Sustainable Supply Chains and the Post-Industrial World

I had an interesting conversation yesterday with a supply chain executive from one of the big Hollywood Studios about sustainability strategies in their industry.  Yes, they got the memo that Wal-Mart is gearing up to demand environmental and social impact information on labels (a few years from now).  And, of course they understand the benefits of slimming down packaging (30% weight reduction for DVD packaging already achieved).  And, as for water or other resource implications in the production process for DVD's, that gets done upstream by replicators who burn and these discs in the first place. 

Net: not much of a sustainability story here - or is there?

I asked about burn on demand capabilities along the lines of the Blockbuster video kiosks that NCR is making now.  The answer is yes, that's just getting started.  In terms of sustainability, each burn-on-demand DVD keeps about 1 pound of carbon out of the atmosphere.  Benefits also naturally accrue in terms of inventory not held, shipments not paid for, and sales not missed.  This business model is capable of delivering $20+ worth of consumer value at virtually zero environmental cost.  The digital supply chain for DVDs offers hope that many supply chains might in time morph into hybridized physical/digital delivery systems in which the physical work (atoms) can be separated from the pure intellectual property work (electrons) to give us revenue growth on ever slimmer tangible platforms.

Of course, such an idea depends on a major overhaul of our physical infrastructure towards an increasingly localized final assembly stage at which the software is loaded before the consumer walks away.  Although this is obvious for entertainment products it is possible to imagine how it translates to other industries.  Take life sciences for instance, where diagnoses and conceivably even lab tests could be conducted remotely with patient (or sample) condition transmitted electronically to specialists for analysis.  Maybe it can work in automobiles where options like GPS navigation or fuel optimzation technology could be enabled at the dealership or even at home via bluetooth connections.  Is it possible for supermarkets to offer mix-on-site food, beverage or health and beauty products in reusable containers?  Yes it is.  Each of these ideas however, requires a whole bunch of new equipment and processes to get anywhere near viability.

The big idea is to realize that future generations will spend most of their disposable income and time consuming ideas, rather than commodities.  If our supply chains are still oriented to the delivery of stuff by truckload we'll end up making less money and a bigger mess. 

Taming Complexity in the Global Supply Chain: HP's Story

HP manages one of the most complex and truly global supply chains out there. The $118B company serves nearly every country in the world manufacturing and sourcing from every corner. And at the heart of that is Tony Prophet, senior vice president of HP's $57B Personal Services Group (PSG--which includes PCs, notebooks, and procurement for all HP).

A few years ago, the computer industry was labeled a commodity, with manufacturers making the same things and indistinguishable from each other. But the truth is the industry is just the opposite. While everyone may be building a computer out of the same parts, and most are doing it through a mix of owned and contract manufacturing, how well they create a brand identity around those products makes all the difference.

Manufacturing in the Content Economy: Samsung's Challenge

Samsung Electronics seems far removed from the content economy, but it's anything but. Content is invading nearly every aspect of products and manufacturing these days. As a maker of mobile phones, televisions, camcorders, Blu-Ray players, appliances and other electronic devices, Samsung is dependent on its products not just playing the content flowing through the global economy, but enhancing it for the consumer wherever possible.

"All of us fear being commoditized," Omar Khan said. Mr. Khan is the senior vice president of strategy, product management, and customer service at Samsung Telecommunications America. He followed former Disney CEO Michael Eisner with his keynote at AMR Research's Supply Chain Executive Conference today.

"Whatever it is we do, it has become a level playing field for everyone. When a company like Google or Apple can make a cellphone, it's changed. They aren't companies that are creating hardware, they are creating the content that creates those devices, which are then manufactured by someone else in Taiwan. Our challenge, all of us, is how do we innovate and make money doing it so we don't become commoditized?"

So what is a manufacturer like Samsung's role in the global content economy? Create products that enrich end-consumer experiences.

China's IP Crimes Come Back to Haunt Them

Our quarterly risk data is in again and the topic of intellectual property risk continues to grow as a concern for supply chain strategists looking to China for sourcing and manufacturing.  Not only was IP infringement risk highest by a mile in China vs. other geographies, but it was also the highest rated risk proportionally among all 15 risks studied.  For perspective, 59% of supply chain executives surveyed said China was tops for IP risk against the second worst IP infringer, India, who was cited by 8% of respondents.  In fact, the number two overall vote getter for IP risk was the control answer "Not a risk in any region" which got 16% of the votes.

This time we dug a little deeper to see what companies are doing to limit their IP exposure.  The top response by a wide margin (33% vs next highest at 19%) was "We in-source sensitive components & processes to protect IP".  We have been tracking the move back from China to near or on-shore production and sourcing and this new data says global supply chain strategists increasingly look to China for commodity manufacturing only.  This is not what Beijing wants to see as it tightens labor regulations and tunes exchange rates in an effort to move up the value chain and away from its "cheap labor" brand.

 

I had an inquiry recently from a big retailer whose China supplier was pushing for price increases based on "skyrocketing" labor costs.  This big buyer won't pay these higher costs without some increase in value.  Meanwhile, our data says manufacturers are explicitly going the other way because they are tired of getting ripped off in brands, patents and other IP.  To quote this buyer "there's always another China" meaning, low cost labor options abound.  If the IP problem isn't addressed, China's long march to economic power will grind to a halt in the mud of distrust.

IT is Shaking up the Educational Supply Chain Too

Last week I met a fellow named Ross Mitchell who had just won a major decision by the Massachusetts Supreme Court allowing him to sit for the Massachusetts Bar exam, despite having attended law school at an institution not approved by the ABA (American Bar Association).  The decision was a big deal because the unapproved law school in question was Concord Law School, a completely online school owned by none other than Kaplan Inc., who in turn is owned by the Washington Post.  Although the ruling had a couple of caveats, the net effect was to open the gates for students to take online education all the way to the goal line, in this case, admission to the Massachusetts Bar.

With the Boston Globe about to hit a wall and both education and healthcare costs growing faster than people can believe the ray of hope once again is Information Technology.  Newspaper print editions' poor economics is partly due to a cumbersome physical supply chain and partly to hugely ineffective broadcast advertising methods.  In education and healthcare similar problems arise from mass production methods applied to what are inevitably highly customized goods.  The key is personalization without the attendant high costs of a one-on-one tutor or live in nurse.  In newspapers, perhaps the answer is what I have come to use instead of even the New York Times, which is a Blackberry account with the Washington Post.  Personalized information delivery (including the round-trip kind that goes back to a teacher for grading) may break the high-cost-delivery death grip that is ruining knowledge based sectors of the economy.

If the Massachusetts Bar will accept students trained online then the hurdle to gain entrance to these fields just got cleaner.  The exam is no easier, but preparing for it is now alot less expensive.  Digital supply chain grafted onto physical supply chain promises more such forward leaps in efficiency.

My Exploding Brain and the Growth Platform that only Apple Gets

OK.  I write lots of impassioned stuff about the need to master the content economy and the mega-growth platform of intellectual property.  Today my brain nearly exploded as I read the New York Times pages B2 and B3.  On B2 Treasury secretary Tim Geithner is quoted saying:

"Never before in modern times has so much of the world been simultaneously hit by a confluence of economic and financial turmoil such as we are now living through"

It is the epic shift promised in Naisbitt's Megatrends back in 1982, but now the earth is finally cracking.  The UAW meanwhile guts what is left of Detroit by looting the quake damaged house of Chrysler instead of preparing anyone for the real struggle to come.

Over on page B3 however the sun shines brightly on Apple. So brightly in fact, that its reflected moonglow is enough to hoist the old Ma Bell (now AT&T) out of a terminal land-line decline.  The App Store has just sold its 1 BILLIONTH download, and analyst A.M. Saconaghi at Sanford Bernstein cited as most impressive of all the company's 36.4% gross margin for the quarter.

The quote that caught my eye on page B3 was Apple COO Tim Cook (a supply chain guy from way back) dismissing netbooks:

"When I look at what is being sold in the netbook space today, I see cramped keyboards, terrible software, junky hardware, very small screens, and just not a consumer experience that we would put the Mac brand on, quite frankly".

For those who believe in demand driven supply networks as AMR has researched it for the past five+ years this single quote says it all - sourcing strategies, design strategies, branding and content strategies, all hooked to the engine of consumer experience.  Stop focusing on what your industry can't do and ask yourself, how should our demand driven supply network change to harness the engine of consumer experience?  Harley-Davidson does it well enough that people literally tattoo the brand on their bodies.  Procter & Gamble does it with human biology and the promise of youth.  BASF does it with chemistry that improves the finish of a snowbaord.

The exact wrong way is what Chrysler is doing - fighting over who gets screwed worst.

The Next Big Land Rush: Believe or Not, Its Knowledge Management

This sounds silly for anyone who has ever been involved in the typical hapless library exercise of a digital “knowledge management” initiative.  The lasting image for most of these efforts is of a black hole - everything goes in, nothing comes out.  But get ready for a change of tune.

The root of this is an exploding need among all players up and down the global supply chain to harness and leverage their intellectual property without giving up control or worse, having it hijacked and used against them.  An example is the kind of engineering intensive knowledge stored in the heads of thousands of soon-to-retire manufacturing process guys in the chemicals industry.  I talked to ExxonMobil about this and found they’re keen to solve it before the IP ends up sitting on a beach in Florida somewhere.  At the exact opposite end of the spectrum is the issue of managing IP for a company like Hasbro.  They have pure entertainment images that will manifest as profitable toys like Barbie, unless someone raids the files and dumps a load of cheap counterfeit knockoffs onto the market.

How do you capture, catalog, update, distribute, and otherwise collaborate on knowledge (i.e., IP) when it ranges from expertise to trademarks?  It turns out practically every technology vendor category has an answer for you.  Collaboration vendors from little guys like Jive to big guys like OpenText have a story.  B2B and EDI guys like Sterling Commerce, GXS, and Inovis are part of the puzzle.  PLM guys like Dassault, PTC or Siemens are certainly in the mix.  Digital Rights Management vendors have been thought of largely in terms of media and entertainment uses, but players like Adobe, EMC, and even Oracle (with its Stellent property) deserve a look on this front.  Plus the security vendors like Symantec, EMC and RSA need to be considered.  And finally, all the platform guys figure into the equation - IBM, Microsoft, and Oracle all appear across the board with “solutions” in each of these categories.

The net of it all is that manufacturers and retailers across sectors will absolutely need to handle the question of how IP works its way around the global supply chain.  One worry: letting Microsoft Sharepoint creep in as the defacto standard for management of IP in interenterprise collaboration.  Its so easy to set up and start using… it naturally links to your most familiar workspace, namely Excel, PowerPoint, and the rest of MSOffice.  But where is the control and scalability?  I’m not saying Microsoft can’t do it, just that renegade groups of employees doing it on their own will almost definitely end up making a mess, and possibly and expensive one.

Missing from the list of vendors with a solid pitch here is SAP.  The ERP backbone of choice for so many companies may have a stranglehold on transactions, but they lack punch when it comes to interenterprise collaboration, relying on partners like Seeburger and Crossgate.  This may seem a sideshow in Walldorf, but every industry is beginning to see the value of stuff that is presently flying around the digital supply chain, largely unsupervised.

I’d love to hear ideas on how best to map out a strategy for this problem.

The Dawning of a New Economy: Nokia Makes Another Move

The timing of this week’s Chain Reaction column (subscribe here) couldn’t have been better. After discussing the dawning of a new economy based on intellectual property, we now get news Nokia is moving further into that realm, opening an app and ringtone store. We've wrote awhile ago about Nokia's moves in this direction, increasingly competing with Apple. I, for one, am excited about this new move, not only because it shows continued progress toward a future global supply chain strategy that is more about ideas than merely handling material, but because it represents one clear path out of the demand-freeze now gripping the global economy.

Today’s Washington Post led with an article about the still worsening economy. The quote that caught my eye was; "Manufacturing, construction, financial services, non-financial, retail—wherever you look, you see a complete collapse in demand," said Julian Callow, an economist at Barclays Capital in London. "It really is like the floor has come out of confidence in global economic demand."

We have no demand because the traditional engine of growth, the American consumer, is sated. These pure content businesses can buck this trend because they are uniquely able to set prices at zero and still not lose money. Suppose Nokia or Apple decides to spur sales by running a promotion selling apps for a few cents. Do they lose money? Only to the extent that they pay royalties. Absent any production or shipping costs these sales are zero marginal cost. Plus, admit it, when you see ads on TV for Apple’s apps you are tempted, no?

As we showed in this week’s Chain Reaction, the best thing is that creation of these apps does not require any of the normal 20th century business infrastructure. Clever people, tinkering away at their desks is all it takes. Lots of people out there have time to get into this game now. It may be a slow, halting start, but the growth engine is here.

Let us know here your thoughts about the ideas in this week’s column and Nokia’s move.

Apple without Jobs – No Problem for at Least the Near Future

PC magazine just posted a thoughtful article by Tim Bajarin that says Apple’s idea pipeline is far from empty and that Steve Jobs’ absence should not mean an end anytime soon to its track record of breakthrough products.

We have more on why after the jump.

A Whole New Supply Chain

"We’re in the middle of a period that I refer to as a period of 'combinatorial innovation.' So if you look historically, you’ll find periods in history where there would be the availability of different component parts that innovators could combine or recombine to create new inventions. In the 1800s, it was interchangeable parts. In 1920, it was electronics. In the 1970s, it was integrated circuits.

Now what we see is a period where you have Internet components, where you have software, protocols, languages, and capabilities to combine these component parts in ways that create totally new innovations. The great thing about the current period is that component parts are all bits. That means you never run out of them. You can reproduce them, you can duplicate them, you can spread them around the world, and you can have thousands and tens of thousands of innovators combining or recombining the same component parts to create new innovation. So there’s no shortage. There are no inventory delays. It’s a situation where the components are available for everyone, and so we get this tremendous burst of innovation that we’re seeing."—Hal Varian, professor of information sciences, business, and economics at the University of California at Berkeley and Google’s chief economist, McKinsey Quarterly, January 2009.

This interview caught my eye because we are hosting a conference this spring on how companies build, monetize, and protect intellectual property in the global supply chain and too many supply chain folks still seem baffled by how to approach this issue. Mr. Varian points out the most important thing supply chain professionals need to understand if they want their operations to succeed: today’s combinatorial innovation is happening with bits – the physically non-existent components that add up to intellectual property. I touched on these issues in the latest Chain Reaction newsletter (subscribe here).

To supply chain people this means that any asset you manage which can be rendered as pure information–artwork for branding, formulas for food or medicine production, engineering data for complex assemblies like aircraft–can take advantage of the unlimited availability, reproducibility, and distribution of these IP components.

We have good news and bad news after the jump.

Retailer Survival Guide: Your Brand

Just in time for the National Retail Federation's big show in New York, this week's Chain Reaction newsletter (subscribe here) examines what makes stars in the retail world. The short answer: brand, specifically, those retailers that are more than just stores, but have built a brand that resonates with customers and keeps them coming back. Think Best Buy, Target, and Whole Foods and what they do differently than Circuit City, Linens 'n Things, or other struggling or defunct companies.

Read the full column here (preview account required) and let us know what you think.

New i-Tunes pricing – how does business get paid for pure content products?

I had an eye-opening conversation yesterday with a very senior operations exec at one of the big Hollywood studios about the pricing challenges in content industries--the tone of the dialog was pretty scary. To quote him on lessons being learned in the music business "the sky isn’t falling, it has fallen".

We circled the issue for a good 30 minutes from the old "Content is King" mantra of a decade ago through the hypothesis that maybe distribution is what really matters and ultimately back to the devices on which we consume content, whether that’s an iPod or a Blu-Ray player. No one seems to know how to get paid.

Shock to the System: Can the Volt recharge the US Auto Industry?

GM rolled out the production model of the Chevy Volt, this week.

GM rolled out the production model of the Chevy Volt this week

We had questioned whether GM and US manufacturing were ever going to get how the economy has moved from being based on things, to being based on ideas, what we call the "Content Economy." As we wrote in the new Chain Reaction newsletter (subscribe here), the Volt may be proof that GM gets it. In fact, GM is now talking about incorporating the platform the Volt is built on, called the E-Flex, into a whole line of its products. We hold out hope

2008 Supply Chain Top 25 with an Apple on Top

The 2008 Supply Chain Top 25 is here and the winner is ... Apple (No. 2, last year); it signifies an epic shift away from the 20th-century production efficiency mentality to a new era of value based on ideas, design, and content. The full list was unveiled last night at a special dinner at the Phoenician Resort in Scottsdale, Arizona. We're all here for our annual Supply Chain Executive Conference with this year's theme: "Globalization Comes Home" (and a keynote speech by former Mexico President Vincente Fox).

Last year we wrote, “Businesses like Disney, Microsoft, and Nike must rely on supply chain to realize the value of pure content industries, like feature films, computer games, and sports.” The implication of this line is even more compelling today as shown by our top-ranked supply chain, Apple, whose retail outlets churn cash with virtually no physical inventory on site.

Semantics matter, however, and the term supply chainunfortunately still carries baggage from days when the factory was king. Today’s business world relies on supply chain for everything from mobile phone service to home healthcare. Engineering, sales, and finance have all seen change over the past decade, but none has experienced the complete redefinition that is sweeping the world of supply chain. With truly global flows of material, intellectual property, and money, the supply chain suddenly owns accountability for where, when, and how reliably value is created along the chain.

At AMR Research, we have written extensively about the need for a demand-driven approach to global supply chain design and execution. Simply put, companies employing it perform better financially in terms of return on assets (ROA), profit margins, and earnings per share. As this year’s Top 25 shows, it is the companies whose approaches to supply chain are more about adding value than cutting costs that come out ahead.

We'll have an extended commentary of this year's Top 25 in this week's newsletter (you may have noticed it's delayed delivery as we waited for the list to be announced. Look for it Monday). We'll also have highlights from the conference for you. Stay tuned.