Jeremy Rifkin's recent New York Times op-ed piece headlined “The Rise of Anti-Capitalism” caught my eye with its assertion that zero marginal cost is fast becoming a reality in modern economics. From a traditional supply chain standpoint, this observation manifests as a race to the bottom in pursuit of ever-lower costs. For those working on the future supply chain, however, it is an invitation to the fun part of business, which is creating new value with ideas.
The meaning of “zero marginal cost”
Classical economic theory portrays marginal cost curves as rising, meaning that higher quantities of production cost more per unit than lesser quantities. This makes sense so long as the inputs to production are capital, labor, and materials. But the theory struggles to accommodate the production value of ideas, which is why it is yielding to an Internet-age reality of zero marginal cost.
The production cost of one more unit of a child watching Frozen on his or her iPad is zero. When this happens billions of times across millions of ideas, we see steady progress towards a new time in economics.
Rifkin ties in a series of disruptive technologies that all share the trait of distributing information to points where it can create value. Among these are 3D printing, local solar and wind power generation, massive open online courses, and the Internet of Things. Laying these tools on top of a global supply chain that is already running solid ERP systems, using cloud-based planning and visibility tools, and practiced in the fine arts of lean, one can easily see the productivity revolution that is now happening.
To quote Rifkin: “The inherent dynamism of competitive markets is bringing costs down so far that many goods and services are becoming nearly free, abundant, and no longer subject to market forces.”
Supply chain people are the ones making this happen by constantly finding another 5% to take out of the system day after day. Some approach it looking to squeeze suppliers, gouge customers, or short-change labor. Most, however, understand that sustained growth in efficiency comes from solving bigger problems cooperatively rather than shaving pennies at the transactional level.
The economy of abundance
The future supply chain will create value by, for instance, linking sensors and controls on things like Caterpillar tractors and Johnson Controls' thermostats back to parts depots and control towers to optimize uptime and energy efficiency.
It will dispatch detailed CAD models to distributed 3D printers in operating rooms, auto-repair shops, and hardware stores for local production of unique parts for use in almost any application imaginable.
It will also recognize and manage the closed-loop system that is inherent in everything from agriculture to steel production and design the network accordingly. The wealth sharing and sustainability-enhancing qualities of this system are very promising.
We should welcome and enable the zero marginal cost economy, not only because it's good for the world, but also because it's much more interesting than working as a cost center. SCM World research on supply chains' span of control shows consistently higher degrees of engagement and influence among professionals who are part of the idea-generation process rather than errand boys for brand management or R&D.
In companies with powerful supply chain voices, it is far more common to see integrated product and process design, collaborative supplier relationships, and proactive customer demand management. Such companies are also more willing to invest in talent development.
Those that consider new product development and launch (NPDL) as “essential” to supply chain, for example, are twice as likely to spend 5% or more of fully loaded personnel costs on skill development as those who say it is “not part of supply chain.”
The challenge going forward is for supply chain strategists to design networks of suppliers, plants, distribution centers, and channels that can harness the power of zero marginal cost economics to move material only when it is absolutely essential.
The business impact of getting this right will be rising profits built on creating value for customers and suppliers. The personal impact is avoiding the zero-sum game of working as a cost center in a race to the bottom.
This blog is reprinted with permission from SCM World. “Ideas Power the Future Supply Chain” by Kevin O’Marah originally appeared March 21, 2014.