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TRIMILLENNIUM MANAGEMENT:SUPPLY
CHAIN Managing Digital Networks By Pavan Vohra
The question is: how? Not how to go on-line for many companies are already on-line. The real question is how to integrate Net technology into the company's core business strategy. What distribution and marketing strategies will work in the Digital Economy? A.T. Kearney asked this question of leading global companies, both service and manufacturing. We discovered that although the answers are unique to each firm, and vary according to industry, most strategies can be defined around 3 key ideas:
Traditionally, companies designed product-offerings to meet the needs of selected market segments. Product attributes such as price, quality, warranty and service were designed for an average target customer. Non-target customers were left under-served or unserved by the product. In an on-line world, however, customers are able to find or assemble products that meet their individual needs much more easily. The primary challenge for firms that adopt a customised product approach is to manage the many combinations and variations the product can assume. In this on-line world, suppliers have new options for addressing broader customer needs. Customers can test alternative products, and compare a variety of configuration, cost and service trade-offs. In effect, they assume responsibility for their own satisfaction. Just as the past decade has seen a convergence around the Microsoft Windows standard, over the next few years, television-manufacturers will vie to have their product become the standard for digital television broadcasts. They face the dilemma of either predicting what the most popular standard will be, or offering many types of televisions, and, possibly, taking a loss on the ones that don't sell. Panasonic has responded by unbundling the television into a high-resolution monitor-good for all standards-and a series of receivers-one for each standard. Panasonic's risk is reduced dramatically with this approach. Clearly, unbundling the product and mixing in enhanced components can serve a greater number of customers. Traditionally, companies determined how they delivered products and services to their customers. Companies selected wholesalers, distributors, retailers, and, in some cases, even salespeople to take their products to market. The power to make these choices allowed the company to enforce differentiated pricing strategies. Inevitably, some customers do not like the choices they are given. The stores may be inconveniently located. The sales staff may not communicate effectively. Supply chain costs may result in products being more expensive than the perceived value. No matter what choices a company made, some potential buyers were excluded or underserved. So, money that should have been spent was left on the table. Disintermediation alters these practices. Price-differences are harder to maintain as products become more alike and as customers have greater access to competitive prices. Essentially, price-differences come down to the transportation-costs of moving products between markets. Music CDs, for example, are available globally, partially mitigating the price premium of imports. By acknowledging and allowing customers to use their power to go direct, a firm can reach more people. Opening even a single direct on-line channel lowers the entry barriers to many markets. The firm that goes direct does not have to build stores or warehouses or hire sales-and-support staff. What it needs is prompt, reliable delivery-options, and advanced customer service support. Just as unbundling the product meets more customer needs and opens channels to new customers, creating customer communities can alter the way things get done. Traditionally, companies decided what processes to perform internally and what to buy. They chose where to set up business and what technologies to use. They chose how work was structured, scheduled, despatched and measured. Their chances of making the best choices when making decisions about growth were slim indeed. But, by unbundling the supply chain and outsourcing internal processes, the company can call upon the best performer for every important activity in its business. There are many growth opportunities for serving empowered customers with the unbundled supply chain. As I previously noted, it is critical to offer customers greater choice in the configuration of the products and services they buy. Does it also make sense to let them specify the suppliers used in making the products? Increasingly, the answer is yes. The first step to empowering customers with the unbundled supply chain is to offer them options. Service options can be performed by the company, the customer, by preselected suppliers or by any qualified supplier. As more options become available-for example, pre-sales support-and more suppliers join in, a community forms around the core product or service. We call this community a digital network. A digital network is a community of business partners and customers linked in an electronic network. It brings many participants together, each with his own mature set of capabilities, to create value in a new and unique collaborative network. Providing choice in the supply chain leads to a new industry model based on a trading-community that follows natural demand patterns. These communities provide a sustainable platform to develop new products and services that, in turn, create new and unexpected sources of growth and value. Pavan Vohra is a Principal at A.T.Kearney
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As we enter
the New Millennium, headlines and cover stories in the business press
extol endlessly the virtues of the Net, digital technology, and
e-Business. Yet, for every successful Net-savvy company, there are 10
others that are falling behind and losing customers. Companies must
prepare for a different future in which today's supply chains just can't
be competitive. All it takes is one upstart competitor with a strong
digital supply chain infrastructure and an innovative, customer-driven
approach to take away years of hard-fought marketshare. But the news for
established companies is not all bad: the learning curve is short, and
those that jump in now and adapt to the digital world can use their vast
experience as a competitive advantage.