Apple, Amazon and Agility – the New Triple A Supply Chain

My first title for this inaugural column was “Don’t Worry, Be Happy”. Instead, in a tribute to my good friend and our Chairman, Dr. Hau Lee of Stanford University, I went with the above. The link between the two ideas is something we should all care about, which is how the supply chain profession is, at this very moment, keeping the world economy chugging along despite the best efforts of our political leaders to ruin it.

Whether you’re reading this in the US fretting about the fiscal cliff, the Eurozone worrying about double-dip recessions, or elsewhere wondering whether your chance for the good life is going up in smoke. The fact is that plenty of us are feeling the fear. Having read through the past year’s notes from conversations with many of you, I instead feel downright bullish – and I think you should too. Here’s why:

The key is productivity. Looking backwards in time at the most basic measure of productivity – output per hour of labour input – it’s clear that the US hit an inflection point in annual productivity growth around 1996, exactly when the internet became commercially available. Smoothing the trend lines shows a slope of about 0.63 for the years between 1948 and 1996 and 1.11 since. This kink in the pace of improvement coincides perfectly with the application of networked information technology to the production and distribution of physical goods. In other words, productivity growth jumped as soon as supply chains started to master the use of the internet. You, the SCM World community, are in fact saving us from ourselves.

Two companies we looked into during 2012 help to prove this point. The first of these, Apple, is supplied by many members of the SCM World community and all have views (off the record, of course) on what makes it tick. My own opinion is that Apple has figured out how to lift supply chain up to the plane of “value chain”. In part, this means less emphasis on process management and more on programme management, especially around innovation. Apple does new product development and launch the way Steven Spielberg does cinema – blockbuster. Apple also understands the urgency of ecosystem support for its value proposition. For some, Apple is a way of life, not just a product. Finally, the company has pursued a degree of vertical integration that makes 1920s Ford Motor Company look almost niche by comparison. From silicon to storefront retail Apple owns it all, and despite having all its manufacturing “done” by Foxconn, spent something like $4bn in capital equipment and tooling during 2012.

The results include massive economic value for some, and bull-in-a-china-shop supply chain ripples for others. For everyone, however, Apple demonstrates how clever engineering and design, when elevated to massive scale, makes lots of money and with far less hydrocarbons per dollar than a Ford Model T. The productivity revolution lies in embedding digital value in physical product.

Also a customer of many SCM World members, Amazon too wields massive market power. For retailers Amazon is like the plague. Its classic retail value proposition of big selection at low prices is so perfectly suited to online shopping that traditional bricks and mortar retail has absolutely no chance to survive without radical change. Amazon has also done scale like no one since the Marshall Plan – building dozens of huge and highly automated warehouses in just a few years. And, the company’s obsession with demand information capture looks ready to make even the most sophisticated forecasting system seem positively Stone Age by comparison.

The results include dramatic and sudden changes in the physical footprint of the consumer/retail supply chain. Initiatives like “Frustration Free Packaging” and the purchase of warehouse robotics maker Kiva are removing variability from the chain in ways that will affect factories, packaging lines, distribution centres, trucks and stores. For Amazon, the internet breakthrough means that every consumer’s demand can be understood and met with previously unimaginable precision.

The connecting thread and most common thing I heard from you all last year is the quest for agility. Apple currently offers 775,000 apps in its App Store and 40 billion have been downloaded to date. Viewing each download instance as an item/location combination, the Apple supply chain served almost 20 billion unique “moments of truth” when the customer chose the product in 2012. Each time the customer feels personally served, and yet for Apple nothing was picked, packed or shipped. In terms of productivity, this little miracle is the tip of the iceberg.

Amazon is also setting new standards in agility. By bullying suppliers to follow its rules for packaging, delivery and take-back and, at the same time, conditioning consumers’ shopping behaviours, Amazon is standardising huge swathes of the materials handling landscape. The perspective of the customer is increasingly personalised with a web interface that knows each of us as individuals and a direct-to-the-home touchpoint. Productivity gains here encompass everything from less retail real estate through leaner inventories and eventual make-on-demand production in plants.

The irony of all this is that both Apple and Amazon have built this agility on the back of selective, but sweeping, standardisation. For Apple, that means a very limited hardware product line, while for Amazon it means a massively standardised order fulfilment system. The customer sees agility, while suppliers and other partners in the value chain see complex systems engineering challenges.

These two companies quell my worry about the future because they have shown that the cost of complexity is an inverse function of supply chain agility.

Don’t worry, be happy – but keep working on your agility because it’s the only way to win.

Kevin O’Marah
Chief Content Officer
SCM World

Please contact me directly with any comments, questions or suggestions. I welcome your feedback.