Implementing Supply Chain Segmentation

We begin the webinar with findings from our 2013 CEO study in which we asked 180 CEOs in supply chain related industries about key strategic challenges.  Some of the findings were quite compelling:

Based on these challenges, we then share how you can use the supply chain as a competitive advantage in addressing these issues by integrating these three areas:

• 
• Customer segmentation — Understanding the unique requirements of different customers. Identifying clusters of similar demand across all customers, products and services that will dictate requirements for value chain capability.
• Supply chain segmentation — The process and governance to create differentiated capability for end-to-end supply chains to support unique demand requirements. Moving from one-size-fits-all supply chain management to managing a portfolio of supply chains that delivers upon different value characteristics such as speed, cost, service and differentiation, among others.
• Cost to serve — The ability to broadly and deeply understand supply chain costs and their relationship with the activities and services that drive them. A fact-based method for determining the appropriate service mix and operational model for each customer or product. Analytical capability to calculate the historical and forward-looking profitability of products, customers and routes to market.

We go into detail on this “Yes, but…” Value Chain model in the webinar and explain how it can address these key challenges identified by our CEOs.  The webinar is live on demand… and reminder that I am now on Twitter @psumattdavis

REGISTER

If you’re interested in additional information on supply chain segmentation, here are a few blog entries I’ve written on the subject:

• Gartner Supply Chain Top 25 and Supply Chain Segmentation
• Supply Chain Segmentation… Why is everyone so one-size-fits-all?

• Supply Chain Segmentation Becoming a Reality: Dell & Converse

ANZ and APAC community, can’t wait to see you in Melbourne in August. 

I’m on Twitter now @psumattdavis

Webinar details…

Please join us for a complimentary Gartner webinar designed especially for supply chain leaders.

Tuesday, 4 June

Value Chain: Implementing Supply Chain Segmentation

Presented by: Matthew Davis

10:00 a.m. AEST   REGISTER

Note: This webinar is LIVE.

Leading Gartner analyst Matthew Davis will provide insight into Supply Chain Segmentation best practices and tools to create a demand-driven value network.

Becoming demand-driven requires the ability to understand customer value, as well as the capabilities to deliver upon those findings. The next generation of supply chain leaders will manage a portfolio of supply chains that provide differentiated outputs, aligned to unique customer value characteristics.

We will explore: 

• How the supply chain can create differentiated value for customers
• How integration of customer segmentation, supply chain segmentation and cost to serve enhance customer value
• How to create a customer-driven vision that you can execute

After registering, you will receive a confirmation email with a calendar invitation and instructions on how to join the webinar.

View all upcoming webinars at gartner.com/webinars

Questions? gartner.webinarsapac@gartner.com

As I collected my thoughts on the flight back from Gartner’s Supply Chain Executive Conference, I kept coming back to the incredible positive energy that permeated through all the events of the week.  The three days was a celebration of the best of what supply chain can be and a world-class example of sharing our stories to move the supply chain discipline forward.  My top 10 moments:

#10: 1,100+ Attendees – Over 1,100 supply chain and IT professionals in attendance!  It was incredible to see such a large group and an honor to meet so many of you.

#9: #gartnerscc – A group of tweeters attending sessions throughout the conference kept everyone up-to-speed on all the great messages being shared.  With so much outstanding content running simultaneously, I was delighted to have such a great source of real-time information… especially all the pictures.  Thanks to all who were so active this week!

#8: Packed Track Sessions – I was amazed to see the 300+ chairs filled in several sessions.  We worked especially hard to find a balance of core research with innovation topics, strategy with execution and what to do with how to do it.  I left the conference feeling good about our progress based on my small exit survey of attendees.

#7: Big Data and Supply Chain Analytics – The last day of the conference and still we had standing room only for our session for “Big Data = Big Supply Chain Analytics.” I was excited to share some of the amazing analytics research completed by Noha Tohamy integrated with her and my findings on Big Data in the supply chain released for the first time for our attendees.  The case examples were a hit, especially the use-case from Syngenta on using Big Data for supply chain segmentation analytics.  Attendees (and Twitter) were full of buzz on Noha’s analytics framework:

#6: 3 Newbies in the Top 25 – The 2013 list of the world’s best supply chains was unveiled and we welcome Qualcomm (#24), Ford (#22) and Lenovo (#20) to the list.  Qualcomm excels in its supplier management programs, Ford in product complexity optimization and Lenovo in efficiently growing volumes across several global markets.  Full list here.

#5: 5 Stages – Our recently published 5 Stage Demand-Driven Value Networks (DDVN) model was a key feature in several of the track sessions.  Providing a unifying framework to the many core, foundational and innovation themed sessions, the 5 Stage Model provides granular detail on the journey to a supply chain that enables profitable trade-offs for its customers and business partners.  Click here for a free copy from E2open.

#4: Jim Collins – After rifling through a series of amazing leadership messages, he was referenced by many for the rest of the week.  His best quote: “You are not entitled to anything than the opportunity to be better.”

#3: Supply Chainnovators ™ – Dana Stiffler, VP Research, launched an exciting new program called “Supply Chainnovators” that will share innovations from Supply Chain organizations in companies $1B – $10B in annual revenue. It’s a great new program that will give insight into what leading mid-market companies are doing in their supply chains and how you can implement in your businesses.  Congratulations to the first two Supply Chainnovators, Celestica and Eastman Chemical!

#2: “The Truth Tellers” – Fred Wagner, VP Global Supply Chain Customer Connectivity at Johnson and Johnson, stated in his keynote that the supply chain organization acts as the “truth tellers” for the business highlighting that supply chain has elevated the need for fact-based decision making.  Fred rolled through a series of great takeaways including commentary on the entire supply chain discipline when he said, “Twenty years ago, there was no chief supply chain officer, rather a materials manager in the basement. Now they’re at the table with the CEO.”

#1: Our Community – Cheesy as it may sound, I really am proud to work in an area where the people care so much about what we do.  This attitude was exemplified in the reactions I saw to the announcement of the Top 25 which were, almost without exception, overwhelmingly positive.  At its core, the Top 25 is the best way to start a conversation about supply chain leadership and this year’s group demonstrates leadership in performance and in sharing the knowledge with others.  And to have so many company co-presenters, case studies and inspirational keynotes only further showed why the supply chain community will continue to create value for our customers and provide the globe with the products and services needed, every day.

After an intense week of non-stop action, I left the conference more energized than when I arrived.  Can’t wait to see you in Melbourne and London!

Have a great story to share from the event?  Drop a comment below.

I’m now on Twitter at @psumattdavis

Matt: Before we get into the conversation on supply chain segmentation, can you explain for readers who aren’t familiar with Gartner’s Supply Chain Top 25, what is, why we do it and how we make the list?

Debra: Sure.  The Top 25 is our annual ranking of demand driven leaders – which companies, globally, are furthest along that journey.  Our goal?  To foster innovation in supply chain practices by providing a forum to debate and discuss what it means to be “excellent” in supply chain – when you really dig down into the concept of excellence, you start to realize quickly what a rich discussion it is.   The way we come up with the ranking each year is through a combination of objective financial data for each company, coupled with a more subjective opinion component by supply chain executives from around the world. For anyone who is interested in the details, our methodology is very transparent by design, detailed in the report which is publicly available at www.supplychaintop25.com

Matt: We just completed briefings with companies from industrial manufacturing, healthcare, chemical and process manufacturing, retail, consumer products and high tech on their 2012 results and future strategies.  I’d say that more than half and at least one company in every one of those industries mentioned supply chain segmentation at some degree.  I’ll readily admit a bias toward the topic given my coverage, so did you hear this as much as I did?  Given you’ve run the Top 25 analysis for 8 years now, have you heard an increase in interest on the topic or is it always on the radar?

Debra:  Absolutely an increase, not only in interest but in companies actually working on segmentation.  Companies have been talking about it for awhile, but more and more are doing something about it now.

Matt: I just looked back at 2012’s Top 25 and 19 of the top 25 companies on the global list are doing some form of segmentation in their supply chain and 11 of those 19 are actively maturing end-to-end supply chain segmentation.  Is supply chain segmentation a differentiator that helps get you into the Top 25?  If not today, do you think it will become that differentiator in the near future?

Debra:  I do see supply chain segmentation as a differentiator for companies.   The “one size fits all” approach almost guarantees that you’re sub-optimizing in some aspect of your supply chain performance. With segmentation, you are identifying the different end to end supply chains that you operate, setting supply chain targets that are aligned with the business goals for each one, and then measuring against those differentiated targets.  It makes sense the benefits of doing that are going to show up in your financial performance.   

Matt: Back in 2010, we analysts went through several sessions to align our positioning on supply chain segmentation.  At that point, we agreed that supply chain segmentation and cost-to-serve were complimentary but NOT interdependent.  Has that positioned changed based on how companies have progressed the last three years?

Debra:  Yes.  We started to find, both through the Top 25 analysis and in our in-depth research on supply chain segmentation that companies who were working on supply chain segmentation also had initiatives for customer segmentation and cost-to-serve as part of the process.  So we asked why…  We uncovered that supply chain segmentation is the process by which companies change parts of their supply networks, business processes or metrics targets to get differentiated outcomes from the supply chain.  Without an understanding of the costs of those changes, the value generated for a customer or what value characteristics customers wanted – and would pay for – supply chain segmentation was like a ship without direction or control.  Customer segmentation identifies the value characteristics which will dictate the needed outcomes from supply chain segmentation (the direction of the ship) and cost-to-serve analysis identifies the impact of designed changes and can estimate the new net profitability (the control of the ship).  Essentially, when supply chain people say they want to do “segmentation”, they will have to address all three of these areas. 

(Matt: by the way, shameless plug… we’ve written a 7 step process by which to do this in “The Seven Steps of the Supply Chain Segmentation Journey”)

Matt: Is supply chain segmentation a fad?  And, if it’s been around as a concept for more than 10/15 years, why are so many companies working on it now?

Debra:  It is not a fad.  Companies have been doing inventory segmentation through item classification, market segmentation in pieces as they’ve grown globally and segmented supplier relationship management for a couple years now.  End-to-end supply chain segmentation extends the benefits from these activities by aligning processes across all supply chain functions rather than just in pockets.  In our demand-driven maturity model, companies at higher levels of maturity are focused on generating profitable value for customers by making tradeoffs, and you can’t do this without segmentation.  It’s emerged – quite rapidly and broadly – because many companies have now integrated their supply chains strongly enough that managing the end-to-end, rather than just silo’ed functions, is finally possible.  The theory always made sense, now it is becoming practical – it’s  a question of evolutionary growth occurring in and across supply chain.

Matt: Should everyone be working on supply chain segmentation?

Debra: No. Well at least not yet.  Supply chain segmentation is a fairly advanced concept and can create a new form of complexity to govern when processes and parts of the physical supply network are split.  Only an advanced company which has strong integration across functions and visibility across the end-to-end network, to cost data and to how decisions are being made will be successful in managing a segmented supply chain.  Even the initial design of a segmented supply chain requires a certain base level of maturity.  As part of the tradeoff analysis which shapes segmentation, companies will need to model impacts to end-to-end inventory, perfect order fulfillment, manufacturing lead time, lead time to customers and profitability.  Many aren’t ready for this yet.  After the design, piloting the segmentation design only works when there is collaboration across supply chain and between supply chain, sales and parts of the product organization.  So, no, not everyone is ready to start working on it.  We tell companies to assess the current supply chain capability and then address any foundational gaps before starting the segmentation design.  Using the value of a segmented supply chain for differentiated business models as a long-term vision can definitely help move along the foundational work, but it doesn’t mean that every company should be working on it now.

Matt: I’m sure you get this all the time… I often hear from people that the peer voting process is a secret, that it’s exclusive or that we selectively filter who actually votes.  It’s a pretty straight-forward process… can you tell people how to vote if they’re interested?

Debra: Yes, we hear all kinds of things about it!  We’d love to hear from anyone who is interested in being a voter – just go to www.supplychaintop25.com and click on “become a voter”.  It’s true that we can’t take all applicants – we only allow one voter per company, for example, so we have to check and make sure that we don’t already have a voter from your company.  Besides the “1 voter per company rule”, the requirements are pretty simple:  voters have to be in a supply chain or related role at a manufacturer, retailer or distributor.   You don’t have to be at one of the companies being voted on in order to vote, and you most certainly don’t have to be a Gartner client! Voting starts this year on April 3, so let us know.

Some background… Debra and I are both analysts in Gartner’s Supply Chain Research group and work cross-industry with leaders of supply chain organizations globally.  In addition to managing the annual Top 25 methodology and analysis, Debra specializes in metrics, performance management and demand-driven best practices.  My area of coverage is supply chain strategy planning and governance, supply chain segmentation, customer segmentation and cost-to-serve.

The goal with supply chain segmentation is to move from a “one-size-fits-all” approach to a portfolio of supply chain execution options.  Most “how to” advice on supply chain segmentation focuses exclusively on 2×2 analysis of historical SKU, product or demand data.  Most often, the 2×2 is a compare of volume versus variability or demand predictability.  The result is a distribution of product performance that can be broken into four quadrants.  In general, companies will arrive at something similar to this 2×2:

Once SKUs / products / demand / etc is broken into these quadrants, you can now define the processes and physical supply network best suited for each environment.  High volume / low variability items can be managed “no touch” or efficiently with a focus on lowest possible cost.  AND it’s actually achievable because the supply response is aligned with the demand pattern.  Other strategies include agility (high touch) and resposiveness (low touch).   But isn’t this internally focused?  What if a customer demands 100% availability? Or a born-on date to show freshness? Or a unique route to market?

Is the approach on moving from “one-size-fits-all”… one-size-fits-all itself?

It is the focus on value as defined by the customer that will challenge (NOT invalidate) the 2×2 analysis.  In starting with the value outcome, you must now address more than just volume and variability.  The key is to marry the two together.  The value outcome is a demand segmentation and the volume / variability analysis is the constraint against that outcome.  Even just defining “customer” gets a bit tricky when you look at the demand network … especially in Industrial Manufacturing and Healthcare industries.

Customers are both the channel partners (distributors, retailers, IDNs, doctors) as well as the end users of products (patients, farmers, consumers).  These customers define value in different ways and your analysis must begin by selecting how far into the demand network the value-based segmentation will extend.  To capture all of these requirements, I have defined three forms of supply chain segmentation. 

(detail on these three types, the implications for your initiative, timelines and budgets shared in “Design the Right Type of Supply Chain Segmentation for Your Business“)

1. Internal product/supply network — Using historical SKU data on product demand volume and variability, companies design end-to-end efficient, agile and responsive supply chains. Companies with legacy cost-focused supply chains carve out an end-to-end service-driven supply chain. Organizations that compete with service and differentiation create an end-to-end efficient or low touch network.
2. Channel-back — In order to address varying channel requirements, analysis begins with an understanding of how value is defined by partners or markets. Value attributes include speed to market, freshness, predictability, price (cost), availability, delivery frequency and lead times. The supply chain is then segmented to deliver these value outputs by managing the necessary trade-offs.
3. End-user-back — Analysis of how end users — patients, farmers, consumers, businesses, etc. — define value highlights required trade-offs. Value attributes can include price (cost), on-shelf availability, value-added services, specialty packaging or labeling, seasonal needs and integrated solutions. The supply chain is then segmented, based on these criteria as opposed to regional or industry-vertical customer segmentations.

The analysis, future-state designs, implementation plans and timelines for these three forms vary. While there tends to be a natural progression through the three types, no one form is necessarily better than the other, and not every company will pursue all three.  So why is so much of the supply chain segmentation conversation focused on volume / variability analysis?  

1) It works… and it adds value.  An analysis of the volume and variability is a great way to estimate the complexity required to bring products to market.  It highlights where variability is increasing required resources and shows which products are predictable enough to automate process support.  It is often a first view into the fact that demand is already segmented and that the legacy one-size-fits-all approach only works for a portion of that demand.

2) It’s where you have the most control.  Historical SKU analysis is going to surface constraints of the supply network.  It enables you to create balance internally by managing inventory, cost, forecast accuracy, perfect order and other supply chain metrics with different targets.  When segmentation stretches into demand outcomes (think lowest cost, fastest speed, always available, highest service level, etc), you have less control.  You are extending the need for differentiated processes outside your four walls into the demand channel, which often has multiple layers of distributors and routes to markets.

3) It was a first step.  Supply chain segmentation is far from a new concept and, yet, very few companies have executed upon it.  It is a concept that has had to wait for the rest of the supply chain discipline to catch up in order to become viable.  Many companies have broken down the functional silos, have enabled collaboration with their network partners and have translated customer value requirements into tangible supply chain needs.  All of this activity was needed to show that supply chain could, in fact, manage trade-offs without undoing years of work on cost reductions.  Product / supply network segmentation is a natural extension of this journey as processes and resources are aligned to the complexity needed based on which quadrant they land in.  Great value… but only a first step.

The most advanced practitioners of supply chain segmentation have advanced into channel-back and end-user-back approaches.  It has likely been a multi-year journey.  Gartner has written case studies on a few of these companies to share their stories, but, in general, any “how to” literature is few and far between.  Here’s why.

1) It is THE source of competitive advantage.  While there has been a lot of talk on supply chain segmentation for at least 20 years, very few can accurately lay claim to successful implementations.  Even fewer can show that their work has progressed past internal product / supply network segmentation into truly (and profitably) managing differentiated outcomes.  So for those who have cracked the nut, now is the time to quietly reap the benefits while the rest catch up. 

2) It is pretty darn complicated to explain.  Internal product / supply network segmentation is often boiled down to the 2×2 analysis and is often directly connected with known product segmentation techniques.  When you extend the analysis into the demand channel, you’re now adding in customer segmentation… and a new form of customer segmentation no less.  Rather than the historical splits by geography or business unit, you must now segment customers based on their desired outcomes.  I have found that to have an effective discussion on channel-back and end-user-back segmentation, the only answer is time.  The solutions are often an overhaul to the entire business model.  Time is needed to work through analysis of customer segmentation and product segmentation while showing how segmentation of the supply chain can be the connective tissue between the two.

3) The wave is coming.  I have actively been working with many companies, in every manufacturing industry, on channel and end-user-back approaches.  Many are through the analysis and planning phases and are now running pilots on the proposed segmentation solutions.  This work is largely kept tight to the hip and the pilots are often in one region or on a select few products.  With success will come expansion.  Expect to see a broad swath of case examples emerging in 2014 on “value based outcomes” and “differentiated business models” as that will be the story of success with these latter two forms of supply chain segmentation.  In particular, I expect to see some unique use cases from consumer products, high tech and pharmaceutical companies.

What do you think?  Is supply chain segmentation just more of the same? Or will it be another step forward for supply chain as a facilitator in corporate strategy?

Bottom Line: If the only analysis you see is a 2×2 of SKU data or comparing volume versus variability, you’re only hearing part of the story… And you’re competitors are certainly happy about that.

Hype around “Black Swan Events” – large scale, unpredictable disruptions – is all the rage today in supply chain risk management.  But if black swans are supposed to be the outliers, then why does it seem like supply chains are being hit by so many each year?

The black swans were always here.  It is business that has changed.  Blame globalization and the internet.  Globalization has extended supply chains more than ever before, both demand and supply networks.  It is the extension of our supply networks around the world that has led to the frequency of risk events.  And the internet (along with the 24 hour news cycle) has given us exponential, real-time visibility to each disruption as it occurs.

I don’t see the trend of extending supply chains slowing any time soon, so buckle in for the bumpy ride.  The leaders in preparing for these disruptions are focused on what they call supply chain resiliency and are investing in four areas: multi-tier network visibility, supply chain agility, risk management and network modeling expertise.  Expect these companies to be better off when the disruptions occur.

I don’t think there are any more black swan risk events than there were in the past, we can just see them now.  Disagree?  Let me know…  The one thing we can ALL agree on is that the supply chain community needs to end the love affair with the term “black swan” … It’s so last season.

As an analyst, it’s my job to find patterns that indicate trends.  This same core competency has a lot of synergy in finding patterns in corporate buzzwords and phrase-ology.  What we’re really talking about here is a new normal, where it’s important to balance use of words that are on the way out with the hot new verbal trends in the corporate jargon toolbox.  As an action item, I took some of my thoughts on these trends offline to ideate on how I can assist with making you the coolest person in the boardroom.  At the end of the day, I landed on what I think are some great tips that you can leverage to create chaos across the hippest of work communities.  Take what I’ve said below, see what sticks and certainly ping me if you want to tie out on any black swans that I may have missed…

Buzzwords follow a similar curve that we see in a lot of product lifecycles.  As I created my forecast for the hottest 2012 buzzwords, I plotted the contenders based on their popularity and acceptance in the workplace (see Figure 1).

To aid in taking advantage of the 2012 forecast, I provide the translation of these terms by their respective place in the lifecycle…

THE NEWCOMERS… NEWLY LAUNCHED TERMS

• “ideate”:  sure, let’s talk…  but can we make it sound simultaneously scientific and zany
• “2020″:  finally, a plan for the future that we don’t have to change next year
• “…certainly…”:  new, but spreading like wildfire.  inject anywhere in a sentence to let others know you’re both open and sincere
• “chaos”:  hip new term prevalent in the consultant and analyst space… read as ”variable.”

THE MAINSTAYS… WIDELY ACCEPTED

• “new normal”: took off after the recession as a way to say, “seriously, it’s not getting any better.”
• “what we’re really talking about here is..”:  a handy way of saying, let me try to fix what someone else has said
• “balance”:  oddly, you can’t do the same thing the same way and expect a different result
• “black swan”: no, I haven’t read the book, but it sounds so much cooler than just saying “risky.”
• “at the end of the day…”: a nicer way of saying, “We’ve talked about this far too long.” (even if you’re the only person who has been talking)
• “take it offline”:  let’s never speak of this again
• “leverage”:  plagiarize and steal are such nasty words
• “see what sticks”: there’s no time for critical thinking or filtering. can you handle that part?
• “tie out”: i’ll be giving you some more work later
• “toolbox”: a way of talking about how we work that feels more like work-work

DEAD IN 2012… END OF LIFERS

• “Action Item”: i’m delegating tasks, but now we all feel more like superheroes
• “…ping…”: (see: I’ll ping you later) read as “yay! more email because I can’t just tell you now.”
• “Synergy”:  I’m not sure what’s happening, but let’s assume it’s awesome for everyone.
• “Core Competency”: I can do at least one thing right.

Now, we all know, success is not just knowing the buzzwords, it’s also knowing when to use them.  I’ve provided a handy pocket guide to buzzword excellence in Figure 2. 

In all seriousness, many buzzwords emerge for good reasons.  They arise and stick because they accurately capture issues that we’re all facing regardless of industry, position or region.  In a sad way, they’re good indicators of what will be key initiatives for the corporate masses.  A more enlightened person than I may also say that they unify us all in the challenges that industry must solve to continue to evolve.  If that’s the case… new normal, 2020 and ideate would show that optimists see a bright future.  Black swans, new normal and chaos are all indicators that this optimism will be tempered by some major global challenges.  We’ll need all types - optimists and pessimists, skeptics and dreamers – to come together to solve these biggest challenges in 2012 and beyond.  Let’s just hope we have the right words to communicate with one another.

• Functional Silos:“What we’ve got here… is failure to communicate.” – Cool Hand Luke
• Cost-to-Serve: “SHOW ME THE MONEY!” – Jerry Maguire
• Best Practices: “I’ll have what she’s having…” – When Harry Met Sally
• Demand Sensing:“You talkin to me?!” – Taxi Driver
• Demand Shaping:“These aren’t the droids you’re looking for.” – Star Wars
• Predictive Analytics: “They’ve done studies, you know. Sixty percent of the time, it works every time.” – Anchorman
• Capacity Management: “You’re gonna need a bigger boat.” – Jaws
• Risk Management: “There’s no reason to become alarmed, and we hope you’ll enjoy the rest of your flight. By the way, is there anyone on board who knows how to fly a plane?” – Airplane
• Sales and Operations Planning (S&OP): “You can’t handle the truth!” – A Few Good Men
• Network Visibility: “If I’m walking into a sh*t-storm, I want to know which way the wind’s blowing.” – Spy Game
• Collaboration: “Keep your friends close… but your enemies closer.” – The Godfather II
• End-of-Life Management: “Goonies never say die!” – The Goonies
• Benchmarking: “I’m not perfect, but who are we kidding, neither are you.” – Wedding Crashers
• Cost / Benefit Analysis: “All I’ve ever wanted was an honest week’s pay for an honest day’s work.” – Sergeant Bilko
• Fulfillment: “Why don’t you just go home? That’s your home. Are you to good for home? Answer me!” – Happy Gilmore
• Tradeoff Analytics: “Have you ever wondered if there was more to life, other than being really, really, ridiculously good looking?” – Zoolander
• Continuous Improvement: “If you can dodge a wrench, you can dodge a ball.”– Dodgeball

 And for anyone in process management… “I don’t have to take this abuse from you; I’ve got hundreds of people dying to abuse me.” – Ghostbusters

I introduced the concept of an Original Solutions Orchestrator (OSO) in a recent blog posting “You HAVEN’T heard of an OSO?! Let’s talk about some solutions.“  In that blog, I discuss how the push to solutions is completely shaking up competition in device manufacturing, with High Tech being one of the most largely impacted industries.  A key finding in our OSO research is that those who control the data will control the solutions. 

So to see that social networking leaders, as value-based solutions providers, may be cutting out pieces of the traditional electronics value chain is not too surprising.  They are demonstrating that customer value is shifting from hardware feature sets to application and content based offerings.  The tablet business a prime example of this shift.  Less than a month ago we saw one major tablet provider receive some criticism for pricing the hardware below cost.  This move was one of the most clear examples of High Tech hardware moving to the “razor blade model.”

A four pack of razor blades may cost you over $20 at a retailer, whereas the razors themselves are often half that price. Some companies even just give the razors away. The hope is that consumers get locked on a particular razor and then continue to buy blades on an ongoing basis. It’s commonly known as the “razor blade model” — give away the razors and make up the margin on continuing revenue streams for blade purchases.

As device hardware continues to commoditize, software, content and applications are driving more value from the customer’s perspective. In certain product categories, the hardware is simply a software delivery mechanism. This value shift is changing where and when revenue and margin will be realized. The aftermarket may very soon become the primary market. As this evolution continues, it is not unlikely that hardware may just be a manufacturer’s means to enable an ongoing software-based revenue stream.   These trends all signal an important message for supply chain organizations: Software equals value. Supply chain management for devices is changing, and we all must understand the emerging capabilities in software, content and digital distribution.

So are the OEMs getting that message?  Seems like it.  These OEMs themselves are developing solutions offerings.  When was the last time you saw a PC commercial that didn’t directly mention “solutions”?  Most start with that and barely touch on the associated hardware.  All of this churn across the High Tech ecosystem points to important points for supply chain to consider:

• How will physical distribution networks change in the next five years?  It is likely that the hardware / software value shift will continue (if not accelerate) toward software.  Supply chain will decouple hardware and software delivery and organizations will be tasked to manage both the physical and digital supply chains.  We will see postponement re-emerge as a primary competitive weapon, but this new era postponement will focus on software as opposed to late-stage assembly.
• What is the role of the digital supply chain?  Software, content and application delivery has been managed largely with minimal supply chain interaction.  Leading organizations are developing digital supply chain capabilities and applying concepts from physical supply chain management to mature these groups.  New capabilities like embedded software (see: Embedded Software Is an Enabler of Demand-Driven Supply Chain Orchestration) are also vastly changing how, where and when software can be distributed.  Supply chain has a key role to play in enabling embedded software capabilities.
• Who are the OSOs?  In short, it’s not yet clear and the opportunity is wide-open.  As we discuss in “Original Solution Orchestrator, Part 1: Integrating Physical, Digital and Solution Networks to Transform From an OEM to an OSO“, the OSO is a manufacturer, service provider or other corporate entity that connects data from the extended customer value cycle with the upstream supply chain to create complete solution offerings. An OSO comprehensively solves unique customer issues with the right mix of hardware, software and services across the extended customer value cycle.  We expect to see OEMs, software development orgs and even major consultancies take on this role in the pursuit of some high, recurring revenues in aftermarket services and solutions.
• What is supply chain’s role in OSO?  Currently, there’s no clear owner for designing, integrating and managing data as part of solution management. We believe supply chain, as an end-to-end enabler of corporate strategy, has a vital role in connecting physical, digital and solution networks. The leaders will use supply chain to exploit the opportunities in solution management by using concepts such as lean, network design, change management and collaboration across supply chain, IT, sales, product, and finance organizations to enable an OSO business model.

So what do you think?  A year from now, will this story be an isolated example of a change to High Tech markets or just the first in a series of ecosystem evolution?

So what does this OSO concept have to do with today’s acquisition announcement?  Google has had a clear strategy to tap into the digital and solutions supply chains in it’s development of the Android platform and associated applications.  In fact, I discussed this strategy back in October (Android: Google using content in a new “razor blade model”) in which I concluded that content / data is going to be equally if not more important than hardware in the near future.  In looking at our OSO model above, note that the Android platform is a clear example of the digital supply chain (DSC) in that it brings content to a device.  And Google’s website, analytics, search metrics, etc are all parts of the solutions supply chain (SSC).  The acquisition of Motorola will complete the OSO model by enabling a physical supply chain in the distribution of mobile devices.

The implications of a company like Google leading a development an OSO model are quite intriguing.  To date, most of the companies who have marketed themselves as OSO’s have almost all been device manufacturing OEM’s.  I have seen many of these OEM’s develop the OSO model through a web of strategic partnerships with software vendors and service providers.  There’s has been equally as much activity in the acquisition space from these OEM’s as well.  Consider Dell’s acquisition of the service provider Perot, Intel’s purchase of McAfee, HP’s of EDS and Palm, and on and on.  Today’s announcement shows that the OSO trend is spreading throughout the ecosystem and presents an interesting question for manufacturers, software companies, service providers and telecoms.  Who is really my competition?

Today’s announcement highlights the acquisition of hardware manufacturing capability.  What are some other activities we may soon see?  As we saw with IBM’s sale of the ThinkPad to Lenovo, it’s possible that the hardware manufacturers will sell off parts of their hardware business to focus on services.  There has already been a major push to outsource manufacturing across the industry, so a “0 asset” supply chain may be a possibility.  We could also see movement from the software vendor ecosystem who have capabilities to capture and manage data.  Or even from the telecoms that provide the infrastructure to connect the SSC and DSC with the physical supply chain.

The point is that as we see development of this OSO model, competition is going to get much more complex.  The partners and customers of today, may be competitors of tomorrow.  The key to surviving to reap the big margins in the OSO world will be to first understand the model and then to craft a clear strategy to manage it.

What do you think?  How will the OSO model complicate the High Tech market?  What should companies across the ecosystem focus on now to prepare for tomorrow?