Metro and the Digital Download Race

I spoke at a conference in London this week and had a question from Mark Halper with Manufacturing Executive magazine about how companies other than Apple could play in the content economy. I rattled off my favorite examples of content as brand for CPG companies, content as patented science for pharmaceuticals, and content as engineering technology for chemicals companies. Where I have tended to feel a little thin, however, is in examples of content businesses and supply chain strategies for retailers. 

Conveniently, upon my return to the United States I was greeted by a little item in the New York Times about the innovative and respected German retailer Metro, who is acquiring London-based 24-7 Entertainment. 24-7 was founded in 2000 to handle downloads of digital content like music, films, and ringtones. According to the article, 24-7 managed 93 million downloads last year in Europe, trailing only market leader iTunes. Apparently, the plan is to manage it all as part of a wider consumer electronics retailing chain (Saturn and Media Markt). 

The emerging picture is one of a retail shopping environment facilitating shopper choice and presumably whetting consumer demand, but shorn of some (eventually much) of its inventory. Physical supply chains built to ship CDs and DVDs become obsolete. Soon to follow will be much of the physical chain supporting consumer electronics SKUs, whose variation can be burned in at the retail shop rather than built in somewhere upstream in a factory.

How fast can retailers learn the new rules of layering consumer-friendly features onto in-store items with digital-only SKU variants? Metro will be one standard to watch. Another angle is to ask whether they’ll learn it fast enough to keep up not only with the likes of Apple, but also Nokia whose 2006 acquisition of Loudeye lets it take cash from consumers after they’ve left the store.

The race is really on now. My guess is that it will move faster than many in the physical supply chain community can imagine.

The Global Supply Chain: Accelerating Recession and Recovery

I’ve been on the road for the past week and a half, but last Friday I had an interesting e-mail conversation with Jim Shepherd, an SVP at AMR Research, on the how the global supply chain affected the downturn, and will hopefully positively affect a quicker recovery in manufacturing.  Jim and Tony Friscia, AMR Research’s CEO, are going to write further on this topic in the coming weeks (I’ll post a link to it when it’s published), but I thought I’d share with you our email conversation below.

Jim Shepherd:
I have been reading lots of articles these days about the rapid decline in industrial output. The basic thrust is that this is a global disaster and the drop in manufacturing is unlike anything seen since the Great Depression, etc. Here is an example of the graphics used:

When I look at these graphs, I tend to see a very different picture. It seems to me that we are seeing modern supply chain management at work. For the first time in history the global network of retailers, wholesalers, manufacturers, and raw materials providers were able to rapidly sense and respond to a decline in demand. The initial drop in consumer spending was caused by a combination of the bursting of the housing bubble and the banking crisis, but the global supply chain reacted almost instantaneously. This actually appears to have occurred on a pretty orderly basis, without massive inventory buildups or long signal delays that might have caused downstream suppliers to keep producing unneeded goods. It would be interesting to know what the time lag was between Best Buy selling fewer plasma TVs and the drop in production of components in China, but I’ll bet it was a matter of days. 

We finally have a situation where the majority of companies in the supply chain have processes, information systems, trained professionals, and trading partner communications that allow the global supply chain to respond to change with astounding speed. The reduction in demand was unexpected and faster than anyone had ever anticipated, but manufacturing, with a few notable exceptions like the auto industry, was equal to the task. The bad news is that this reaction speed and global connectivity has also meant that the recession spread from Wall Street to the rest of the world is 30 days instead of the multi-year rolling recessions that we have seen in the past.

I think it is an opportunity to celebrate the progress we have made in supply chain management technique and technology, and I also think that it bodes very well for the industry’s ability to rapidly recover when demand returns. We might want to examine the sequence of events involved in restarting of the global supply chain and consider how it might work and how fast it can happen.

Kevin O’Marah:
It’s a good thought. I certainly agree with the premise. In today’s New York Times, there is a long article about the huge decline in manufacturing worldwide.

On one level, it demonstrates as you say that the global supply chain has reacted very quickly to demand drop-off. To your Best Buy question, I was in Asia last fall with a supplier when they told me they were already well into plans to cut production, and had in fact shut off Circuit City well before they declared bankruptcy. The demand signal was heard loud and clear.

The follow-up questions are all about what everyone does now that our manufacturing sector has in fact delivered this economy of abundance—so rich that we demand no new stuff at all. 

I think two answers are ready. One is to apply this magnificently efficient global supply chain to the problem of feeding and clothing the poor. Developing world demand is where we can find customers. With our brilliant efficiency, we should be able to price low enough to begin making a difference. The other is finding ways to embed information in our manufactured products to add consumer value without adding material. This is the theme of the conference. I marvel at the pace of change, but am ever hopeful that we are perfectly well equipped to respond.  Supply chain can save the world.

 

Supply Chain Can’t Save the World If It’s Not Allowed to Serve the World

I’ve said that supply chain is the answer to some of our really deep problems like environmental sustainability, affordable healthcare provisioning, and developing world welfare. Today, with a total freeze on world consumer demand, this is more important than ever. All of which makes the rise of protectionism pretty scary. 

Mexico is essential to our economy, and I would argue demand for consumer products in Mexico is one potential out for growth-starved companies here in the United States. We may be protecting some jobs with this kind of policy, but we are jeopardizing a far bigger prize—renewed global demand for everything.

I support almost the entire Obama administration budget because I see real growth in spending for stuff from servers to insulation. And although I know it means a huge ding on the long-term value of the dollar, I’m OK with it because we need demand now, and, we have needed some of these basic investments for years. Sadly, I worry that Michigan’s support for Obama in the election now means he owes organized labor a favor. Saving GM is dubious enough, but letting protectionist sentiment take root might end up undoing everything. After all, it’s the GLOBAL supply chain that works miracles of productivity, not thousands of local supply chains. Didn’t we learn this lesson back in the 30’s?

JCI in the Driver's Seat

Despite the dismal state of the auto industry, here’s a story about how Johnson Controls Inc. (JCI) is still innovating, trying to revolutionize the plug-in hybrid car market. One of the reasons JCI consistently makes our Supply Chain Top 25 (No. 23 in 2008), while many of its OEM clients do not and none of its supplier competitors do, is that JCI isn’t content to sit around and wait for the car makers to dictate its business. It’s willing to take the lead and define its own market by looking beyond its direct customers (the OEMs) and to the consumers themselves. This is also part of the larger intellectual property in the supply chain puzzle we’ll be discussing at our spring Supply Chain Conference. In the difficult automotive industry, JCI represents how every member of the supply chain can play a vital role in the flow of ideas through the supply chain.

Supply Chain Degree Programs: What Works?

I wrote a piece the other day about where the jobs will be in 2010. It ended up being the most-read article on the University of Massachusetts’ LinkedIn site (much to my surprise since I didn’t post it there). I guess looking for work is top of mind these days.

The funny thing is that we are told constantly by our friends in supply chain organizations at the big F1000 companies that finding, developing, and retaining supply chain talent is a major challenge. For all the fear in today’s economy, I think too much focus falls on the supposedly “good manufacturing jobs” we are losing. Squaring this disconnect boils down to redefining what the work looks like. Gone is the dehumanizing assembly line job; on the rise are the problem-solving, idea-generating, and connection-building jobs.

If you happen to be a hyper-creative RISD grad like Shepard Fairey, the future is all hope for you. But what about the typical engineer, MBA, or APICS-certified materials manager? No worries: Opportunities are there for people who master not just the skills of sourcing, operations, and logistics, but also the broader business context around it—i.e., the problem-solving, idea-generating, and connection-building stuff like new product launch, customer fulfillment, and after-sales service. At the risk of sounding consultant cheesy, one might even call it value chain.

Too many universities, however, are coming to this wider picture slowly. Lots of schools are ramping up supply chain programs, conferring degrees at undergrad and graduate levels, but many seem overweight in certain areas at the expense of others, and few really link supply chain back to product innovation. Make no mistake, solid (preferably certified) expertise in classic operations skillsets is essential, but your earning power comes from building on rather than just mastering the foundation.

I had the good luck to learn at the feet of three academic geniuses: Bill Lovejoy in Operations, Seenu Srinivasan in Marketing, and Dave Beach in Mechanical Engineering. These three professors at Stanford created a course called “Integrated Design, Manufacturing, and Marketing,” which had more influence on me than anything I have ever studied. The course was (sadly) discontinued and Lovejoy fled to Michigan, but the seed was sown.

Looking around, I wonder which schools today offer the ambitious young supply chain professional the best start. I have seen great things being done at the University of Wisconsin’s Grainger Center, and I still think Stanford probably owns the top talent in the world with Hau Lee. My colleague David Aquino just launched a survey on supply chain talent and university success stories. If you have some ideas about where he should look, please fill out the survey or leave a comment here for me.

Where the Jobs are At: 2010

If 2008 is the year we hit the wall, then 2010 is the year we start to show our resilience and see the light at the end of the tunnel. The big hook in Thomas Friedman’s March 7th column is all about how much junk we have built, bought, and thrown away in an extended surge of unsustainable growth. 

AMR Research has been studying this topic on three big dimensions since about 2000. The three all fall under the big title of Supply Chain Saves the World, and for those who enjoyed “The World is Flat,” the links back to strategies for global supply chain management are not just obvious—they are compelling.

First, we say supply chain is the discipline that most directly affects environmental sustainability. Every factory pumping out stuff; every truck, boat, or airplane delivering stuff; even every farm, forest, or mine that gives us the raw materials for all this stuff; are managed by supply chain professionals. The average asset productivity gain per year across the global supply chain is about 10%. This discipline, applied to packaging simplification, scrap reduction, energy recapture, and material reuse can, and with the right consumer leadership will, deliver a sustainable planet.

Second, we say that supply chain is also the answer to world hunger. The same efficiency gains described above apply to making markets like Nigeria, Pakistan, and Brazil attractive to business. A recent detailed study by IBM found that the best supply chains (those in our Supply Chain Top 25) consistently view emerging markets overwhelmingly in terms of new customers rather than new sources of cheap supply. This philosophy, especially when accompanied by real respect, will raise welfare around the world.

Third, we argue that supply chain is the discipline that will fix the healthcare problem. For three years running we have assembled leaders from drug, device, distributor, and provider organizations in Boston to dig into field research on the potential efficiency and efficacy gains of applying “demand-driven” (customer-oriented) supply chain practices to this troubled sector. The finding again is that 10% per year productivity improvements are within reach. If we can adapt the lessons learned in consumer goods to healthcare we will solve the problem.

So what about the light at the end of the tunnel? I argue it’s already visible and lies in learning, both as individuals and as a society, to create value in the most carbon neutral, globally sustainable industry available: pure ideas. The notion is that a “Content Economy” has been born, and like the tiny mammals that got their start alongside dinosaurs, the jobs, businesses, and markets emerging now will proliferate and thrive. I expect that a generation from now most people will work in pure information jobs. The good news—back to Friedman’s piece—is that these jobs consume virtually no energy, involve cutting no trees, and require dispatching no trucks.

There will come a time when, like agriculture before it, the industrial age fades from the foreground to its eventual supporting role in the world economy. Essential, yes, but certainly not the backbone of a healthy, happy human population. By 2010 this should be obvious, and to the relief of stock markets around the world, will be something investors can bet on.

Cydia and Apple: Lawsuits Will Be a Sideshow

Today’s Wall Street Journal has a big article about a new renegade competitor that is challenging Apple’s App Store and in the process whetting the appetites of IP lawyers. With all due respect to the legal eagles involved, technology and the global supply chain should make this debate moot.

The deal is this: Cydia’s founder is an application developer who, like many, doesn’t see himself as an enemy of the cool company of Cupertino. He does, however, want to have other app developers able to get to market and get paid for their IP. Apple, however, stands to lose some pretty serious margin contribution (30% commission on estimated 2009 sales of $800M, according to Piper Jaffray) and, arguably, a degree of control over the cherished User Experience. The legal issue is that Cydia’s apps work only on “jailbroken” iPhones, a process (or crime) that involves installing software written to modify the operation of the device. Cydia’s founder, Jay Freeman, claims 1.7 million iPhones have installed this software to date. Apple, understandably, sees a copyright infringement. Lawyers see an irresistibly interesting case pitting the little, ironically named Freeman, against the sinister controlling monopoly—almost like the famous 1984 Apple Super Bowl ad being shown in reverse.

The interesting thing for technology and supply chain folks, however, has less to do with the potential precedent-setting debate surrounding this matter than with the design, production, and distribution strategies that a smart company like Apple can come up with to put the issue to bed. Apple is number 1 in our Supply Chain Top 25 (by the way, supply chain professionals are welcome to vote in our 2009 Supply Chain Top 25), and not because of their lean or six sigma discipline. The secret sauce is in how industrial design, software design, and electronic design weave together into an irresistible whole. In recent years, Apple has added another layer to its supply chain innovation—retailing. The Apple stores, not to mention the AT&T distribution deal for iPhones, puts this once totally vertically-integrated computer manufacturer squarely in the business of relating to consumers all the way from concept to profit.

Defending the App Store will ultimately depend more on technical and business decisions made in component supplier collaboration, retail promotion, and technical support systems than decisions in the courtroom. Good lawyers will buy time to let Apple’s strategists work out the best way to protect its cash relationships with consumers. Hopefully, this will also allow creative types like Mr. Freeman to get paid for their creative work. But as the music industry learned the hard way with Napster, IP law is not enough to protect a business—physical supply chains must be part of instantiating control.

Categorizing Content in the Supply Chain

The Intellectual Property theme for our upcoming supply chain conference is generating an explosion of ideas, but an even bigger explosion of questions. Everyone, it seems, gets the basic idea that content, or IP, is important to their supply chain strategy, but often has trouble linking their version of the issue to the most obvious content types like iTunes or the New York Times. My colleague Jim Murphy and I took a crack at breaking this problem down. Here’s a first pass:
 
“Content” breaks up into different categories that behave differently:
 
Downstreaming Content:
Entertainment
News
Tradeable Business Information
 
Upstreaming Content:
Consumer Demand Data
Patient Health Data
Industrial Operational Data
 
Embedded Content:
Patented Science or Technology
Trademarked Branding
Fashion & Design
 
There are probably other kinds, but each of these nine behaves differently depending on source, use, and access characteristics. Each also has combinatorial requirements, for instance: iTunes + iPod = value.