13 minute read
Thought Leadership Tom Craig
The emergence of disruptive innovation in Supply Chain Management
When speed is the new competition
In this Opinion-Editorial (OpEd) contribution, Tom Craig, President LTD Management, Pennsylvania, USA, a leading authority and professional consultant on logistics and supply chain management and regular contributor to Global Supply Chain examines the new supply chain innovation as it applies to e-commerce. He affirms and makes the case that neither e-commerce nor Amazon but the new digital dynamic that drives online customer buying and makes products more accessible to customers is essentially the star disruption. Disruptive innovation, a term of art coined by Clayton Christensen, describes a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors —Editor.
The concept of disruptive innovation / disruptive technologies originated from an article by Joseph Bower and Clayton Christensen. Disruptive Innovation (DI) was viewed as a way of growth.
It was discussed it in terms of and in context of companies. The take was with corporations whose customers were corporate businesses, not individual shoppers.
That is a narrow view. This is a different take on DI, a new supply chain management that created a new way of selling that is now global.
Context Disruption is the new selling reality; it is how a company used a new service to make a new market niche and a dominate position. That service—the New Supply Chain Management—is the innovation, the disruptive innovation that drove Amazon’s success.
E-commerce is a new selling market and approach that is disrupting retail. This was not an overnight event. Early online selling was often by individuals using free delivery as a reason to buy. The delivery performance for these sellers was inconsistent. It was not a consistency and standard for online customers.
Against this, incumbent store retailers basically ignored e-commerce. They were unable to understand what was being done and how it worked. They failed to see the threat. These companies did not see the growth from doing it—and the loss from not doing it.
That is until Amazon caused the retail apocalypse, retail paid the price for ignoring e-commerce and for its lack of robust movement into it and transforming to the New Supply Chain Management.
Borrowing from Christensen, this may be comparable to what happened to many main frame computer manufacturers. They missed personal computers that changed the computer industry.
The Amazon phenomenon Amazon’s success was a twenty year in the making overnight sensation. The game changer was when a small company, Amazon, offered and provided two-day order delivery at no cost. Two-day delivery! They performed as promised. They did what no other firm selling online had done. They did it because of the New Supply Chain Management.
E-commerce is not the disruptive innovation. Nor is Amazon, another who sold online. It is the new supply chain that drives customer buying and made products more accessible to customers. And this new supply chain is about more than technology. It is also about the structure of technology, process, and organisation.
Alibaba in China is basically a platform for third-party sellers. Amazon sells both products it owns and for third parties. And their success, especially with their products, validates the New Supply Chain Management.
Customers were used to going to stores to buy products. They often made small purchases. Retailers always monitored overall store sales and foot traffic metrics. Customers were provided with stores and were expected to come in to buy.
At this time, retailers looked at statistics as to the number of stores and foot traffic to show how they were doing. These measures are about where the company is now, and customers were viewed as a mass of present buyers. They assumed what customers wanted.
Think of it this way. Why was it not a leading retailer, seeking to better serve customers, that was the leader in making online buying such a powerful way of selling direct to end customers. These customers have names and are not just people who go to a store.
Enter e-commerce E-commerce was a new-market approach. And there was no such thing as order delivery velocity—two-day or any firm day. So what was done exceeded customer expectations. As it progressed, customer expectations grew with the buying convenience and order delivery performance. These small order customers were now empowered.
What happened was that the New Supply Chain Management is about customers. It created customer expectations and defined customer service beyond a label. Additionally, it provided a path for the rise of customer power.
With e-commerce, the size of this market segment has been recognized and defined. Go to the store or use e-commerce with fast, free delivery. As they say, the results are history. This is the true retail apocalypse. E-commerce, not store sales, is dominating retail growth.
Accelerated deliveries The online order delivery speed is driven by the strategic and weaponised supply chain management (SCM). It is a very different approach and process. And from it, a company and a market arose. The New Supply Chain Management is disr
This can also be seen as to how few firms have transformed to it. Instead, with everything, they are staying with
the fundamentals of the old supply chain with a few adaptations to try to gain the performance of the New Supply Chain. As a result of order delivery speed, retail is omni-channel with e-commerce and stores (or clicks and bricks). The convenience of buying online is shifting retail to online sales at the expense of store sales. Leaders here have strong supply chain performance, thanks to the New Supply Chain Management.
Amazon’s e-commerce dominance can be seen in the February 24, 2020, Forbes online article titled, ‘Target Emergences as 8th Largest E-commerce Retailer – Here’s How Their Marketplace Strategy Is Entirely Different To Amazon and Walmart’, by Kiri Masters. It shows Amazon has 38.7% of e-commerce sales. Walmart at #2 has 5.3%. Target, the subject of the story, has 1.2%. There were leaders and laggards—and those who do not even register on the sales charts. Supply chain management is the real disruptor. Speed is the new competition and that is achieved with the New Supply Chain Management.
Top 10 US Companies, Ranked by Retail Ecommerce Sales Share, 2020
1. Amazon 38.7%
2. Walmart 5.3%
3. eBay 4.7%
4. Apple 3.7%
5. The Home Depot 1.7%
6. Wayfair 1.5%
7. Best Buy
8. Target 1.3%
1.2%
9. Costco 1.2%
10. Macy’s 1.1%
Note: Represents the gross value of products or services sold (Browser or app), regardless of the method of payment or fulfillment, excludes travel and event tickets. Source: eMarketer, Feb 2020
While Amazon gets the attention, it was the New Supply Chain Management that is the real topic. A service, supply chain management based, turned retail on its head. The order delivery paradigm that Amazon started is driven by a New Supply Chain Management. Now retail incumbents are struggling to copy it.
Old Supply Chain Management To give some perspective on how it is innovative, here is an overview of the supply chain management that had been, and for many, is still used. It can be described as a monolith and one size fits all. The traditional supply chain is defined by its logistics, especially warehousing and transportation. This can also be seen in the SCM organization. That arrangement hinders the ability to improve performance, especially the kind needed with the new selling reality.
Most of the focus is on the downstream, or outbound, part of the supply chain. This is the part, often domestic, that goes from factory to the buyer or from warehouse to the store. A key performance supply chain metric for the C-suite is logistics costs. As such, SCM was almost viewed as a necessary evil to make and sell products. Note, there are other KPIs, but they are internal to supply chain management, such as for order picking.
Also, the supply chain is operated and designed as node/link or stop/go. Inventory is an asset, and inventory rich, while being out of stock of other products, is often accepted. Warehouses are located on transportation costs.
Outsourcing is common, usually for cost reduction. Putting another party, especially an outside party, into the supply chain adds complexity and can work against achieving the required velocity of the new selling.
Another example is the Last Mile. This is about the shipping cost from the e-tailer / retailer / manufacturer. So it creates misdirection from focusing on order delivery performance. What is notable too is that leaders who use the new supply chain are not ones complaining about the ‘Last Mile’. Adding to this cost emphasis is the revenue/cost/profit of online selling versus store. Margins are smaller with e-commerce.
Many retailers and consumer goods manufacturers do not see the significance of what the new supply chain is doing. They seem to be focused on maintaining some degree of status quo with stores, despite this new selling reality which is about customers. Many also see online orders as fulfillment and not as part of a bigger picture of total supply chain management.
New Supply Chain Management What has happened is not an evolution, and revolution is not an adequate term of how SCM performance drove and continues to drive Amazon’s success with order delivery velocity. Supply chain management is strategic and weaponized—an upgrade from its backroom status. Amazon changed retail with the New Supply Chain Management’s performance of the 2-day order delivery.
Now it is even dropping to one day and same day. E-commerce has become customer convenience and customer expectations. All because of the New Supply Chain Management. This performance elevation and enhancement are giving customers more than they already have— greater value.
The more descriptive term of what the new supply chain has done is perfect order performance.
Customers receiver complete orders of what they ordered and delivered as they expected/specified. Complete orders. No mistakes. Delivered on time.
Contrast this to e-tailers who deliver orders in multiple shipments and delayed. Think too of store retailers with out of stock shelves. The out of stock delay also occurs with manufacturers. In these cases, customers are left to deal with the failings of sellers.
For starters, no business activity is more complex than end-to-end, nonlinear supply chain management. None. The New Supply Chain both recognizes it and addresses it. That is a big differentiator for what it does and why. Importantly, it is central to what it can do. • Essential elements of the new supply chain include: • Recognize the end-to-end supply chain • Understand supply chain complexity and its nonlinearity • Extend focus upstream to where the supply of supply chains begin • Build end-to-end inventory velocity • Compress time • Align the warehouse network with customers • Use metrics that the C-suite appreciates • Integrate process and technology
The new competition—speed Achieving order delivery speed is not about fulfillment. It is about end-to-end supply chain velocity creating inventory velocity. Speed is the new competition.
End to end is important. It means the supply chain, inventory, velocity, visibility, technology, and process.
This SCM has a different structure with integrated process and technology. Organization is based on velocity upstream and downstream. Technology is part of this SCM group.
Metrics are elevated and have the company view. The Perfect Order— delivered (not shipped) on time, complete, and accurate—is the best customer service measure.
Inventory velocity—call it turns or days off—and how to move it faster through the supply chain. This inventory velocity creates investment opportunities with its working capital benefit. Inventory safety stock is to buffer uncertainty. Compressing time reduces uncertainty and the capital tied up in safety stock.
Important too are using strong metrics. Perfect Order performance may be the best company and customer service metric. Period. Next is inventory velocity. This can be turns or days of inventory, especially if it is end-to-end inventory.
Warehouses are aligned for order delivery service. This means having more warehouses for proximity purposes.
Defined by supply chain—end-to-end metrics such as inventory velocity—turns and perfect order. Structure reflects upstream and downstream. There is velocity and performance. It includes technology personnel to drive greater velocity with visibility. There is also integration in addition to process and technology. Reverse outsourcing by bringing logistics activities in-house. This in turn improves speed with removing an outside, intermediate. It also brings greater control.
Conclusion What is happening with retail, now omnichannel is impacting retailer suppliers who must improve their supply chain performance to meet the requirements of their customers. Another step in how the disruptive innovative supply chain is spreading.
Recognizing that some define disruptive innovation as to a company, this could be called dual disruptive innovation—Amazon and the New Supply Chain Management. But what differentiated Amazon’s e-commerce offering was the New Supply Chain Management that drove their success with incredible order delivery service. It is a business model whose success is built on the New Supply Chain Management. New Supply Chain Management is sustainable. Within retail, the gap is widening significantly between those who are transforming to the New Supply Chain and those they are entrenched / stuck with their approaches.
The old, call it outdated, supply chains are institutionalized by companies that continue to fixate on logistics costs and do not want to invest in responding to disruptive innovation. A result of this is that firms that were once leaders are isolating themselves and being passed by those who are transforming.
All this adds to the growth and competitive advantage that Amazon has with the supply chain weapon. A question is, as e-commerce grows global across markets and industries, who will take on the New Supply Chain to take the respective leads in their niches. They all have noticed what is happening. Failure to act has no validity.
The gap issue is compounded by the escalating speed of order delivery. Delivery accelerated from two-day to one-day to same day. Customer power and expectations are moving in response to the speed and firms that provide it and the enhanced convenience it represents. Laggards are risking being at a tipping point of not being able to change in time. Compressing the order delivery time is putting additional pressure on stores. And, the convenience of the fast delivery as compared to going out to a store coupled the new supply chains of leaders versus laggards is extending the retail apocalypse. Also, the new reality with the New Supply Chain Management is sweeping across markets, industries, and the world. It is spreading past B2C/DTC (direct to customer) into B2B. Customers, whether people or firms, want their products faster. Manufacturers, retailers, and others who think they are immune to what is happening may be placing their business futures at risk.
The New Supply Chain Management drove the order delivery success and has become disruptive innovation. It has now moved from B2C/DTC e-commerce to retail to grocery. And it is not stopping as in crosses markets, industries, and the world. Next gen supply chain management is here with the New Supply Chain Management. Think bigger than technology as next generation. Think beyond standard industry segments, beyond retail, beyond manufacturing.
Technologies, such as the Internet of Things (think beyond connectivity) will require the new supply chain for connectivity with is greater velocity. Forget velocity. Think velocity squared.
It is called disruptive innovation for a reason and resistance is futile. n
(References: Bower, J. L., and C. M. Christensen. “Disruptive Technologies: Catching the Wave.” Harvard Business Review 73, No. 1 (January–February 1995): 43–53.)
