Will the complexity of customization destroy supply chains?

Via SAP SE Newsroom

Aug 26, 2016

Digitization is making it easier to respond to increasing consumer demand for personalized products. According to a report by SCM World, 90% of customers value individual goods and the majority of supply chains have already been rebuilt to support this demand.

Plus, 3D printing has the potential to further customize products and reduce required inventory. Also, consumers are more empowered to search for a balance between high quality and low pricing, switching between manufacturers and retailers according to their demand and brand expectations.

There’s no doubt that the rise of digitization continues to impact our economy and society. But as product personalization becomes the norm, could supply chain complexity increase to the point that any competitive advantage from this “unit size of one” model is erased?

Will supply-chain complexity erase any competitive advantage from the “unit size of one” model?

Choice Might Not Equal Customization

When Apple launched the iPod and its associated e-commerce business, the music industry was completely disrupted. This one approach reversed the industry back to its origins, before vinyl records were invented, when money was made through concerts, not recordings.

The music industry is an exciting showcase of the relationship between digitization and consumer demand. In the past, large music labels influenced consumer choice through radio, concerts, and marketing. However, in the era of digitization, everything is now an online or smartphone search away – at least in theory. As a result, consumers can track down their preferred music independently from traditional rating systems and music channels on the radio and TV.

The so-called “long tail” theory states that demand will shift away from mainstream products and markets in our digitized economy. Or in the case of the music industry, consumers will gravitate away from “music hits” towards more niche artists and produce a long tail of products that are bought by a fraction of consumers. This would certainly further increase the complexity of supply chains, as manufacturers and retailers would need to maintain more product variants down to every niche.

According to an article in the Financial Times, the reality for the music industry is different as the “fat head” (i.e., the subset of superstar artists) still eats the “long tail.” Despite digitization, superstars have consistently dominated music revenues between 2000 and 2013, as cited in research by Mark Mulligan of Midia Consulting. Although they are increasingly digitally connected, consumers are still going to the mainstream for new music. For manufacturers and retailers, this finding can be quite comforting because it indicates that demand is much more conservative now and customization into the long tail will probably become smoother and more manageable than thought.

Smart Supply Networks May Beat Complexity

Complexity will no doubt rise in modern supply chains. But despite real-time demands, pricing, local need, customization, ethics, and resources constraints, digitization may offer a helping hand as well.

Here are four ways your supply chain can tackle complexity:

  • Simplify processes. Research by MIT Sloan shows that companies can overcome increasing complexity on the demand and product side of the business. You can simplify internal processes with the help of digitization – such as the Internet of Things, Industry 4.0, and Live Business operations – based on data analytics and simulations.
  • Distribute complexity. The number of stock-keeping units (SKUs) may increase due to changes in demand and customization. However, this does not impact just one manufacturer in the value chain. Modern supplier networks can act as a swarm to distribute the impact of an increasing number of SKUs, given that they are based on Live Business operations.
  • Consider local demand. Research shows that retailers are configuring their assortments, according to local demand, to achieve higher revenues. However, the impact of the online market remains subtle, as the average consumer already has access to the product they want to buy. The long tail, it seems, is a result of aggregating sales.
  • Leverage 3D printing. While consumers may not wanteverythingto be highly customized, 3D printing can still change the way many products are manufactured. Using the advantages of a decentralized production model, it is possible to add customization in the last steps of the process, directly at the buying center, or maybe even the midway point between mass customization and traditionally industrialized manufacturing.

Is It Possible to Cope with Supply-Chain Complexity?

When it comes to consumer behaviors, not much has changed. They are still conservative as well as demanding. However, there is one exception that cannot be ignored: Consumers now have access to a plethora of sources and retailers from around the world to fulfill even the most niche of demand. In parallel, digital networks are sending out fast waves of trends and fashions through our economies that many people will follow.

As they were in the past, manufacturers and retailers are squeezed between following a trend and customizing products – just on a much more agile level due to digitization. Managing these opposing forces is not an easy task. Yet, simplifying their internal processes and realizing the benefits of live supplier networks with high-end demand forecasting and logistics can enable companies to leverage the advantages of digitization in their favor.

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