Plug-and-Play Supply Chains: A Smarter Path to Growth
Companies and their supply chains have found a powerful new strategy for driving profitable growth brick by brick—the plug-and-play supply chain. Here’s how it works.
Years of growth, merger and acquisition activity, changing customer markets, and globalization have taken their toll on supply chains. “Instead of operating a concise set of ‘configurable’ supply chain segments, many organizations wrestle with a web of complex and overlapping or underdeveloped supply chains,” says Accenture in a recent research report.
A DHL Supply Chain survey of 350 companies on supply chain structure and strategy bears this out. Thirty-two percent of respondent firms report operating more than 10 discrete, ‘one-off’ supply chains. Other studies cite even higher numbers.
The problem with this complexity is that it creates a web of disconnected, cumbersome, high cost, and full of waste supply chains. It hampers companies’ ability to respond to real-time market dynamics, and exposes them to quality gaps and performance failures—all of which threaten competitiveness.
These realities have sparked new interest in streamlining supply chains through two methods: segmentation and standardization, but not the practices of five or 10 years ago.
Thanks to advances in big data analytics and visibility, organizations can now create cost-effective, agile supply chains built on intelligent, data-driven decisions around customers, markets, and, importantly, profitability. This emerging model is called the plug-and-play (P&P) supply chain, and it is gaining traction worldwide.
The P&P supply chain is a simple concept. It comprises a set of core standardized, easily replicated solutions, augmented by standardized, process-proven bolt-ons that are tailored to unique segment or market needs.
The easiest way to visualize P&P is in the context of Lego blocks. The core supply chain consists of blue blocks that form the foundation/majority of the construction. The bolt-on options are yellow, light blue, and grey—far fewer in number—added atop the blue foundation. These alternate colored building blocks are limited in number of colors, and standardized within their own color.
“The idea is to create configurable base-case solutions that satisfy 70 to 80 percent of a market segment’s requirements,” explains Gary Keatings, vice president solutions design, DHL Supply Chain. “Then add optional plug-ins that provide solutions based on unique customer requirements.”
The first step in creating a P&P supply chain is smart segmentation.
All companies segment their supply chains—at least to some degree. Traditionally, though, they based their segmentation on general attributes such as customer type, products, divisions, geographies, and channels. This approach remains in wide use, according to the DHL survey (see Figure 1).
Fig. 1 How Are Your Supply Chains Organized/Segmented?
Source: DHL Supply Chain, 2016
Segmenting by such broad categories, however, has its drawbacks. “It’s essentially a blunt instrument,” notes Richard Sharpe, CEO of Atlanta-based consultancy Competitive Insights.
When companies segment by product and customer, for example, they typically do so based on aggregated characteristics or data. They may segment by revenue or by some form of cost or profit allocation, and they may apply a standard margin. Or they simply segment by region. “But there’s no precision in their decision-making because the information they’re basing decisions on is not precise,” Sharpe insists.
As a result, two different customers buying the exact same products may generate wildly different profit contributions. And no one knows why.
Next-generation segmentation tackles this problem of managing by aggregates and averages. “We can now drill down to accurate profitability by SKU, by customer, and by channel to see the drivers of profitability and the root causes of unprofitability,” Sharpe explains. “This provides the data needed to make smarter segmentation and standardization decisions.”
Segmentation looks at the true cost to serve,” notes Tom Kroswek, group director for supply chain solutions, innovation and product development, for Ryder, a third-party logistics provider based in Miami. Cost to serve includes all the logistics expenses—inventory, storage, processing, transportation, handling—involved in distributing a product.
“Good warehouse and transportation management systems feed this information into an analytics platform, which allows companies to calculate logistics cost to serve by customer and by SKU,” Kroswek says.
Other critical data, coming from the company’s enterprise resource planning and, if applicable, point of sale systems, complete this cost and profitability picture. “You need to collect data from all four sources, which are usually separate and siloed,” says Sharpe. “Then cleanse the data and translate it into a single version of the truth—a single picture of profitability.”
“Most companies have the data, but they don’t look at it holistically,” Kroswek notes. “Instead, they make sales-driven decisions based around sales volume and promotions.
“The sales force is doing what they think is best—selling everything to everyone,” he adds. “They may make special logistics arrangements for a customer who placed a big order. But if the company doesn’t understand the cost to serve by SKU, it may have made a decision that actually loses money.”
In this journey to smart segmentation, big data analytics often produce startling findings. For example, when one consumer products company mapped the number of customer delivery locations against how much they contributed to total profit, it found, much to its dismay, that 95 percent of its delivery locations are only marginally profitable.
Further, the five percent that are profitable represent 80 percent of the group’s profits (see Figure 2).
Fig. 2 Customer Segmentation by Exact Profit Contribution
Source: Competitive Insights, 2017
Armed with these insights, the company worked with its customers to adjust order and delivery parameters to be more cost effective while still maintaining service levels. Although the reconfiguration is still underway, the company is steadily increasing customer profitability.
Once companies segment their supply chains, the next task is to standardize them, doing so across people, process, and technology. The idea is to create repeatable supply chain components and solutions that are finely tuned to drive profitability.
Because they deal with so many types of supply chains, third-party logistics (3PL) providers are on the forefront of adopting this standardization strategy.
“We realized that although the processes we had developed to service our customers were working at peak efficiency, our methodologies and services were difficult to scale—for us and for our customers,” says Keatings. “It was taking all of our effort to manage the existing complexity in our business. We had to find a better way.”
DHL’s biggest challenge was solving the same problem repeatedly and not creating an institutional corporate memory of best practices. So, it conducted an extensive review of its best-in-class customer sites, and mapped what “good” looks like. It used this information to create a process library for two streams—one for physical processes and a correlating one for systems/IT.
From this exercise, DHL created a core operating template—with a physical and an IT solution—that solves for the most common supply chain requirements. It then compares a new customer’s requirements to that template, assesses how much of the supply chain fits the template and how much doesn’t, and develops a solution that solves for the right mix of standardization and customization.
“In the supply chain mapping process for a new customer, we may find there is an 85-percent match to three of our existing customers’ supply chains,” the DHL vice president explains. “We then figure out what the next 10 percent of tailored, but standardized, plug-ins should be. Finally, we solve for the 5 percent of truly unique challenges on top of that. The key is starting from that 85-percent fit.”
The potential benefits of adopting a P&P supply chain strategy are significant, as Dell proved. According to a case study in MIT’s Sloan Management Review, Dell re-engineered its global supply chain using smart segmentation and standardization. The results:
- 37-percent improvement in product availability
- 33-percent shorter order-to-delivery times
- 30-percent reduction in freight costs for notebooks
- 30-percent reduction in manufacturing costs.
Similarly, companies in the DHL survey expect big wins in efficiency, cost reduction and agility (see Figure 3).
Fig. 3 Expected Benefits of Full P&P Implementation
Source: DHL Supply Chain, 2016
Implementing a P&P supply chain strategy is not easy. For many organizations, it flies in the face of how they perceive their company and its operating model.
“People have gotten used to thinking that their company, its supply chain, products, and customers are special, unique and different,”says Keatings. “They’re reluctant to change over to this new strategy because they’re worried execution will break down in some way.”
Add to this the fact that the cost to change can be significant. “If you move over to the blue ‘Lego platform’, you switch off existing infrastructure and may require a new or different infrastructure,” the DHL vice president notes. “Most people are not keen to invest in long-term supply chain projects. They’re looking for quarter-by-quarter savings from their supply chain. So, no one wants to own that longer-term investment.”
The bottom line: analytics-driven supply chain segmentation and standardization, successfully implemented, can increase an enterprise’s profit, and repeatedly.
“Enormous money is at stake,” says Sharpe. “If I can make just 10 percent of my marginal customers more profitable, I can increase my profitability without selling a single additional product. And that is huge.”
P&P on the Block in India
One global medical device company has been working on intelligently standardizing and segmenting its supply chain for specific markets—not just to reduce costs, but also to fuel growth. “Our underlying premise is that we create supply chain elements that are standardized and thus interchangeable,” explains the company’s supply chain director. “Then, we can easily tweak the supply chain in question to fit specific markets.”
The company tested this strategy in India, one of its target high-growth markets. “We devised two different supply chains to serve India—one for premium and one for generic medical devices,” the director says. “While these two supply chains were similar in many respects, they were adjusted to offer a different array of products and services to people of different incomes. This was crucial to making our company competitive in the Indian medical technology market.”
One supply chain serves the “elite” market, distributing premium products at premium price points. The higher margins and profitability on these products allow the company to provide a higher level of service to its customers.
At the other end of the spectrum—the “generic” Indian market segment—the manufacturer built a supply chain capable of handling lower-price-point products consistently and efficiently—at a cost structure commensurate with the product price profile. “We used the same warehouse for both price points—and were able to gain economies of scale simply by creating a value-adding capability within that warehouse,” the director notes. “So, we optimized our network but still served both spectrums of customers.”
The bifurcated supply chain strategy for India paid off for the medical device maker. Cost-to-serve was appropriately attuned to each market segment. This enabled the manufacturer to compete effectively and profitably in both segments—and win market share in India’s fast-growing market.
The Plug-And-Play Supply Chain
Core solutions should satisfy 70-80% of the requirements in a market segment.
What is it?
- Core, standardized, easily replicated solutions, augmented by standardized bolt-ons
- Two key building blocks:
- Smart segmentation
Source: 2017 PSM Workshop; ©2017 lharrington group llc