Integrating Innovation Into the Supply Chain

Few will dispute the notion that the Internet is an innovation. In the electronics supply chain, however, the Internet hasn't quite changed the game the way many expected. In its heyday, the Internet was going to replace entire business models and enable buyers to bid for the components they needed. Inventory management was going to resemble the Amazon.com model. Entire BOMs could be matched with components with a single click. The possibilities were endless.

There are a number of reasons why all those things haven't happened to the extent that was predicted. Chief among them: Buyers just didn't want to change their habits.

It's not that buyers resist change altogether. Practices such as TQM, JIT, and lean manufacturing have caught on with a vengeance. Procurement is always looking for ways to save costs. But in high-volume, high-cost businesses such as electronics, buyers want to know where their inventory is. They want some level of pricing predictability before they place their orders. Most importantly, they don't want to give up many of the human relationships they have forged in favor of automation.

Two academic researchers, Martin Christopher and John Gattorma, found some commonalities among buying behaviors. They outlined those commonalities in a whitepaper published in 2005 in the Journal of Industrial Marketing Management:

Essentially, we have found that customers tend to demonstrate a limited number of "dominant" buying behaviours for any given product or service, and that these behaviours may change if the situation changes...
The mix of these four buying behaviours will vary across product/service categories and countries.
Clearly, the "Collaborative" buying behaviour is more driven by a need for trusting relationships and predictability, rather than price. The "Consistent" buying behaviour is focused on predictable low-cost service, and is very price sensitive. The "Dynamic" buying behaviour is price aware, but customers exhibiting this type of response will pay a premium if their largely unpredictable and demanding behaviour is met, at speed. And finally, the "Innovative Solutions" buying behaviour is only interested in a quick and creative solution, at practically any price!
So the key task becomes one of understanding the mix of these and any similar behaviour segments for a given product/service category. Once this is completed, a pricing strategy by customer-segment type is easily developed.

The writers conclude that supply chains have to be aligned with customer behavior.

There are a number of upsides to the industry's refusal to move exclusively to the Web. The industry has changed drastically since the dot-com boom of the late 1990s. Components are becoming more complex as suppliers enter highly specialized niche businesses. Designers are being asked to provide more designs with fewer resources. And economic uncertainty is making inventory management a risky business. The Web plays a supporting role in all of these, but it is not the main player. Here's how the Web affects these aspects of the supply chain.

• Suppliers: They can communicate a lot of information over the Internet, such as datasheets, schematics, and benchmarks. However, most suppliers also provide call-in centers to help engineers work out a problem.
• Designers: Engineers cull a lot of information up front and use the Web to compare a variety of components. There are also numerous design tools available online. However, distributors have hired more engineers to support customers who don't get direct help from suppliers. And the increased complexity of designs and devices has increased demand for person-to-person assistance.
• Inventory management: The Web provides a window into inventory prices and availability. However, OEMs need to forecast demand as far out as possible, and they can't rely on a last-minute order for 10,000 components. Many have preferred pricing relationships that can't be shared on the Web. Long-term contracts and preferred pricing are still negotiated face to face.

Buyers are using the Web more extensively for a lot of things, but it is supplementary to most models, not a direct replacement. The Internet has changed the way the supply chain conducts business, but not in the way most pundits expected.