Mercado | Article | From ‘Chains’ to Response Networks - How to align your supply and demand networks

From ‘chains’ to response networks: How to align your supply and demand networks

Article

From ‘chains’ to response networks: How to align your supply and demand networks

The advantages of having a digital supply network

When the British logistician Keith Oliver coined the term “supply chain” in the 1980s, the world was incredibly disconnected in comparison to the modern era. Globalization was in its early days, PCs were yet to be mass manufactured, and the World Wide Web was just an inkling in the mind of Sir Tim Berners-Lee. Few could have predicted just how connected we would become and the role that the supply chain would play in enabling that connection at scale.

The supply chain, as the name suggests, was the creation of a world of linear thinking. Even today, its logic—from the upstream sourcing of components in the first mile to the distribution of final products in the final mile—remains reminiscent of one chain interconnected to the next. The challenge for the industry, according to Accenture’s Maria Rey-Marston, Supply Chain Innovation Global Co-Lead, is “to move from the concept of a linear chain to the dynamic configuration of a network of companies and locations.” A sentiment echoed by industry veteran Dave Anderson on a recent live show we hosted on the evolution of the supply chain—you can listen in full here.

To align to this new thinking, many businesses are turning to the next phase in global supply chain development: the Demand Response Network (DRN). As omnichannel demand—brought about by the ballooning of eCommerce thanks to companies like Amazon—continues to dictate the need for brands to become ever more agile and responsive, we’re starting to see the formation of a smart network of interconnected nodes on the demand side of the equation, each seeking to incrementally improve and enhance customer satisfaction across the final mile.

But this is only half the picture. The supply side is an equally important component in the success of this network model—if not arguably more so. Products spend roughly 80% of their production lifecycle in the first mile (the initial stages) on the supply side, taking on average 5 months to be sourced, manufactured, and shipped to destination.

As businesses consider the implications on demand, there is no doubt that they must also reflect on the supply necessities, or as we call it, the Supply Response Network (SRN). Rey-Marston rightly points out, the network must also comprise “smart suppliers, plants, and transportation companies, as well as intelligent locations for placing products,” all of which typically occur thousands of miles away on another continent, well before products arrive in a nearshore warehouse or distribution center.

To understand a little more about what this all means, we sat down with supply chain expert and Mercado CEO, Rob Garrison to get his insight on the role SRNs will play in shaping the future of the industry. Here are the highlights from our conversation.

Thanks for joining us Rob. Let’s start with your definition of the “linear supply chain” model.

As we all know, linear means a straight line from A to B. For the forefathers of the modern supply chain, that meant a direct connection from raw materials to production through disposal. We live in an industry that has operated like this for nearly half a century, but practically it’s extremely inefficient. The model allows little flexibility to respond to changes on either the supply or demand sides, and leads to tremendous waste.

Can you give us an example of what that looks like for an importer right now?

Sure. Let’s say I’m an importer and I place an order for 1,000 red bikes on March 1. Given the average time it takes to source, manufacture, and ship that product, I most likely won’t have them available to sell until September 1 at the earliest. Five months is an eternity in an omnichannel world where demand is 24/7 and is in constant motion.

And that’s the good news, right—that’s if everything goes to plan. What if in June, 3 months after I first placed my order, I find out from my retail team that the best selling color bike is now blue? Or I discover that the supplier has only made 900 units? Or he’s used an adult bike frame rather than one for kids, so they’re way too big? A linear model has no way of responding to this. Once it’s in motion, it’s very difficult to change course.

Where do you see issues with the current linear model?

The biggest problem is arguably waste. Production in the apparel industry, for example, results in 30% of goods ending up in landfill due to overproduction, incorrect forecasting, or a late change to a style or trend that can’t be altered quickly enough. This ‘waste’ means lost sales, increased expense and inability to effectively support ever changing consumer demand.

The model never worked well, however in a pre-internet, pre-on-demand world, it was easier to direct consumers to the products that were available. Today however, consumers hold the power and can instantly redirect their purchasing decision in countless directions within seconds.

Other issues with using the linear model today include decreased speed to market, a lack of resiliency, inflexibility, and loss of sales. For example, apparel can be purchased cheaply, but it takes up to a year to get to market. By the time the product arrives on a retail shelf, it may be obsolete, meaning massive markdowns, or worse. The “cheap purchase” and expected “high margin” anticipated in this scenario actually appears to be a loss in the end.

So what do you think is the best solution to these problems?

Importers must start using modern, 21st century, purpose-built applications and platforms to manage this highly complex, lengthy, and high-risk process, as they will contain the features, workflow, and automation needed to address all of these issues—and more.

The outcomes can be remarkable. Sales increase due to real-time, accurate product information during the product’s 5-month-long journey, as well as expense reduction due to massive increases in efficiency. A typical importer generates 900 emails per order for every supplier in their network, and 60% of all orders have changes (with an average of seven changes per order). Moving forward, I believe companies should look to implement a new type of platform to address these supply-side issues, which I refer to as a supplier responsive network (SRN).

What would a supplier responsive network offer?

An SRN enables both importers and suppliers to connect through a modern platform to manage and monitor all relevant data regarding orders, products, inventory, and shipments. This information is shared in real-time across the entire supply and demand network. Increased visibility, collaboration, and analytics lead to radically improved agility and response times.

Products are the lifeblood of sales. Managing the product lifecycle with a modern platform ensures organizations have real-time data on the disposition of the product at all times. Enabling them to feed their demand planning systems, systems of records, and support systems continuously so they can adjust for maximum sales opportunities.

Without modern tools, companies are operating primarily in arrears, departments and systems are not connected, and the DNA of an order is not retained.

Should we expect to see an industry shift from a linear supply chain model to a more network based model? Or is that a dream that’s unlikely to be fulfilled?

The ‘good news’ is the primary tools today are email and spreadsheets to manage the first mile. This means there's no need to "rip and replace" existing systems, so the market can adopt new platforms quickly and efficiently. Modern technology has made adoption significantly easier and costs significantly less. These three factors alone make it much easier than prior generations to shift.

In the last three years, importers have received wave after wave of shocks to their supply chain. These scenarios were all the evidence needed that the existing tools were insufficient to manage the normal complexity or any adversity. This topic is now being discussed in every board room and every major business publication which will be followed by plans to avoid more pain. Between now and 2025, importers will have to transition to a modern platform, else suffer the consequences.

Change is never easy, but it's much easier than the challenges created by what’s in place today. It has become so lopsided that the switching cost is extremely low relative to the opportunity cost of not doing so.

What challenges do you expect the industry will face during the transition?

With consumers and investors alike becoming increasingly vested in the transparency of the global supply chain, meeting these expectations is certainly going to be a challenge for those not yet investing in their first mile. Add to that increased global competition, and you’ve got a market that’s ripe for transition but reluctant to open up.

The playbook for dealing with these challenges has already been written in the final mile. Consumers expect products faster, buy anywhere, pickup anywhere, and do so at the lowest cost. In order to keep up with the more savvy customer, importers will need to transform the way they buy products from their suppliers.

Market forces, consumer expectations, final mile complexity, and increased competition will leave importers no other choice than to modernize their purchasing practices.

With change, comes opportunity. The reality is that a shift needs to happen, and fast, if we’re to see the international supply chain not only weather, but remain relatively unscathed from future shocks. The consequences of not doing so will be detrimental to individual businesses and the future of global trade.

As we see continued investment to advance importer’s ability to react to demand pressures, the same needs to happen on the supply side through the advent of supply response networks—helping to increase visibility and transparency across the first mile. Only then, will those companies who plan, buy, and move goods thousands of miles each year, be able to truly create the levels of resilience and interoperability that are required to not only keep the supply chain on track, but enter it into a new era of success.
Rob Garrison, Mercado CEO

About the Author

A highly accomplished Global Supply Chain executive with 25 years of experience, Rob Garrison has provided strategic vision and leadership to Fortune 500 companies. Rob has an impressive history of building agile, technology-enabled supply chains, and he has an established track record of forging high-growth partnerships, positioning organizations for success and launching innovative technology solutions that significantly improve end-to-end supply chain efficiencies. Rob is currently CEO and founder of Mercado Labs.
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