Startup Struggles with Supply Chain Business

TL/DR Abstract

Many startups make it to the end, and meet the dreams of their founders.

Many other founder on the rocky shores of hostile markets.

However, an equal number of startups founder due to another reason - an inadequate supply chain (or backend as they call it in the startup lingo). In reality, the backend is even more important than the front end.

Why?

Because, no matter what you promise to your customers, you do not have a business if you cannot meet that promise reliably ever time a customer stands in front of you.

That is where supply chain comes into picture. Start ups make two big (uuuge) mistakes when it comes to supply chains:

1. They recognise the value of supply chain / fulfilment capabilities / backend far too late. They assume that magically the backend will take care of itself. That never happens.

2. Once they recognise the value of supply chain / fulfilment capabilities / backend, they hire the wrong person from an established and mature supply chain to take care of the problem. They fail to recognise that the maturity of the supply chain is an issue.

That is why we used our practical experience with a number of well-funded startup supply chains to create the supply chain maturity model for innovation and startups. We outline this model in a number of our books and reports.

It's really hard to design products by focus groups. A lot of times, people don't know what they want until you show it to them.

Steve Jobs (1955 - 2011), Business Week, May 25 1998

In most people's vocabularies, design means veneer. It's interior decorating. It's the fabric of the curtains of the sofa. But to me, nothing could be further from the meaning of design. Design is the fundamental soul of a human-made creation that ends up expressing itself in successive outer layers of the product or service.

Steve Jobs (1955 - 2011)

Let’s Start With A Story of Supply Chain

When Apple first launched its iPod music players in November 2001, no one had an inkling what it would lead to in a decade's time. The first salvo that Apple fired in what eventually became a market domination of the mobile phone market, did not look like a mobile phone at all.

Indeed, none of the mobile phone players - whether market leaders such as Nokia or Ericcson or followers such as Samsung, Siemens, LG, and many others - displayed any sign of discomfort at the launch of iPod. The entire battle of iPod and iTunes was fought on the turf of the music industry's drive to save itself from $0.99 per tune pricing policy of Apple.

Fire-Aim-Ready Innovations Keeps Your Competitors Guessing Your Intentions

Ironically, an industry which was half decimated by music piracy was busily fighting the very network which could save it - while the industry that would eventually be decimated was cheering on.

When the iPod first came out, all the competing products in the market were clunky, large and erratic in their functioning.

When the iPod first came out, all the competing products in the market were clunky, large and erratic in their functioning.

Story of Supply Chain

Why We Are Qualified To Write This Article?

Over the last three decades we have led and worked on more than 500 projects in supply chain restructuring in dozens of industries and countries.

A small subset of those projects was working alongside the funders, the boards and executive teams of well funded startups to configure their supply chains from scratch. We are the world's only supply chain boutique strategy firm who have built a considerable library of intellectual capital on startup supply chain management.

VERY FEW PEOPLE KNOW SUPPLY CHAINS LIKE WE DO - Retail, beverages, food, milk, dairy, meat, livestock, explosives, chemicals, cotton, rice, graphite, solar power, natural gas, crude oil, fertilizers, electronics, packaging, glass manufacturing, machine parts, automobiles, industrial goods, mining, etc are just some of the industries where boards and executives have benefited from our proprietary knowledge.

Since when no one had heard of supply chain, our co-founder Vivek Sood has been considered one of the most authoritative professionals in the field when it comes to the subject of supply chains restructuring in his clients' corporations in Australia, Asia, North America, South America and Europe.

He has written four seminal books about restructuring supply chains to gain massive advantage in business. He also regularly delivers keynote speeches at business schools and conferences such as University of Technology Sydney, Supply Chain Asia, Asian Bankers Forum, APEC Business Advisory Council.

He has been quoted in the authoritative business press and over 100 academic papers written by supply chain researchers around the world. Vivek and his team have examined thousands of supply chains during their projects over the last three decades and helped hundreds of executives build safe, cost effective and sustainable supply chains and careers.

Transferring music files from CDs to computer to digital music devices was a major task, and piracy and peer-to-peer sharing was rife on the internet.

Many observers doubted the wisdom of selling tracks on iTunes when they were freely downloadable on the internet.

With its white headphones, small form factor, easy to use interface, user friendly computer link to both Mac and Windows, iPod quickly became an epitome of 'cool' from 2001-2006.

As successive versions of iPod were issued (I cover version update in much more detail in Advanced Product Phasing) newer features, more capacity, updated iTunes software for computers were introduced luring the customers to buy many more versions of iPod.

Newer products in the same genre - iPod mini, iPod Nano, iPod shuffle, iPod Touch - were introduced to further capture the market, each with its own round of successive generations.

Why We Are Qualified To Write This Article Supply Chain?

Apple was making huge inroads into the hearts and minds of the customers - especially non-Mac users who had no previous experience with the iconic brand.

At the same time it was gaining expertise, knowledge and experience in small portable gadgets learning how consumers interacted with these, learning what the missing pieces in the existing gadgets and most were importantly building key connections with the network of suppliers, developers and other network participants who would eventually make the iPhone a resounding success.

Meanwhile, smart phones were becoming popular with consumers and Blackberries with the corporate markets.

When Apple Fired Its Second Salvo In The Battle For Mobile Phones, It Was Still Not Fully Ready In The Traditional Sense.

For example, most corporate IT barons scoffed at the idea of using iPhones for corporate emails and networks because of the missing security features. Even the cameras on the first version were far more basic than those on the other smart phones on the market at that time.

However, the first iPhone was still an outstanding success which can be attributes to its massive consumer following from iPods, its 'cool' advertising, far superior user experience, reputation for delivering on its promise, and a number of sticky and unique features which were marketed very well.

Behind the scenes, Apple had already assembled an outstanding network of suppliers ranging from Foxxcon - the Chinese assembler to Fingerworks - the developer of the then unique touch screen software to the ARM the licenser of the CPU.

Working closely in a huddle with these suppliers, who were each sworn to secrecy, Apple retained its leadership position in product development time compared to its competitors by outpacing them significantly, while at the same time raising the product quality to level that leapfrogs the competitors.

Its innovations were truly disruptive in the industry, even though it always leapfrogged the competitors rather than take the low road to disruption as suggested by Clayton Christensen in his theory.

The disruption in the industry is evident from the fact the RIM - the maker of Blackberry - was soon on the ropes unsure of its own financial future.

No one knew at that time that the supply chain that Tim Cook would build for Steve Jobs at that time would sustain Apple without a single hit for another 10 years, and make it the largest company on earth and bigger than the economies of many countries.

Fire-Aim-Ready Innovations Build A Self-Reinforcing Eco-System Supply Chain

Having fired the first salvos in the battle of the mobile phones - Apple moved on to the next steps. It started taking aim towards its final goal of market domination.

It expanded its network of suppliers by a factor of hundreds of thousands by releasing the SDK (software development kit) for the Apps for iPhones and iPod touch.

Millions of Apps were soon released, each tested and approved by Apple to perform to its standards, making the developers big stakeholders in the success of iPhones.

There is no doubt that innovation is the engine that drives the economic development train. As stated famously by the renowned management guru, Peter Drucker "Innovation is the specific instrument of entrepreneurship. The act that endows resources with a new capacity to create wealth."

An ability to innovate is the Fire burning inside the boiler of an enterprise that makes it successful and enduring. So it should not be a surprise that the first cornerstone of 5 STAR Business Networks is related to innovation.

You will also discover through reading this article why we call it Fire-Aim-Ready (FAR) innovation and why the companies that practice this achieve far superior results.

Innovation being one of the engines of growth is heavily researched topic

To some extent every business innovates at some times. A new product, a new way of making old products, or at least new technologies to build or supply the products or services occasionally show up on the radar screen on most businesses.

Many other businesses, such as 3M, have made innovation their hallmark of fame. Most other businesses lie somewhere in the middle of the continuum of possibilities in this respect.

The key questions are, however, how do super-networked businesses innovate better than the rest of the businesses and whether their results match the expectations.

While researching the topic of innovation, I was not surprised to note that no other topic besides leadership has prompted more numerous amounts of business books than the topic of innovation.

In fact, my research associates accumulated more than 550 summaries of business books on the topic of innovation when I had to stop them from collecting any more - simply because it would be impossible to go through any more, and be able to discern any new thoughts.

Towering above all the other writers and intellectuals on the topic of innovation is the Harvard Professor - Clayton Christensen. Among his books are the three titles - The Innovator's Dilemma, The Innovator's Solution and The Innovator's Prescription; the titles sum up the content of each of the three books quite succinctly. [1][2][3]

All these books are very interesting to read and use a number of case examples to set up the dilemma - the eternal struggle of the innovator to stay at the cutting edge of the innovation circle - and then provide the solution - create disruptive innovation by targeting new customers and fend off the competitors. I will not attempt to paraphrase his thoughts on innovation, but rather quote few selected words that are relevant to our discussion here

"A value network is the context within which the firm establishes a cost structure and operating processes and works with suppliers and channel partners in order to respond profitably to the common needs of a class of customers. Within a value network, each firm's competitive strategy, and particularly its costs structure and its choices of markets and customers to serve, determines its perceptions of the economic value of an innovation. These perceptions, in turn, shape the rewards and threats that firms expect to experience through disruptive versus sustaining innovations." The Innovator's Solution - Page 44 [2]

In our experience, the value network mentioned above, akin to the 5-STAR business network, is almost as important as the firm itself - not only for innovation, but also for efficiency, profitability, product phasing and modularized outsourcing.

Importance of the value networks - a network of suppliers and channel partners - to innovation is underpinned by its use throughout this book, and for that reason among other I thoroughly recommend Clayton's book to the readers.

Many Companies Falter In Their Innovation Efforts Because Of Mismatch Between The Lifecycle Stage And Supply Chain Structure

Whether the innovation is disruptive or sustaining, whether it responds to the needs of new customers or existing customers, poorer customers or richer customers, or yet a different segment of customers altogether, the process of innovation itself is improved considerably by using the 5 STAR Business Network effectively.

Supply Chain Revenue

Startup Struggles with Supply Chain

Figure : Product Lifecycle (Source: Booz Allen and Hamilton, P. Kottler)

It is now well accepted and established that most products typically go through a product lifecycle similar to the figure above.

In the introduction stage, the product concept is put out, research and development is carried out, and the product is introduced into the market. At this stage, the key focus of the company is on carrying out research and development and introducing the product to the early adopters or to the enthusiasts who have a pressing problem, which this product solves.

However, it is a very critical stage because the early enthusiasts will both like the product and decide to recommend it by word of mouth to their friends; family and peers or they will influence others to reject the product.

Also at this stage the company is still gathering a lot of market-intelligence about the product features, value in use, and sophistication of the technology with the intention of improving the product.

As the product catches on, it goes into the next stage called growth stage where the early majority starts accepting the product and there is a massive ramp-up in the volumes, in the production, and in the profits.

The company is scrambling to keep up with the demand at this stage. The key focus is to make sure that the shelves are full and stores do not run out of product.

In the next stage the product hits maturity. The growth starts tapering off and the competition becomes more established in the marketplace. Supply chains are becoming more defined and customers are becoming well educated in the product benefits, features, differentiating factors and value in use. Now, the company wants to make sure that it can supply the products to the customers at the most profitable margin.

Finally the product enters the last stage of its lifecycle called the decline. At this stage the product is finally being phased out either because it has been replaced by another technology or product, or because it is no longer necessary for the lifestyle of the consumers.

In this stage the company wants to maximize its own profitability before making a decision to discontinue manufacturing the product.

We have observed that many companies, even multi-line companies, follow similar trajectories, albeit over a much longer period of time. The maturity stage is extended for a long period of time in these lifecycles, though the other stages are not inconsequential.

"The Start-Ups' Struggle" Supply Chain

Our work in supply chain strategy with growth stage companies has convinced us the supply chain model which is most appropriate for a mature corporation will almost certainly fail in a growth stage corporation.

Most start-ups struggle, and they come to this realisation far too late. Many of them fail as a result.

Supply Chain Maturity differs at each stage

In fact our supply-chain maturity model describes 4 stages of supply-chain maturity where each stage of product life-cycle is paralleled by a maturity stage of supply chain.

Supply Chain Maturity

Startup Struggles with Supply Chain

Figure: Supply Chain Maturity Model

In the book mentioned above, I elaborate much more on how to use the right supply chain for the right stage of the product lifecycle.

One entire chapter is dedicated to a supply chain model that is suited for innovation, start-ups and rapidly ramping up companies. You will see many times a supply chain manager being hired from a mature long-established company being hired by a rapidly ramping up company, and failing to recognize the difference till it is too late. Unfortunately, in this race, you never get a second chance.

I am currently creating an online course based on above material, and my projects solving deep problems in innovative companies. Ask me for more details.

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