Digital age to require greater supply-chain agility

These days, customers can stand in the aisle of a retail store and comparison shop like never before. If they don’t like the price, they can whip out a smartphone and probably find it cheaper somewhere else online. There’s an app for that.

But companies are getting smarter about customers, providing services and amenities that will prevent customers from turning to lower-cost competitors.

Here’s an example: A department store sells a chair for $100. It comes fully assembled, which is great for the customer who needs a chair immediately and isn’t interested in putting it together. But some customers have been heading to a discount retailer that sells the same chair – unassembled – for half as much. Armed with this information, the department store starts offering two prices: assembled for $100 and unassembled for $50.

This kind of analysis doesn’t stop on the showroom floor. Digitally enabled consumers are expected to reshape the variety of ways products will be offered to customers – a transformation that is expected to impact the entire supply chain, according to The Chief Supply Chain Officer Report 2012, a survey of almost 1,400 supply-chain executives, released September 28th by SCM World.

The desire for value-added services such as assembly or service guarantees will force supply chains to become more agile as complexity is pushed upstream from the consumer, said Kevin O’Marah, head of faculty for supply-chain think tank SCM World.

Sixty-one per cent of supply-chain practitioners expect e-commerce- and mobile-enabled customers to be more receptive to offers trading product choice, price point, availability and convenience against each other when making purchases. Those customers may be willing to pay a premium for value-added services, such as immediate availability, home delivery, service contracts or financing.

Just 14% of respondents expect the customer of the future to be interested only in the lowest price.

“That’s a good thing in many ways,” O’Marah said during a webinar discussing the survey results. “The value proposition you throw at the customer can be defined by what’s special about your business.”

The survey results say value-added services are expected to be in demand in both business-to-business and business-to-customer situations, according to O’Marah. The anticipated willingness to pay more for such services was more pronounced in businesses that are closer to the consumer, such as retail.

So think about a washing machine. A customer may want to spend a little more on a washing machine that has an extended warranty, rather than saving money on a unit that is guaranteed for just one year.

There will be plenty of opportunities for companies to differentiate themselves with different packaging considerations, service commitments, delivery offerings and financing terms, and this could have profound implications for supply chains.

The customer of the future might be angry if it takes three weeks for a part to be shipped from a factory halfway across the world if the washing machine with the warranty breaks. While sitting at the laundromat, that customer will use Twitter, or some other social media platform, to tell the world not to bother buying the expensive washer with the warranty. Supply chains will need to be able to help companies meet those demands for service, O’Marah said.

“Upstream, there are a lot of requirements for agility that are going to be driven on us by the demands downstream for different placement of product, different packaging of product, different configurations and so forth,” he said.

These are additional demands placed on supply chains, whose traditional function has been to provide material at the lowest possible cost. The survey showed that supply-chain managers still believe operating cost reductions are their most important objective. But creating value through increasing revenue, and providing a competitive advantage through differentiated customer service capabilities, also were rated as important.

Fifty-six per cent of respondents said e-commerce and mobile-enabled customers will drive brands to develop direct-to-consumer fulfillment capabilities. O’Marah said this will add to supply-chain complexity.

“Supply networks upstream are going to feel this pressure, but they don’t really see it coming yet,” he said. “And that means that these powerful downstream customers are going to show up and find less flexibility, less agility than they want.”

Demand and supply … and social media

For example, the iPhone’s popularity means that consumers are willing to buy 5 million of them over the course of a weekend at a launch.

Geraint John, SCM World’s senior vice president for research, said a supply-chain officer in the high-tech sector said he can expect shortages of resistors and capacitors for six weeks each time Apple releases a new iPhone because of the high demand.

“That’s a real, live issue, and he has to deal with that,” John said during the webcast.

Companies that manage those kinds of supply-chain disruptions without having their own production compromised have a better chance of succeeding.

Social media also is expected to play a bigger role in supply-chain management, although the survey showed that pressure from social media isn’t felt yet at many companies. Forty-seven per cent of respondents said social media is having no effect on their company’s supply-chain strategy; the most frequent social media effect cited was improved communication with trading partners.

But 56% of respondents expect social media to inform their company’s supply-chain management practices as a source of customer feedback.

With these dynamics at work, O’Marah said managers of company supply chains need to:

• Put direct-to-consumer fulfillment on their road map for the future.

• Know what value-added services they can provide and how to follow through on them.

• Prepare for feedback from customers through social media.

If consumers in the future won’t be focused strictly on price, there will be pressure on supply chains to provide value beyond cost containment.

“There are implications all the way up to the machinery we choose in our plants, which allows us to set certain standards for what’s an appropriately or economically sufficient batch of product to run,” O’Marah said. “How much flexibility have we built into the upstream supply chain? And the answer is, we’re going to be expected to have a lot, and it looks like we’re not ready for it.”

—Ken Tysiac (ktysiac@aicpa.org) is a CGMA Magazine senior editor.