About Supply Chain Strategy
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 millenia – akin to the chicken and egg question. Indeed, this may be the genesis of that famous question. I call this the “Innovators’ Conundrum.
Here is my answer to a similar sounding question on a popular forum.
A Good Story Supply Chain Strategy Resolves
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.
Innovation Can Be Driven Either By Demand Or Supply
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:
Alternative Supply Chain Strategy Resolves
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?
Objective Analysis Of Key Drivers Of Demand And Supply Will Show The Basis Of Innovation
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?
The Board Agreed That Innovation Will Only Succeed If The Supply Chain Structure Matches The Demand And Supply Drivers
Based on these factors we developed the following matrix to enable answering the question:
Based on these factors we developed the following matrix to enable answering the question:
Red Box (Box 1) Is The Danger Zone
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.
Light Green Box (Box 2) Needs More Customer Intimacy And/Or Supplier Agility
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.
Dark Green Box (Box 3) Needs More Supplier Intimacy And/Or Customer Flexibility
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.
All Innovation Must Have An Effective Business Network
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.
Your Company’s Innovation
If you have questions about your own company’s innovation strategy, send me an email on [email protected] 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