Is It Time To Vertically Integrate Your Supply Chain?

Will reading a recent Wired article over on CNN Tech on why nobody can match the iPad’s price, I began to wonder if maybe it was time for multinationals to start vertically integrating their supply chains again. Now that the perfect storm of cost, supply risk, and market turbulence has hit, it would appear that the outsourcing and right-sizing craze of the nineties and early noughts has revealed its dark underbelly. The shiny paint of internal cost reduction has cracked and pealed and all the hidden costs associated with logistics, delays and stock-outs, and lack of buying power on the part of your suppliers are now exposed.

The article, which notes that none of Apple’s competitors can meet the $500 that it asks for an entry level 16 GB wi-fi iPad, notes that Apple is able to achieve this feat for two reasons:

  • It’s unique retail strategy:
    It sells primarily through its own retail stores and, thus, doesn’t have to share a big chunk of the profits with third party retailers.
  • It’s unique vertical integration:
    The article notes that Apple is the most vertically integrated company in the world – it operates its own retail chains, all hardware and software is designed in-house, and it runs its own digital content store. As a result, it doesn’t have to pay licensing fees to third parties (as even the A4 chip is owned by Apple).

This results in a company that is able to not only able to use a vast ecosystem to design, build, and sell its products, but that is able to control that ecosystem as the last company in our industry that creates the whole widget (Steve Jobs, Wired.com).

Makes you wonder if its time to integrate those key pieces of the supply chain that you spun out over the last two decades because some consulting organization, looking for an excuse to further drain your bank account, convinced you it was a good idea. Or at least take a significant (share-based) interest in a few key suppliers so that you can guide them towards a successful path and, when it makes sense, buy raw materials on their behalf.

Implementing VFS: A Beginner’s Guide, Part III

In our last post we presented an example of how a leading technology company, namely Apple, probably used a variation of the Value Focussed Supply Strategy when they decided to enter the smartphone market with the iPhone and illustrated, with a few liberties, how the VFS process could have led them to that market and that product and the success that followed. In this post we are going to elaborate on the process that was described in CAPS recent report on “Linking Supply to Competitive Business Strategies”.

Given the following seven-step process that we outlined in our last post:

  1. Understand Customer & Supplier Markets
  2. Identify Directional Changes
  3. Link Insights into Directional Changes to the Business Strategy
  4. Evaluate the Company’s Strategic Options
  5. Set Holistic Value Focussed Goals
  6. Evaluate and Select Strategic Supply Options
  7. Identify and Implement Levers

We can identify the following key questions for each step:

  1. Understand Customer & Supplier Markets
    • What are customers buying and what do they want to buy?
    • What is the balance of supply vs. demand in the supply market?
    • What capabilities do organizational suppliers have that are not being utilized?
    • Are there any limitations on raw material supply?
  2. Identify Directional Changes
    • How are customer buying patterns shifting?
    • Is a market transformation occurring?
    • Is the supply base expanding or consolidating?
  3. Link Insights into Directional Changes to the Business Strategy
    • Which categories and products are likely to have the greatest market demand?
    • Which categories and products will have the greatest impact on financial and market performance in the short and long term?
    • Which categories and products fit with the business strategy?
  4. Evaluate the Company’s Strategic Options
    • Which categories and products could be truly strategic now and in the future?
    • How would each of these shape the company’s market presence and supply chain?
    • From a VFS viewpoint, which are the best options?
  5. Set Holistic Value Focussed Goals
    • What performance is expected from the supply base?
    • What performance is expected from the organization?
    • What performance is expected from the distribution partners?
  6. Evaluate and Select Strategic Supply Options
    • Which suppliers will be used? Which are strategic partners and which are tier two?
    • Will the organization handle JIT inventory itself or use third party inventory management services?
    • Will the organization manage distribution itself or hand it over to a 3PL?
    • Will the organization use currently existing supply markets and supply chains or create new ones?
  7. Identify and Implement Levers
    • What can change the market dynamics?
    • What can change what is bought?
    • What can change interaction with suppliers?

The answers to these questions will dictate:

  • target market,
  • primary category,
  • key product(s),
  • key suppliers,
  • VFS strategy,
  • VFS goals, and
  • VFS levers.

In our next post we will dive into some of the key questions in each category and explain some of the thought process that will help lead the organization to the right answer(s).

5,500 Miles of Common Border …

… and heat treating a few million pallets is going to stop the spread of insects across the Canada – United States Border. Really? No wonder the CTA takes no position on the science behind the decision to eliminate the exemption that allows wood packaging materials (WPM) crossing the Canada-US border to bypass heat treating and marking requirements — because there is no science. Insects don’t respect borders. Heat treating a few million pallets is not going to stop the spread of insects across the border. Trust me.

As per this recent article in Canadian Manufacturing, all removal of the exemption will do is “disrupt border crossing” because it’s going to take quite a while to individually check Three Hundred and Twenty (320) Million pallets to find the millions that don’t meet the requirement. So while it’s not necessarily a bad idea, since an insect-laden pallet could accidentally find its way to a foreign country and introduce a foreign bug to the local ecosystem that could be harmful, like the CTA says, elimination of the exemption (and subsequent enforcement) shouldn’t begin until APHIS and CFIA, working with industry, are satisfied that there are enough WPM compliant pallets in circulation to meet the demands of Canada-US trade. Otherwise, we’ll have lineups at the border from Detroit to Toronto (which is about 244 miles), and that won’t help anyone.

Implementing VFS: A Beginner’s Guide, Part II

In yesterday’s post, we discussed CAPS’ Value Focussed Supply (VFS) and how it represents a valid methodology for taking supply management to the next level. Given that many leading organizations are seeing decreasing returns in their supply management efforts, it is becoming clear to leading analysts, providers, and thought leaders that this decade needs to see the introduction of Next Generation Sourcing and Supply Management Techniques if Supply Management (and Procurement) are to have a hope of getting, and keeping, their seat at the C-Suite table.

In addition to discussing the four levels of VFS in their recent report on “Linking Supply to Competitive Business Strategies”, the report outlined a high level process that can be used as a starting point. As noted in our last post, this process can be broken down into a seven-step program that will get a company on its way. Specifically:

  1. Understand Customer & Supplier Markets
  2. Identify Directional Changes
  3. Link Insights into Directional Changes to the Business Strategy
  4. Evaluate the Company’s Strategic Options
  5. Set Holistic Value Focussed Goals
  6. Evaluate and Select Strategic Supply Options
  7. Identify and Implement Levers

To understand this process, we’ll start with an example that’s easily understood. To do this, we’ll have to travel in time and space and go back to Cupertino circa 2006. Apple, having just conquered the mobile music device industry with the iPod, is looking for the next market to conquer. They make computing hardware, the iPod was a natural progression, and they are looking for the next killer product. Where should they go?

  1. Their suppliers are great at supplying leading-edge computer components for compact and mobile devices and good at innovation.
    Their customers are interested in cool gadgets and entertainment and keeping in contact with their peers.
  2. These two observations quickly lead the organization to two potential markets, gaming platforms, which was a very lucrative market for Nintendo and Sony and which their competitor (Microsoft) had entered five years previous, and smartphones, which was a quickly growing market as cell phones were already in the hands of 1/3 of the global population.
  3. The business strategy was continued growth and market leadership in any computing device or mobile market that was entered. Both the gaming marketplace and smartphone marketplace had a number of big players with well established market share, including Sony, Nintendo, Microsoft, and Sega in gaming and Nokia, Motorola, RIM, Samsung, and LG in smartphones. Both could be hard to break into, but ( a) the mobile market is more fractured, ( b) there are more similarities between smartphones and iPods then between generalized computers and specialized gaming systems, and ( c) the market for smartphones is growing rapidly with projections that half of the global population will have cell phones within two years.
  4. The strategic options are to fight it out in the mature and relatively flat gaming market and go head to head with their main competitor on another platform, or fight it out in the growing smartphone market where platforms are not as mature and there are more opportunities for innovation.
  5. The obvious goal is to enter the smartphone market with an innovative new product and capture a leading market share, especially among current, discerning, Apple customers.
  6. Apple evaluated it’s supply chain and locked in a sufficient supply of strategic components to ensure it could meet projected demand.
  7. Knowing that a phone was useless without a carrier, Apple signed a strategic agreement with one of the largest carriers who would see the 3 years of exclusivity it was granted as a way to significantly grow its own market share and, in turn, aggressively promote the new product for Apple.

Now, we’ve made a few assumptions and taken a few liberties, but it’s easy to see that Apple obviously used some type of VFS strategy when they decided to introduce the iPhone and enter the mobile market, because, within 2 years, they were the top selling mobile phone on the market.

In our next post, we will begin to dive into the steps in more detail.

Is Your Supply Chain About To Get A Lot Leaner?

We already knew that food prices are rising considerably across the board. They’ve risen so much (29% in the past year) that the World Bank estimates that 44 Million people have been forced into poverty since last June as a result.

If this isn’t enough, thanks to the skyrocketing price of cotton (which has more than doubled in the past year, hitting all time highs), “clothing prices are set to rise 10% this spring” (BlazeMedia). Considering that the average household spends about 15% of their budget on food and 5% on clothing, which are not discretionary expenses, the average household is now looking at a total increase in their non-discretionary food and clothing expenses of 5%. Given that, after housing, food, clothing, transportation, health care, insurance, and debt payments, the average household had less than 15% of their funds for discretionary expenditures, this says that the average household now has less than 10% of their funds for discretionary expenditures. That’s a 33% reduction in discretionary funds in less than a year!

This says that any company that provides a discretionary product or service to an average consumer is now fighting over a market-share that might have shrunk by a 1/3rd. Someone is going to lose and someone’s market share is going to get smaller. This means that a number of supply chains are going to have to get a lot leaner this year for those companies to survive. Is yours ready?