High performance supply chains have been created through trade liberalization, globalization, advances in logistics & communication networks and soft infrastructure developed & implemented by software companies and business consultants. Now the high technology start-ups have taken over the valuation, job creation and consumer favour. The incumbents thinking that the current scenario is a passing hype and ignore the rising trends may face peril. It is time for all supply chain and logistics companies for revisiting their business models and act strategically.
Professor N Viswanadham
In the last three decades, carefully crafted globalization policies for reducing the trade barriers and the free exchange of goods, services, capital, and labour & advances in the communications and information technologies have played essential roles in creation of high performance supply chain networks. They increased productivity, opened markets, and created opportunities for billions of people to improve their lives. Outsourcing to low cost countries has resulted in creating growing emerging markets and burgeoning middle class. Several software companies such as SAP, Oracle, IBM have built software packages and consultants and IT companies have implemented them.
The business model followed by these successful companies is to possess tangible assets of manufacturing and distribution and win through product innovation, scale, lean and efficient processes and better execution. Companies favour ‘closed’ innovation model and supported own R&D. Further, labour protections (minimum wage, worker safety, insurance, unemployment benefits, etc.) are part of the employer’s business model cost structure. The value proposition followed by these companies is to deliver quality products to the customers through their brick & mortar retail partners and make profits.
The rise of smart start-ups using new technologies, and the changes in the political and economic scenarios around the world are heavily disrupting the supply chains. Competition faced by incumbents is not from vertical giants but from a fleet of high tech start-ups.
Disruptive changes affecting the supply chains
There are several changes, which are disrupting the incumbents supply chains. These include in addition to tech savvy young customers: New technologies, government policies, digital start-ups funded by deep pocket venture capitalists, rise of sharing economy and finally societal factors.
New Technologies
New technologies such as mobile Internet, IoT, cloud, big data analytics, 3D printing, blockchain, digital wallets, drones, driverless cars & trucks have been creating new industry giants at the cost of old businesses. They are also creating game changing disruptive innovations. E-commerce is disrupting traditional distribution; Uber and Ola are upending organized taxi companies; Airbnb has hotels very concerned; Bitcoin is future currency; Amazon is testing drone package delivery; driverless cars are being tested in some countries, food delivery startups are favored by younger generations and the list is endless.
The new technologies are also creating disruptive changes in the supply chain business processes: procurement, manufacturing, distribution & retail and finally repair & maintenance. Digital platform based orchestrators act as intermediates between various suppliers and manufacturers. The factory floor is getting automated with Internet of things: talking parts and intelligent machines. By connecting machines, a manufacturer can create intelligent networks along the entire value chain that communicate and control each other autonomously with significantly reduced intervention by operators. Retailers gain an understanding of how shoppers move around their stores – where they go, in what order, how long they stay, when they come to the store, and how all of these questions map to actual sales using machine learning and AI based predictive models. A connected car communicates directly with ‘the cloud’ to offer services such as connected navigation, dynamic routing based on traffic, weather, or road conditions, or an automatic parking spot finder that offers directions to available parking spots. The maintenance and repair service chain is shifting away from preventive maintenance to need based repair based on IoT big data analytics. 3D printing is being used to produce the spare parts. Blockchains offer a way to introduce transparency into supply chains by tracking what went into a product and who handled it along the way, breaking supply chain data out of silos, and revealing the origin and journey of the product to everyone involved from originator to end user. Blockchains can reduce the time and effort needed for customs clearance and trade finance.
Rise of startups
There is a rise of start-ups in the world by unbundling the companies and their business processes using new technologies with massive funding from VCs. These new industry giants are threatening the old businesses. Since 2010, India has become the home of young start-ups. It has 4000 start-ups (US 41,500 & UK 4000) supposed to grow up to 11,500 employing over 250,000 people by 2020. High percentage of the startups use ordinary resources. Recent billion dollar unicorns are digital platforms connecting service providers and customers and they own no assets. For example, Uber owns no taxis, Airbnb owns no properties, Skype or WhatsApp owns no infrastructure, Facebook, creates no content, Netflix owns no cinemas, etc. Further, in all these companies, human resources are on contract and they follow open innovation model. The startups have a business model of delivering value to the customers sharing the resources of other companies rather than owning the resources. This is different from that of the incumbents. Healthcare, retail and investment finance, maintenance & repair, hotels, taxi services are some of the businesses that are heavily disrupted by startups. The sharing economy companies such as Airbnb, Uber and Ola are platforms connecting potential consumers with under-utilized property or skills. Increasingly, the laws written to regulate old industries need to be rewritten to protect the employees as well as the customers of new high-tech startups following shared economy or e-commerce.
Political and economic factors
Currently, Globalization is facing its biggest test. In the past year, there has been an astonishing backlash, in USA and UK. The United States, previously great supporter of free trade, globalization and mobility, is cancelling trade agreements introducing tougher visa regulations and planning to build walls across neighboring borders. The US government wants the people to buy American goods and the companies to hire Americans. This would affect the mobility of the talent around the world. In Europe, the UK has voted to withdraw from the European Union. In India, the government had introduced several initiatives: Make in India, Digital India, Swatchh Bharat and most recent Cashless Transactions and Digital Economy. The last initiative started on Nov 8, 2016 by demonetizing the Rupees 500 and 1000 currency notes which forms about 85% of the cash in circulation. GST law may be introduced soon. These have effect on the retail, auto and real estate industries and their supply chains.
Several countries have seen an upsurge in populist politics to tap into a rage felt by ordinary people angered by the rising tide of migration and its consequences of diminishing employment prospects, heightened security fears, and challenges to national identity. Firms could soon find themselves in an environment of escalating political risk in terms of trade, access to talent, regulatory rules and constraints, and restrictions on new technologies. Political uncertainty could become the major business risk.
What is the way forward?
Today, the business community comprises of both incumbents based on old business model of possessing tangible assets, owning R&D and employees and high valued startups using ordinary resources and contract employees, serving the needs of the people using open innovation and strong social networking relationships. The former variety are struggling with declining customers and to find ways of survival and the startups are trying to turn profitable sooner using automation technologies and algorithmic governance to enhance resource efficiency. The governments are promoting job creation, security and economic growth and sometimes these tendencies are turning to be anti-global. For the incumbents, change in the business model is essential. For example, brick & mortar retailers like Wal-Mart following the value proposition of everyday low prices and possessing stores and warehouse infrastructure, partner network of global suppliers and logistics providers would like to compete with platform companies such as Amazon giving discounts on every purchase and home delivering products at a convenient time.
Same is true with companies like Flipkart, Snapdeal, Uber, Ola, Airbnb and many others. Many incumbent retailers are trying to keep up with e-commerce competitors by following omni-channel strategy and taking the help of start-ups to develop in-store technologies ranging from shelf-stocking robots, to augmented reality displays, to Wi-Fi-based beacons that collect data on shopper behavior. It is also essential for companies to change the focus from product to value creation to customers and partners. A requirement of a successful business model is to identify partners who can share costs (companies, Individuals who benefit from your venture) as well as be the revenue sources. Some IT Companies are moving to platforms inviting other partners to provide complete e-commerce solutions to the customers. In essence, the incumbents need to turn ambidextrous or be Chimeras.
Several start-ups serving the unbundled business processes are disrupting several industry verticals. For example, technology is disrupting the financial sector at an unprecedented pace. From bank transfers, to payments, to loans, each financial function today has a strong play of technology, with more scope for disruptions. Also, truck logistics is a huge sector. India has 4.5 million trucks. It’s a very fragmented market so there’s a great role to play in organizing the market. Each company is approaching the problem differently. While players like The Porter and LetsTransport operate only within cities, companies like Rivigo, Blackbuck and Truckola cross state boundaries. The start-ups are trying to be profitable by providing products & services not only to the primary customers but identifying and nurturing secondary & tertiary customers following the Google Freemium model. One needs to make sure that the right business model is designed, prepared with the right technology and strategy to ensure the success of the project.
To sum it all, manufacturing supply chains are changing face and several disruptive changes are occurring in all phases of the supply chain. Competing globally in this scenario requires new business models based on the deep domain knowledge. This is an area that requires immediate corporate, academic and governmental attention.
Categories
