Effective business models must include three features: the target customers of the business, the value proposition for those customers, and the value chain architecture. Innovation in technology, specifically digital technology, allows organizations to redefine and recreate their business models by giving organizations the flexibility to redraw their value chain architecture. This not only creates new value propositions for existing customers but can also change the customer set.
Redrawing the architecture
Redrawing the architecture is done in two ways. The first is by changing the sequence of the value chain. Activities placed at conventional points in the supply chain are moved to new positions. Online sale of furniture, for example, has moved assembly of furniture downstream in the supply chain, right up to the customer’s door.
If supply chains can be defined as a network of supply chain nodes and their connecting flows, digitalization enables us to redefine the positions of these nodes. Inventory in transit, under production, or under any other work in progress can be considered as a connecting flow since there is a lead time associated with it.
Supply chain nodes such as warehouses, on the other hand, are buffer zones. From the standpoint of supply chain modeling, these nodes serve two basic purposes. One is to decouple two connecting flows that function at different rates of operation. Whenever the two flows cannot be balanced, an area is needed to hold the inventory – or the information – for a time period.
Another way of looking at it: Whenever there is a difference between the end time of one process and the start time of its connecting process, a supply chain node is required. This need could arise due to a difference in frequencies of the two processes or because the process calendars have been defined that way.
The other function that these nodes serve is to act as points of aggregation or disaggregation of information or inventory.
Digitalization enables us to redefine the supply chain nodes. Consider e-commerce sites or cab hire services. They have redefined how demand information can be aggregated and disaggregated on digital platforms and created new customer value. App-based car hire services have created a new customer order acceptance process, eliminating the need to hold a fleet of inventory at any point of consolidation. This helps the system achieve better utilization of available capacity. The idea of a better order acceptance and fulfillment process is now being extended to the logistics industry to achieve better capacity utilization.
Where digitalization would help
An incoming aircraft circling the destination airport waiting for information about its landing slot; a manufacturing order waiting to be scheduled at the shop floor by the plant scheduler; a passenger waiting for a cab booking confirmation on their smartphone; a customer waiting to be served at a restaurant or a takeaway counter – all these are examples of supply chain problems where the process order waits for capacity to be allocated to it.
The other side of the coin is that many a capacity lies idle when there is no process order to be served – for example, movie theaters on weekdays. If digitalization can help, as it has already done in many cases, it is worth extending to these and other scenarios.
Take the air freight cargo industry, where yield management is a big problem. Overbooked aircraft and flights not flying to their full capacity are often two sides of the same coin. The reason is that freight capacity is not only hardcoded within the airline system and among airline operators but is also sold through dedicated sales channels as long-term capacity agreements or spot rates.
Perhaps it’s time for a digital freight capacity management service. A digital aggregator of freight could potentially unlock capacity and make it available to customers, thereby driving overall efficiencies.
Let’s extend this idea to manufacturing itself. Currently, organizations consider capacity management as a core operations management issue. The standard sales and operations planning (S&OP) process decides how orders are prioritized and capacity allocated to the orders. Whether supply chains are configured to operate on forecasting or on replenishment, short-term capacity management is controlled by the manufacturing organizations. Release of surplus capacity to the external world or purchase of manufacturing capacity from external partners is done on long-term contracts and driven through manual processes, from seeking of information to commercial negotiations.
A futuristic scenario
Imagine a scenario where organizations make their available capacity publicly known on a digital platform and wait for business partners to place orders. Or think of customers placing their production orders on a digital platform and waiting for manufacturers to accept them. Of course, the assumption here is that the system has a very high degree of manufacturing sophistication and quality systems are part of the basic hygiene.
If the above seems too outlandish, imagine a future where organizations transparently share their production plans with their customers through digital interfaces, and the customers then decide whether to place their orders or to go to a competitor.
Such ideas might appear sacrilegious at this point, especially for industries that require intellectual property to be transferred and validated to a new site before manufacturing can commence. But where processes can be customized quickly and product standardization exists, digital capacity exchanges would drive better capacity utilization for the entire system.
In electronic media, specifically TV, the era of mass distribution of sequenced content through conventional channels such as satellite TV is approaching its end. Internet entertainment sites enable viewers to select the content they want to see at the time they want to see it. The days of families sitting around a TV set watching common content are over. Thanks to technology, that value chain has been redefined.
The day may not be far away when the manufacturing value chain also gets redefined. It has already evolved from the linear vertically integrated value chains of the past to more complex value networks. Digital exchanges of manufacturing capacity will bring to the surface hidden and underutilized capacities, thereby driving efficiency in the overall system.
The idea of a central external digital exchange for manufacturing capacity might sound farfetched, but it is not a very big leap from the standpoint of technology. Existing enterprise resource planning (ERP) systems have capacity data, for both short-term and long-term planning purposes. It is just a question of leveraging this data in a different way.
In any value chain, it is accepted practice to place an asset at that precise point in the chain, or with that particular partner, where its value is maximized. If this information is placed at such a point where its valuation is the highest, it can unlock hidden value for all the partners. Both customers and planners will have visibility of external multitiered production systems, and decisions will get taken in real time. It will be another instance when a change in the supply chain architecture creates a new value proposition.
A shift in the fulcrum
The question is whether the industry is ready for this disruption in the value chain. If it happens, it would imply a shift in the fulcrum, or the point of control, of the value chain. Years ago, the fulcrum of the value chain for personal computers shifted from the machine to the operating system and the core processor. The shift in the fulcrum also shifted the leadership position to outside the organization for PC manufacturers. (See Clockspeed: Winning Industry Control in the Age of Temporary Advantage, by Charles F. Fine, M.I.T. Sloan School of Management.) Will a disruption in manufacturing lead to another such change? There will, of course, be challenges to the model.
Digitalization in itself cannot be seen as a complete solution for all business processes. It will need to be supported by the due diligence of suppliers and customers, which would still need to be done offline. Contracts for protection of confidentiality and proprietary information would still need to be executed. Financial flows would need to be clearly defined.
But if we can envision a robust, scalable network of validated customers and suppliers of capacity, can the model offer soft acquisition of manufacturing capacity as a value proposition? A virtual manufacturing organization is food for thought.
For more insight on how digital business models are reshaping industries, see How Customer Success Management Drives Digital Transformation.