetic energy.
Of course, I have not yet talked about how supply chain 3.0 differs from its previous version – supply chain 2.0. While the full detail of that is a subject for a future blog post, it will be necessary for us to know that these are different, and that supply chain 3.0 is a step change above supply chain 2.0. So, we will briefly delve into various avatars of supply chains as we look at the benefits of supply chain 3.0.
To understand the potential benefits of supply chain 3.0, let us look at the current business context. The best way for me to get you thinking along the same line as me is show you the following slideshow with just 14 slides from UNDERCURRENT:
It will probably take you no more than 7 minutes to quickly peruse this material and I have no intention of taking credit for the original thinking by the makers of this slideshow. That is why I am neither paraphrasing it, nor taking from it – something I see happening with my material more and more, even in the erudite circles.
My personal takeaway message from the above slideshow is that something immense is happening across the world of business. Combination of globalisation, bandwidth, rising standards in the east and financial adjustments in the west are creating both opportunities and threats everywhere.
Recently, someone sent me the link to a cartoon by marketoonist.com, which I show below for comment. They quipped to me that retail business model is toast. I agreed, but asked in return “which model is safe”. Think deeply enough, especially in line of the material in the slideshow and you can see the same threat lurking everywhere in many different forms.
But the old cliché is right. Every threat does hide an opportunity. I believe this despite the fact that I do not know enough Chinese language to attest to the fact that the Chinese character for threat and opportunity is the same (unfortunately, I could not learn any Chinese through-out the translation of my book into that language).
There is a lot of talk about VUCA – Variability, Uncertainty, Complexity and Ambiguity – when strategists discuss the business environment today. It is a bit ironic that so many military terms get incorporated in the strategy parlance during the time of duress.
However, one thing is clear – that old organisational models are not adequate anymore. New challenges need new responses. In the next entry of this blog series, I will discuss about business models, how they have changed and the effects on supply chain.