What is the internet doing to the supply chain?

Universal supply chain model

We all know that the internet has had a huge impact on our lives but we seldom give much thought to what this is doing to business relationships and the supply chain.

Traditionally the distribution of products from agriculture and manufacturing would be aggregated by wholesalers who distributed in bulk to retailers who sold goods in suitable package sizes to customers who then have their own micro supply chain to end users within their family or business site.

Manufacturers, wholesalers and farmers did not usually sell direct to the public consumer because they had significant barriers to doing so:

1. They have no relationship with the customer.
2. They could have little market penetration due to limited number of distribution sites.  One or two warehouses full of pallet racking in an industrial park does not make for a pleasing customer experience.
3. They were set up for bulk distribution not the small package supply typical of retail stores.

There have always been odd exceptions to these rules.  We have all stopped at roadside produce stalls next to the farm whilst on a country drive.  Manufacturers often have a seconds outlet attached to the factory or warehouse that sells direct to the public, but that was about it.  So what has the internet done that has changed this?

The internet has eliminated barriers 1 and 2.  The internet allows potentially deep connection and relationship between a manufacturer, or any vendor at any point in the supply chain, and the customer of their products (barrier 1).   This is way beyond anything that an old style mail order catalogue could achieve.  The advent of social media is just extending this connection even further and making it more personal.  

The internet also eliminates the need for physical retail store network.  We no longer need the retailer to explain the product to us.  Now when we walk into a retail store we usually know more than the retailer about the product we want to buy, all they need to do is show it to us and ring up the sale.  If all we are doing is going to the retail store to pick up the products we have already decided to buy, then we may as well have them shipped out to us.  Barrier 2 is now gone.  If retail is going to survive then it needs to have new reasons for existing in addition to physical distribution and product advice.

The third barrier is not impacted by the internet and is the hardest, and usually the last one addressed.  That is the organisational changes required to perform small order distribution direct to customer.  For a manufacturer, wholesaler or agricultural producer this means a fundamental change in business operations, marketing and sales that extends throughout the organisation.  Way beyond simply setting up a website and putting up product information and a shopping cart.  It means going from having only a handful of customers who buy in bulk to many thousands, tens or hundreds of thousands of customers who buy in single units and retail packs.  This means customer service, and sales support, individual marketing strategies, credit card payments, all those customer accounts and interactions when things go wrong. It is a fundamental change in business practice, and if you are not ready for it, you will fail.

The addition of an online D2C channel for a retailer would seem to be a smaller step.  After all they already have the customer relationship and the product range, all they need is a website and a distribution infrastructure.  However the number of large retailers who have been slow to embrace this strategy would indicate that this may be a bigger mental hurdle than a physical or business one.

An online sales strategy also requires a significant change in warehousing infrastructure and technology.  Bulk distribution requires pallet racking, and forklifts and stock pickers to pick pallets and cases.  A single order can have hundreds of lines and fill a semi trailer.  By contrast in a typical direct to customer business 20-30% of your orders will have a single line and ship in a post pack.  This requires a change in warehouse layout, picking methods and technology and freight arrangements.  Failure to invest in the correct warehouse processes and systems to support an online eCommerce based business will result in very high cost per transaction  This will result in either an unprofitable business or an over-priced one that will fail to gain traction in the market.

Although the organisational and operational changes required to run a successful direct to customer online business are not simple, they are not new.  They are really a re-use of existing business systems and strategies in a new context and are achievable by any business that sets its course in this direction.

In the universal supply chain diagram I have highlighted four online Direct To Customer (D2C) channels in use today in addition to the traditional customer pick up channel from the retailer.  So it is now possible for anyone to go direct to the customer.  When you combine this with the rise of contract manufacturing you have a powerful combination - isn't that right Mr Kogan?

I have described here what is possible and happening now in the supply chain. However deciding to go direct to your customers will dramatically change your business model and will of course have an impact on your current downstream distribution channels.  If you are a manufacturer then what will your retailers think if you start shipping direct and how could this damage your business in other ways?  

The classic conundrum here is when the retailers service and support for your products is intimately tied to their distribution of your products.  If you go direct, would you put your retailers (and your product support model) out of business?  Would your retailers (and wholesalers for that matter) find alternative sources of supply to their customers? (remember you may not yet have a well established relationship with your customers).  

You must expect that if you decide to compete against your upstream or downstream supply chain partners that this will have an impact on them and they will develop a competitive response.

For this reason traditional retail still works very well in a lot of industries.  This will likely change as the market gets more used to paying for services that they used to get for free.  We will come to understand that when the cost of support is no longer built into the price of the product, we will have to do it ourselves or pay for it when we need it.  Increasingly we get product knowledge and support much better from online resources or by asking friends.  This is not only free but much better.

We are still in the early stages of online commerce and the impact of the internet on the supply chain, new business models are being developed all the time and there is still a lot of room for innovation and change.  We live in interesting times!

If warehousing, logistics and supply chain are important to your business or your personal career then why not follow this blog by email or on Google+.  To tap in to the full benefits of business and career boosting ideas I suggest you join The Warehouse Performance Initiative.

Now anyone can be a manufacturer

Universal model of supply chain

Manufacturing is now a commodity service in many industries.  So many industries have sent their manufacturing into low labour cost countries such as China and throughout South East Asia that these countries have grown their own manufacturing expertise.  These factories are geared to produce goods and can and will produce them for anyone.

So the brand originator does not even have to do their own manufacturing.  They can contract this out to someone else who is great at making things but not so good at innovating new products or selling them into overseas markets (otherwise they would be a brand).  

Of course some of these manufacturers can and do develop their own branded products.  We are currently witnessing the rise of global Chinese brands in the same we we have seen the rise of Japanese brands through the sixties and seventies and Korean brands in the and nineties and noughties.

It works both ways and if the brand originator is also a manufacturer then they can also choose to manufacturer generic versions of their product so they don't lose out entirely when the generic competition comes along.  They can sell the generic versions themselves at a lower price point under a different brand or to someone else who puts their label on the product.

All of these sources of manufactured goods has exploded the range of generic products with someone's brand on them.  My new Agora smartphone from Kogan was made in a factory in China or Korea or somewhere.  All Kogan did was agree on a price and send the manufacturer some artwork.  Now anyone can do this, you can do this if you want to!, just go to alibaba.com.

In the supply chain model we see the flows of generic products from both contract manufacturers and brand originators to wholesalers and retailers who source their own branded products to sell into their existing markets.  This is seen everyday in the supermarket chains all over the world who have their own branded peanut butter alongside the premium brand.  You can only do this if you have a brand you can leverage or are prepared to do the very hard work of building your own brand like Mr Kogan.

Although this can be a very powerful strategy it is also a strategy that is now open to everyone.  This was brought home to me recently when I spotted the same LED head torch that I bought from Anaconda for $45 on display at Kathmandu for $120.  I am glad it happened this way around!  This is however a great example of the power and value of a brand.  Kathmandu is a premium brand and can charge a premium for their products because of the trust and loyalty it has built up with its customers.  Anaconda is a discount store.

Contract and generic manufacturing has had a huge impact on the supply chain and has helped to make goods cheaper and more readily available.  It has also suffered the same fate as any other easily accessible business strategy, it has diminished in value.  This reinforces the power of the consumer who has wide choice and availability, but it also reinforces the power of the branded product originator who stands out with the unique and desired product.

Next we will look at the product flows in more detail and see how the internet is shaking things up with new customer channels and what this might mean in future.

If warehousing, logistics and supply chain are important to your business or your personal career then why not follow this blog by email or on Google+.  To tap in to the full benefits of business and career boosting ideas I suggest you join The Warehouse Performance Initiative.

The most powerful agent in the supply chain?

Universal supply chain model

There is a lot of talk now about how the customer is the most important person in the supply chain.  This is true, but this was not always the case.  For much of history the manufacturer was the most important agent in the supply chain.  After all if there are no goods to supply, there is no supply chain and the customer must make do without.

Through the first half of the 20th century this was the case as manufacturing capacity was developing and demand outstripped supply.  Once TV advertising kicked in through the second half of the century demand was accelerated and manufacturing flourished.  Late in the century manufacturing became more efficient and more globalised as it was sent to low labour cost countries.

Now we have a glut of capacity and product choice because manufacturing is relatively easy and abundant.  Short of Armageddon this situation is unlikely to change, and will probably gain momentum as new technology changes manufacturing in ways we now only dream of.  Unfortunately for manufacturers their trade has been commoditised and what counts now is the ability to originate and develop a unique product and brand.  It no longer even matters whether you manufacture your own products.  You simply need to ensure that your product is supplied to the customer in the way that they expect.  Your customers no longer care about your supply chain, only that their product is delivered on time and that it works.

Uniqueness and design (plus good marketing) is what will bring in the customers like moths to an lamp on a moonless night.  Your raving fans are nearly compelled to buy and will drag along a crowd with them. So much for customer power.  Apple is of course the supreme example at the moment but there are many other brand originators with massive market power in their particular niche (Chanel, Porsche, Rolex, Sony, Harley Davidson etc.).

The brand originators define, create and dominate markets.  This is what makes them powerful.  They are followed by branded imitators and then by generic products at lower price points.  If the imitator creates their own unique brand and product they may also do very well if the market can be grown.  After all there is plenty of room for more than one car or computer manufacturer.  Android has done very well against Apple.  

Unfortunately the generic product, however good, is only a copy of the original.  The generic says - "buy me, I'm just like the leading products only cheaper".  This strategy works well but is the start of a race to the bottom with ever lower margins.  

Over time almost everything becomes a commodity, even the branded products.  Once your product or service is a commodity it gets very hard to earn a living.  If you work for a company who is a brand originator (the bright yellow box in my diagram) then good for you.  If you are anywhere else in the supply chain then expect your business to be under constant financial pressure and to be managed accordingly.

There is lots more to explore in the modern supply chain.  Tomorrow I will look at how generic and contract manufacturing has made everyone a manufacturer.

If warehousing and logistics are important to your business or your personal career then why not follow this blog by email or on Google+.  To tap in to the full benefits of business and career boosting ideas I suggest you join The Warehouse Performance Initiative.

The Yellow Pages misunderstand the internet 2

Just a quick update on my earlier post about how the Yellow Pages would not give me a free listing that most likely no-one would see anyway.  I recently found that possibly the easiest way to get onto the first page of Google in the search rankings is to submit a Google Places page.  This took a few weeks whilst I waited from my postcard from Google to confirm my listing. Here is the result:

So even if I had paid for a fancy Yellow Pages ad, would they have got me listed on the first page of the search engines?  Clearly not.

So as I said before, the Yellow Pages do not understand the internet.  Fortunately Google do.

OK, I am not an SEO expert, but if warehousing and logistics are important to your business or your personal career then why not follow this blog by email or on Google+.  To tap in to the full benefits of business and career boosting ideas I suggest you join The Warehouse Performance Initiative.

The Customer is more complex than you think

Universal model of supply chain

I put up this diagram of a universal supply chain model for WPI members.  My idea is to display the supply chain as it currently appears in such a way that is represents what is going on in most businesses.  This supply chain could be a Business to Business (B2B) or a Business to Customer (B2C) supply chain.  My aim is to be both simple and inclusive of every possible combination so please feel free to suggest improvements to the model if you think there are errors or omissions.

This post could also be entitled "The Customer is not Always The Customer!".  The customer regardless of whether they are a retail customer or a business customer is usually not just one person.  In a business context the purchaser is often not the end user and the purchaser may or may not be the decision maker.  Centralised purchasing and procurement often means that the end user can be left out of the decision entirely and must fight for the right to influence the buying decision.

We often think of retail purchases as being personal decisions but they are just as complex as any business buying scenario.  We often buy things for other people, not just gifts but food and other supermarket items are shared within homes, families and friends.  Parents buy almost everything for their children and yet the children usually influence the decision.

The other people that affect the buying or choices of the end user, I have called the influencers.  These are people who may have no real stake in the decision but still make an impact on the end user or buyer.  These people are everyone from the boss and your peers at work, corporate policy makers, friends and of course the reviewers that are now everywhere on the internet.  These will include past customers and people who simply have an opinion about you based on varying levels of experience and expertise.

Of course your marketing and PR have an impact here, but it is your products and services and the way they are delivered that will have the most impact.  Many of the interactions that are occurring in the yellow shaded box above will be out of your direct control.  The only way to really impact these interactions is to make sure that the point of direct connection between your product and service creates the right experience to keep people coming back and becoming a positive influencer on a future transaction.

The customer is the pre-eminent person in the supply chain.  All of the upstream activities simply do not occur without customers.  Assuming you have a product that is in demand the next biggest contributor to your success will be the quality and competence of your supply chain and its ability to reach the customer wherever they may be and deliver your product with the right experience.

Why not map your own supply chain and identify the customers, end users and influencers within your customer?  Then ask yourself (or better still go and find out) how well your supply chain is delivering both the product and the experience?

If warehousing and logistics are important to your business or your personal career then why not follow this blog by email or on Google+.  To tap in to the full benefits of business and career boosting ideas I suggest you join The Warehouse Performance Initiative.

Universal supply chain model for the 21st century

I'll discuss this more over the next few days but here is my model of the supply chain in the 21st century. The black lines represent the flow of materials in a traditional supply chain.  The coloured lines represent more recently developed material flows that will continue to shape supply chain in the years to come.  A full size (and probably prettier) version of this diagram will eventually find its way onto my website for those who are interested.

The first insight I am trying to show in this is that the customer is not just one person.  More on this tomorrow.

Universal model of supply chain

If warehousing and logistics are important to your business or your personal career then why not follow this blog by email or on Google+.  To tap in to the full benefits of business and career boosting ideas I suggest you join The Warehouse Performance Initiative.