Global Supply Chain Customer Value Chains are being disrupted - What can incumbents do to survive?

If your customer can backwards or forward integrate into your operations, then you must find ways to add more value to the relationship; you must find ways to improve your customer side synergies if you are to stave off disruption. The more connections you can create between you and your customers the more sustainable your business will be, the more difficult it will be for competitors to duplicate your advantages and the more vested your customer will be in your viability.

What is Supply Chain Value Chain Disruption?

All firms must create, erode and charge for value, this process for how firms illicit value from customer relationships is known as a business model. Firms must exploit their customer relationships in order to convert value to revenues. It is natural for firms to move upmarket to seek ever higher margins, the late Clayton Christensen writes about it in his book The Innovators Dilemma where he describes the process. An incumbent will vacate regions of a market where product differentiation is low and seek to improve their existing product offerings through sustaining innovations in order to move upmarket where higher margins validate the asset investments.

Thales Teixeira, in his book Unlocking the Customer Value Chain speaks about Resource Centricity where certain firm owned resources are highly valued and eventually become the centre of the firm's value flywheel. All major business decisions are then based on how much it can help to expand or leverage these highly valued resources. On the other hand disruptors are generally Customer Centric, as Teixeira elaborates; your customers are your most valuable possession all business decisions should enhance your ability to increase the number of customers and leverage them.

Disruptors produce a product that's not yet good enough to challenge incumbents and so it is largely ignored. This is because the margins associated with the activity are not aligned with the incumbents value system for financial rewards; the gross margins aren't big enough. When the disruptor finally starts to erode value from the incumbents value chain it's too late to respond and they (disruptors) have established a business model that creates and charges while eroding less value; as a result the incumbent is not able to compete at these margins as the returns are not valued by shareholders or the firm.

Many believe that disruptions of this nature are solely related to product differentiation whether through sustaining or technological innovation. The current school of thought however as posited by Teixeira is that consumer behaviour and values, specifically the customer value chain has a larger role to play in the disruptive process than previously thought. While it may seem that technology or some product innovation has caused the disruption; the disruptors have actually decoupled the incumbents customer value chain - disrupting their very business model.

How does the disruption take place?

Let's take a closer look at a typical Global Supply Chain Customer Value Chain to see how backwards integration by customers can cause decoupling and learn how incumbents must react to this threat if they are to survive.

The diagram above illustrates a typical global supply chain value chain, please note that it has been greatly simplified. If you are undertaking a value chain analysis it is important to include all the activities in order to get a fulsome understanding of the customer journey as well as all the opportunities within your customer value chain for decoupling.

When firms backwards integrate it is because they feel that they can regain some value that they believe is being eroded. There is a recent trend where customers have been chartering vessels and buying containers. Melissa Repko of CNBC wrote "Home Depot is one of the largest importers in the country. Yet with congested ports, container shortages and Covid-19 outbreaks slowing shipments, the company made a decision: It was time to get its own boat. Decker said the contracted ship, which will begin running next month, is just one example of the unusual measures that the company is taking as it copes with challenges that have ricocheted across the global supply chain."

She went on to write "We have a ship that's solely going to be ours and it's just going to go back and forth with 100% dedicated to Home Depot," President and Chief Operating Officer Ted Decker said in an interview. It marks the first time that the company has taken such a step. Similarly Ikea confirmed to U.S. broadcaster NBC News that it had started shipping goods using chartered vessels. The company also reported that it is purchasing containers to ensure the availability of boxes to move merchandise to its stores.?

Speaking to the Swedish news outlet Svenska Dagbladet Ikea explained some of the reasons behind its decision to take the costly steps of chartering ships and buying containers. The company said it had shipments delayed by the ongoing port congestion as well as incidents such as the?Ever Given?that took months to complete its shipments after blocking the Suez Canal and being detained by the Egyptian authorities. Ikea said that shortages of raw materials along with the problems across the global supply chain were leading to shortages and out-of-stock items in its stores. (The Maritime Executive)

These actions represent a change in consumer behaviour, more importantly they represent a change in consumer values. The consumer values we speak of here aren't end-consumer values but B2B consumer values, firms have begun to value reliability and availability more than cost within global supply chain value chains. This information is key because incumbents current strategic objectives are predicated on a different set of values, it's what's driving decisions by incumbent shipping firms to make ever increasing investments in larger vessels (scale economies) and what's driving them to leverage customers to utilize these resources (Resource Centric) regardless of the time, effort or cost implications for customers.

What does it mean for incumbents & disrupters?

What we are witnessing now are customers who have decoupled those value creating activities from their existing global supply chain value chains to create a new, disruptive value chain which will eventually become a new business model and quintessential threat the every ocean main liner.

By chartering their own vessels customers can decouple those value creating activities from the incumbents supply chain customer value chain resulting in a solution that more closely matches their new ranked order for values where reliability and availability are now most important.

The above represents the value chain as experienced when a vessel is chartered; there will be significant improvements in logistical lead times due to the more direct routes void of stop overs and other uncertainties that can cause delays along the liner route. This consistency in service delivery will allow firms to carry less resting inventory throughout there supply chains which will result in cost savings from reductions in related inventory costs. Logistical lead times will also be reduced leading to greater alignment with demand latency lead times - this will eventually result in positive interference of demand and supply ( See Note 1) which improves global supply chain capacity. It will also result in improved replenishment and order fulfilment rates which improve customer satisfaction driving repeat sales.

Should customers (disruptors) want to achieve savings in this new value chain they can always consider collaboration with other firms to take advantage of scale economies. Although this exposes them to the same risks as with the former model such as intra-partner supply chain disruptions leading to departure delays etc. Incumbents will be unable to achieve the objectives of their resourced centric strategies unless they are able to pivot and quickly recouple their value chains by being more customer centric.

How can incumbents survive the disruption?

History is littered with stories of firms who didn't respond well to disruption. Some firms double down on sustaining innovations based on resource centric strategies. Strategies that themselves aren't aligned with changing consumer behaviour or values but with backwards looking metrics that incentivize incremental growth in legacy business models. Favouring higher margin/ mature products or services for lower margin/ introductory products or services. However, all is not lost incumbents still have time to own the new value chains, if they act now; incumbents must:

Understand their supply chain customer value chain - in order to see where the opportunities for disruption exist. They must then carry out assessments to determine if the threat of loss of market share to disruptors is worth an investment in self-disruption (pre-emptive decoupling) By using smaller vessels to provide a more consistent service to those customers who value reliability and availability more than the benefits of scale economies. They must be sure however to leave value charging and value creating activities in their original supply chain value chain. By doing this they will create value at every point where value is being eroded and be able to charge for value at these new points of value creation.

For example customers containers will now enter the supply chain value chain as normal but instead of taking part in the value eroding activity of awaiting vessel arrival and loading they can charge for value (priority loading) on 'Direct Report' vessel. They must be acutely aware however of the potential for leakage within their value chain an close all of the potential value creating and charging activities lest incumbents leave them with only the value eroding and value creating activities.

Understand the customers consideration set, behaviour and values - charter vessels have now entered the consideration set of customers in the global supply chain arena. Incumbents would use the benefits of scale economies to keep them at bay but now that customer values have changed charter vessels are now included in customers limited consideration sets. How can incumbents learn what their customers new values are when considering their next purchase? Ask them. Disruptors are customer centric whether they realize it or not and their every strategy is predicated on growing their customer base. When incumbents align their supply chain strategies with consumer behaviour and values then they will will be more responsive to changes in the context of business within their respective arenas. Changes in consumer values are a telltale sign of impending disruption.

Align firm values and capabilities with customer centric supply chain value chains - as firm values are reoriented to be more customer centric and less resource centered, managers of legacy business models will resist the change. It is important to align performance measures, metrics and indicators (MMI) with the new objectives. Because MMI's show team members what a firm values, firms must measure what matters. If firm MMI's are still predicated on legacy value chains managers won't prioritize them because their bonuses don't depend on performance in these areas. Firms must integrate the recoupled business models so that all MMI's show the value of the whole. Firms must also match the skills and competencies of team members with the new requirements and align resource allocation with the new customer values. They must deprioritize the importance of resource centricity in decision making in order to allow they new value chain to thrive.

It is important for incumbents within the liner arena to pay keen attention to these developments if they are to ensure the sustainability of their business model. They must not discount the behaviour of their customers as one off or related to some derived demand. The fact that chartering vessels and buying containers have entered customers' consideration sets is a quintessential threat to the way how incumbents create, erode and charge for value. They must respond quickly to reorient their focus from resource centric to customer centric and make the necessary changes within their organizations to ensure the sustainability of these new mental models. Whether they be by talent acquisition or by revaluing firm rank orders for values through revised metrics that are aligned with changing consumer behaviour and values.

Firms must assess the risks to their business and make the call on whether the potential risks, and losses from the disruption are less than the cost to implement a pre-emptive decoupling and recoupling programme.

Note 1: For demand and supply of global supply chain capacity out-of-phase is the default setting resulting in Positive Interference (Good, supply chain) As supply capacity trails demand for capacity by a time period known as demand latency. Demand latency being the time taken for a downstream order to turn into an upstream order fulfilment. This scenario results in a balance (logistical lead time equal to or less than demand latency) between the demand for service delivery and global supply chains ability to meet the demands. Negative Interference (Bad, supply chain) causes demand and supply to be in-phase (logistical lead time larger than demand latency) resulting in increased logistical lead times which creates in global supply chain capacity constraints. (I write more about this in my article - Can Wave Theory help to explain current Supply Chain Disruptions?)

Article References

https://www.maritime-executive.com/article/ikea-is-buying-containers-and-chartering-vessels

https://www-cnbc-com.cdn.ampproject.org/c/s/www.cnbc.com/amp/2021/06/13/home-depot-contracted-its-own-container-ship-to-avoid-shipping-delays.html