supply-chain

Supply Chain In A World Driven By Bits

The supply chain is the set of steps between the sourcing, manufacturing, distribution of a product up to the steps it takes to reach the final customer. It’s the set of step it takes to bring a product from raw material (for physical products) to final customers and how companies manage those processes.

Supply chain in a nutshell

The supply chain represents the set of steps it takes to bring a product from raw to finished. And together with it, it also represents the set of steps it takes to bring the product to the final customers.

All the activities needed to fulfil this mission are part of a supply chain.

Imagine a Starbucks espresso. Before it turns into it, it follows a whole supply chain from bean to cup of coffee. All the steps taken from bean to cup of coffee in a Starbucks store will represent the supply chain for that product.

Supply chains vs. Value Chains

Value chains were first described by Michael Porter in his 1985 book Competitive Advantage. 

Here’s is how a Porter’s Value Chain looks like.

porters-value-chain-model
In his 1985 book Competitive Advantage, Porter explains that a value chain is a collection of processes that a company performs to create value for its consumers. As a result, he asserts that value chain analysis is directly linked to competitive advantage. Porter’s Value Chain Model is a strategic management tool developed by Harvard Business School professor Michael Porter. The tool analyses a company’s value chain – defined as the combination of processes that the company uses to make money.

He believed that the business must first identify its activities and then analyze the value added for each in the context of competitive strength.

Porter split these activities into two primary categories.

Primary activities

  • Inbound logistics – the receipt, storage, and distribution of inputs.
  • Manufacturing operations – where inputs are transformed into a finished product.
  • Outbound logistics – the storage and distribution of products and services to customers.
  • Marketing and sales – any activities that create product awareness among the general public.
  • Services – those activities that increase the value of the product itself.

Support activities 

As the name suggests, these are any activities that support primary activities such as HR management, technology, procurement, and infrastructure.

Thus, to recap the difference between value chains and supply chains, in the classical sense:

  • A value chain comprises the activities a company performs to create value for customers and maximize its competitive advantage. Supply chains describe the network of entities that source raw materials, transform them into products via manufacturing, and distribute and sell them to customers.
  • According to Michael Porter, value chains comprise activities that can add to a firm’s competitive strength. These include primary activities such as inbound logistics and manufacturing and any secondary, support activities.
  • The notion of value chains arose from business management, but supply chains have their roots in operational management. The latter is more concerned with conveyance

Beyond distribution

In some cases, supply chain and distribution are used interchangeably. However, distribution’s main focus is to bring the product in the hands of final customers, supply chain represents all the steps to make and also distribute that product.

direct-vs-indirect-distribution-channels

Yet, depending from the position in the supply chain distribution can take on several forms, all depending to how the customer looks like.

In short, distribution is a marketing activity skewed toward the final customer. If you’re a producer who doesn’t sell its product directly to customers, then distribution will be primarily about dealing with wholesalers, that in turn will distribute the product downstream, until it reaches the final customer.

digital-marketing-channels
A digital channel is a marketing channel, part of a distribution strategy, helping an organization to reach its potential customers via electronic means. There are several digital marketing channels, usually divided into organic and paid channels. Some organic channels are SEO, SMO, email marketing. And some paid channels comprise SEM, SMM, and display advertising.

The supply chain instead comprises all the processes that go from raw materials, sourcing, logistics, and distribution.

Upstream vs. downstream

The supply chain comprises all the steps from raw materials to final customer. Companies can expand within the supply chain by moving upstream (controlling more steps toward production and manufacturing) or downstream (by covering more steps toward the final customer). When moving downstream the company will get closer to final customers through the supply chain. If it goes upstream it will get closer to the sourcing and production.

Why do companies move upstream?

When companies move upstream, they have more control over sourcing and manufacturing of the product. That can give the company more control over the quality of the product. Also, by moving upstream the company can retain more margins, and take advantage of economies of scale.

Why do companies move downstream?

When companies move downstream they get closer to customers, thus gaining more control over customer experience. Any integration, either upstream or downstream can be expensive, yet companies gain more control to ensure the quality of the product (upstream) and the quality of the customer experience (downstream).

Moving both ways

In some cases, companies move in both directions, to enable a fully integrated vertical strategy. The Luxottica case study is a good example of integrating both upstream (toward production) and downstream (toward the sale to final customers it its own retail stores).

Upstream integration case study: Google starts to make its own devices

For years Google had been looking into building its own smartphones. Being the owner of Android, Google now had the chance to take a step upstream the supply chain of data by manufacturing its own phones.

And yet, the first official launch of the Pixel phone only happened in 2016. Google moved upstream by building its own devices, which also led it to be a step closer to customers’ value chain.

The physical phone, part of the Google’s supply chain could be used as the basis also of acquisition of users’ data, in line with the Google business model.

Therefore, when Google got upstream in the supply chain. It also got downstream in the “data supply chain” as it could gather data closer to users.

Downstream integration case study: Apple starts to build its stores

Back in 2001, Apple launched its own stores. As it highlighted at the time:

“The Apple stores offer an amazing new way to buy a computer,” And Steve Jobs, continued, “rather than just hear about megahertz and megabytes, customers can now learn and experience the things they can actually do with a computer, like make movies, burn custom music CDs, and publish their digital photos on a personal website.

This downstream integration, over the years, also worked as a powerful distribution strategy that enhanced customer experience for Apple’s products.

apple-distribution-strategy
In 2021, most of Apple’s sales (64%) came from indirect channels (comprising third-party cellular networks, wholesalers/retailers, and resellers). These channels are critical for sales amplification, scale, and subsidies (to enable the iPhone to be purchased by a larger number of people). While the direct channel represented 36% of the total revenues. Stores are critical for customer experience, to enable to provide the service business, and for branding at scale.

While Apple’s stores are extremely expensive to build and maintain, and they do not represent the majority of Apple’s sales. They worked as iconic locations where customers could recognize the Apple’s brand at scale.

And also the place where Apple could build a set of ancillary services for its own devices.

Supply chain vs. customer value chain

horizontal-vs-vertical-integration
Horizontal integration refers to the process of increasing market shares or expanding by integrating at the same level of the supply chain, and within the same industry. Vertical integration happens when a company takes control of more parts of the supply chain, thus covering more parts of it.

Where the supply chain comprises the steps and actions needed to bring the product from production to sale.

The customer value chain is about the actions the customers take when acquiring a product, and the values they get at each step of the journey.

Supply chains in the bits world

vertical-integration
In business, vertical integration means a whole supply chain of the company is controlled and owned by the organization. Thus, making it possible to control each step through consumers. in the digital world, vertical integration happens when a company can control the primary access points to acquire data from consumers.

Vertical integration can also work in the digital/bits world. Where companies get closer to the customer both upstream and downstream.

In the “data supply chain” the hardware is the closest thing to the customer, therefore we can also consider it to be downstream.

data-supply-chain
In a data supply chain the closer the data to the customer the more we’re moving downstream. For instance, when Google produced its own physical devices. While it moved upstream the physical supply chain (it became a manufacturer) it moved downstream the data supply chain as it got closer to consumers using those devices, so it could gather data directly from the market, without intermediaries.

Breaking down the supply chain as a business strategy

entry-strategies-startups
When entering the market, as a startup you can use different approaches. Some of them can be based on the product, distribution or value. A product approach, takes existing alternatives and it offers only the most valuable part of that product. A distribution approach, cuts out intermediaries from the market. A value approach offers only the most valuable part of the experience.

When companies remove steps in the supply chain, thus making it shorter, this is a process of disintermediation.

disintermediation
Disintermediation is the process in which intermediaries are removed from the supply chain, so that the middlemen who get cut out, make the market overall more accessible and transparent to the final customers. Therefore, in theory, the supply chain gets more efficient and, all in all can produce products that customers want.

In some cases, supply chain might change over time, as those same companies that disintermediated some steps, they might introduce new logics to an existing supply chain.

For instance, in the last-mile problem we saw how Amazon might be disintermediating existing and dominating delivery services, to reintroduce new mechanics of last-mile delivery.

reintermediation
Reintermediation consists in the process of introducing again an intermediary that had previously been cut out from the supply chain. Or perhaps by creating a new intermediary that once didn’t exist. Usually, as a market is redefined, old players get cut out, and new players within the supply chain are born as a result.

Tesla integrating and disintermediating

tesla-business-model
Tesla is vertically integrated. Therefore, the company runs and operates the Tesla’s plants where cars are manufactured and the Gigafactory which produces the battery packs and stationary storage systems for its electric vehicles, which are sold via direct channels like the Tesla online store and the Tesla physical stores.

A good example of both integration and disintermediation, is how Tesla controlled more steps of the supply chain, from production to distribution. While at the same time, it disintermediated the traditional car dealer, by selling its vehicles directly in its Tesla store, and on its e-commerce.

Luxottica integrating and intermediating

vertically-integrated-business-model

Luxottica is a good example of a company that took control of more steps in the supply chain, while positioning itself as the go-to licensor for luxury brands, from Bulgari, to Prada, Chanel and many more that produce their sunglasses through Luxottica.

AI, data and flipped digital supply chains

vertical-integration
In business, vertical integration means a whole supply chain of the company is controlled and owned by the organization. Thus, making it possible to control each step through customers. in the digital world, vertical integration happens when a company can control the primary access points to acquire data from consumers.
ai-supply-chains
An AI supply chain starts with the sourcing of data, which is produced by consumers. As this data gets stored on hardware, it goes through a first refinement process via software. Then it’s further refined, and repackaged by algorithms, and stored in data centers, which work as the fulfillment centers.

Connected Business Frameworks

AI Supply Chains

data-supply-chain
A classic supply chain moves from upstream to downstream, where the raw material is transformed into products, moved through logistics and distributed to final customers. A data supply chain moves in the opposite direction. The raw data is “sourced” from the customer/user. As it moves downstream, it gets processed and refined by proprietary algorithms and stored in data centers.

Bullwhip Effect

bullwhip-effect
The bullwhip effect describes the increasing fluctuations in inventory in response to changing consumer demand as one moves up the supply chain. Observing, analyzing, and understanding how the bullwhip effect influences the whole supply chain can unlock important insights into various parts of it.

Supply Chain

supply-chain
The supply chain is the set of steps between the sourcing, manufacturing, distribution of a product up to the steps it takes to reach the final customer. It’s the set of step it takes to bring a product from raw material (for physical products) to final customers and how companies manage those processes.

Data Supply Chains

data-supply-chain
In a data supply chain the closer the data to the customer the more we’re moving downstream. For instance, when Google produced its own physical devices. While it moved upstream the physical supply chain (it became a manufacturer) it moved downstream the data supply chain as it got closer to consumers using those devices, so it could gather data directly from the market, without intermediaries.

Last Mile Delivery

last-mile-delivery
Last-mile delivery consists of the set of activities in a supply chain that will bring the service and product to the final customer. The name “last mile” derives from the fact that indeed this usually refers to the final part of the supply chain journey, and yet this is extremely important, as it’s the most exposed, consumer-facing part.

Backward Chaining

backward-chaining
Backward chaining, also called backward integration, describes a process where a company expands to fulfill roles previously held by other businesses further up the supply chain. It is a form of vertical integration where a company owns or controls its suppliers, distributors, or retail locations.

Revenue Modeling

revenue-model-patterns
Revenue model patterns are a way for companies to monetize their business models. A revenue model pattern is a crucial building block of a business model because it informs how the company will generate short-term financial resources to invest back into the business. Thus, the way a company makes money will also influence its overall business model.

Pricing Strategies

pricing-strategies
A pricing strategy or model helps companies find the pricing formula in fit with their business models. Thus aligning the customer needs with the product type while trying to enable profitability for the company. A good pricing strategy aligns the customer with the company’s long term financial sustainability to build a solid business model.

Dynamic Pricing

static-vs-dynamic-pricing

Price Sensitivity

price-sensitivity
Price sensitivity can be explained using the price elasticity of demand, a concept in economics that measures the variation in product demand as the price of the product itself varies. In consumer behavior, price sensitivity describes and measures fluctuations in product demand as the price of that product changes.

Price Ceiling

price-ceiling
A price ceiling is a price control or limit on how high a price can be charged for a product, service, or commodity. Price ceilings are limits imposed on the price of a product, service, or commodity to protect consumers from prohibitively expensive items. These limits are usually imposed by the government but can also be set in the resale price maintenance (RPM) agreement between a product manufacturer and its distributors. 

Price Elasticity

price-elasticity
Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. It can be described as elastic, where consumers are responsive to price changes, or inelastic, where consumers are less responsive to price changes. Price elasticity, therefore, is a measure of how consumers react to the price of products and services.

Economies of Scale

economies-of-scale
In Economics, Economies of Scale is a theory for which, as companies grow, they gain cost advantages. More precisely, companies manage to benefit from these cost advantages as they grow, due to increased efficiency in production. Thus, as companies scale and increase production, a subsequent decrease in the costs associated with it will help the organization scale further.

Diseconomies of Scale

diseconomies-of-scale
In Economics, a Diseconomy of Scale happens when a company has grown so large that its costs per unit will start to increase. Thus, losing the benefits of scale. That can happen due to several factors arising as a company scales. From coordination issues to management inefficiencies and lack of proper communication flows.

Network Effects

network-effects
network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.

Negative Network Effects

negative-network-effects
In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining. 

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