2010 – The Mission of Supply Chain

Either you regard 2010 as the last year of the 1^st decade or the first year of the 2^nd decade in this millennium, there is no doubt in my mind that this is an important year for Supply Chain.

As an avid book junkie, I read lots of books, magazines and newspapers every day. Of course, lots of them are purchased via Amazon. And I admit that I am a big fan of Amazon. Not only I often click through its website with no purposes, I pay attention to its newsletter emails, sales events, recommended reading lists, or fill out surveys…

Recently I cannot help noticing the duel between Amazon and some publishers. For instance, during last weekend, Amazon unilaterally pulled off all Macmillan’s books from its website. Later it was announced that Amazon surrendered and agreed to raise prices on all its electronic books.

Besides Amazon’s battle against publishers, you might have also noticed the following events in 2010 January headlines related to Supply Chain:

• No.#1 car manufacturer in the world – TOYOTA announced massive recall on its various models due to the sticky gas pedals;
• Major ocean shipping lines in the Transpacific Stabilization Agreement (TSA) announced emergency revenue recovery surcharge;
• LyondellBasell declared force majeure on US vinyl acetate monomer due to a compressor failure at its La Porte plant in Texas; Nationwide plastic suppliers are raising prices;

… …

So all of these events made me question what’s the mission of Supply Chain in this critical year?

For example, let us dive into Amazon’s world:

As an outsider, the traditional Supply Chain of books is:

Author -> Publisher -> Printer -> Wholesaler -> Bookstore/Retailer -> Distributer -> Consumer

During the Internet revolution, Amazon emerged as the superpower in the book publishing world because it successfully collapsed the traditional book Supply Chain and removed many middle layers by using new technology. It became both Wholesaler and Retailer at same time.

This is not it!

Because Amazon removed many middle men and had no brick-and-mortar heavy duty overheads, it quickly gained a competitive advantage and passed a part of the savings to consumers. Very fast, Amazon gathered its clouts and grew to be the No #1. It is the No #1 in front of publishers or printers, so if you are in the business of publishing books, you have to do business with Amazon and undercut your prices; From the other side, Amazon is also the No #1 in front of consumers, if you want to buy a book on line, the first thing pop in your head is Amazon, this is where you can get the quality service at the most competitive prices. So every party in the new supply chain settled in its new roles, we are now peace and dandy until Amazon launched its Kindle.

Kindle is great, because it uses e-Ink technology and looks like a book but without paper. So the printer is gone and the physical form of books is removed, thus no more printing, material handling, warehousing, packing or mailing. A book can be delivered to consumers/readers wirelessly when they are even driving or sleeping, and at anywhere in the world. (Kindle II)

So what is the price for a book now? How to evaluate a book in the new Supply Chain, which now looks like:

Author -> Publisher -> Amazon (Printer/Wholesaler/Retailer/Distributor) -> Consumer

The initial practice is that publishers sell their books to Amazon as a Wholesaler, and also sub-license them via the Kindle platform. Amazon sets its prices as $9.99. This 10 bucks is split between the supply chain: Author, Publisher and Amazon. And of course, Amazon takes the biggest chunk, because it plays multiple roles of Printer/Wholesaler/Retailer/Distributor, wearing 4 hats simultaneously.

But what Amazon wants is:

Author -> Amazon (Publisher/Printer/Wholesaler/Retailer/Distributor) -> Consumer, i.e.:

Author -> Amazon -> Consumer

Who needs Publishers, since Amazon can do the marketing and advertising, and Authors can do the editing themselves? Wow, what a brilliant idea! My blood is boiling as a Supply Chain professional. That is the success of Supply Chain, because it helps to further reduce costs and utilizes the least resources to produce the maximum returns.

Mission accomplished!

But in this new supply chain model Publishers are obviously screwed, so they want to stall this 3 steps model. First, they fiercely defend their roles in the value chain by limiting and timing the sub-licensing eBook supply. Second, they try to create alliances with other devices (Sony) or other channels (Barnes & Noble, Google). In the end, I found the consumer experience is actually ruined. The number of eBooks is very limited and often with a significant delay. And the market is fragmented, with different devices supporting different formats.

Now device giant Apple led by legendary Steven Jobs came in as the Publisher’s last straw. Based on Apple’s model which is designed around iTune and its new device iPad, the new supply chain process is:

Author -> Publisher -> Electronic Distributor -> Consumer

In this model, Amazon will be shoved back into the role of Electronic Distributor. There are still fewer middle men in the supply chain, so the eBooks are still cheaper without cutting into the authors or Publishers profits. Therefore publishers are excited to push more books and standardize the format.

So who is the real winner? The consumer!

This made me realize the Mission of Supply Chain should NOT only focus on cutting costs or removing layers. The Mission of Supply Chain is to create Shared Values between parties in the chain and ultimately deliver the maximum benefits to customers.

Therefore supply chain function can NOT just be cost driven. It should essentially set to maximize customers’ values and satisfaction.

In the end, what is always right – you can only win when your customer wins!