The Value Chain Model of Tomorrow

Thomas Bornemann, Managing Partner, Consumer Prod

7/1/2007

One of the most frequent questions asked by small to midsize consumer products company executives is, "Should I really pay close attention to this emerging demand-driven supply chain model?" Clarkston Consulting is firmly convinced that the answer is "yes." Small to midsize consumer products companies should begin implementing a demand-driven supply network today.

This conviction is based on two major findings: First, and perhaps most obviously, small to midsize businesses (SMB) are subject to the same macro trends driving the industry toward the demanddriven model as their larger competitors. Secondly, and perhaps most interestingly, SMB companies are usually far better equipped to institute changes rapidly to drive demand-driven concepts in supply chain execution.

The foundation of this new model is the tremendous empirical evidence in the industry that to succeed in tomorrow's crowded consumer products market, companies must be the most nimble and responsive in creating unique value propositions that fulfill consumer needs. Consider these facts:
> Consumers continue to become much more heterogeneous; the "average" consumer that is not based on extensive micro-segmentation is rapidly disappearing
> The consumers of today want ever more choices in products
> Consumers are increasingly getting inundated with more marketing messages; sifting through the clutter is difficult for all consumers
> The role of advertising has shifted greatly; it is much more challenging to reach certain consumers, shifting much of the marketing and sales focus away from advertising to instore execution
> Consumers want rapidly changing product mixes, readily available to their select groups

> Consumers are getting ever smarter and more savvy; they are willing to wait for new products if the value proposition supports it -- and have better information to make the value decisions

> Consumers apply better knowledge to quickly discern brand "sincerity" -- any brand deemed insincere can be negatively impacted quickly by rapid word of mouth (electronically based) exchanges between consumers

> Consumers are technically experienced; they willingly give up personal information in exchange for perceived value and convenience -- new models must capitalize on these new channels of communication with consumers

> All consumer packaged goods companies are being challenged to create meaningful new products that are based on real innovation, and to do this more quickly and efficiently (often with third party alliance relationships)

> Customers, retailers of all types, continue to desire unique and customized solutions, increasing the need for mass customization -- finding unique end products based on common components (lean Sigma based)

> The entire value chain of all industry participants is getting faster, more responsive with better information available for all participants (consumers, retailers, distributors, manufacturers, suppliers, etc.)

THE COLLAPSING VALUE CHAIN
At Clarkston Consulting, we have taken these dramatic changes in the consumer goods industry and named the business model of tomorrow the Collapsing Value Chain.

As Figure 1 shows, the sequential step-by-step world of supply chains linking to demand chains is becoming obsolete. By definition, a chain has handoffs, time gaps, bottlenecks, inefficiencies and misinformation. Today's consumer is losing the patience and desire that this old school model requires. Tomorrow's consumer will continue to demand faster responses to unique needs than today's average consumer products value chain can deliver.

The very essence of this model is rapid, tightly aligned communication channels that leverage today's leading methods to connect all participants in the value chain nearly simultaneously. At its highest level, this revolutionary business model portrays a world in which you can rapidly meet changing consumer demands with a very high degree of flexibility. This new-world value chain depicts:
> Launching new products to the market in weeks not months or years

> Little to no cash draining inventories, rather producing and shipping products to order wherever possible

> Forecasting less, not more as responsiveness increases

> A bias in all decision making in favor of consumer needs and responsiveness, not supply chain costs (revenue growth is a far better sustainable contributor to margin than strict cost savings)

> A highly collaborative model between all members of the execution network

APPLICATIONS FOR SMBS
Why are SMB companies particularly well suited to adapting to the new collapsed value chain? Because the No. 1 driver for adoption of this model rests on strong leadership from the top down, and smaller companies are usually much faster at making course corrections in strategies and aligning execution to get things done. Leaders need to believe in this model and then find creative ways to implement. SMB companies also do not generally have as much invested in hard assets in the linear supply chain model of today, and thus, are more flexible in making adjustments than many large companies.

For example, those SMB food and beverage companies that already distribute in a direct store delivery (DSD) model already have a great head start -- they can quickly get to store shelves and impact merchandising, fill rates and inventory more quickly than those companies that work in warehouse models. Perhaps SMB companies that only warehouse could develop an alliance with a DSD distributor for certain key, heavily promoted, high velocity products that would benefit from shorter product cycle times. That would be one step in migrating to being a leader in the newly collapsing value chain. CG

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