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The Digital Value Chain

By David Aquino, CPIM | July/August 2012 | 22 | 4

The Digital Value ChainDeveloping a comprehensive data distribution strategy

Whenever the question arises of which company has the best-performing supply chain, Apple inevitably is at the top of key lists and industry markers such as the Gartner Top 25. In the recent past, some questioned whether Apple had a true supply chain, pointing to how the tech giant has branched out from traditional computer hardware and consumer devices to areas such as e-commerce and digital content. Lately, however, many of its harshest critics have come to admire Apple’s supply chain capabilities, including its brilliant success in integrating new product design and launch, pricing strategy, consumer loyalty, and e-commerce infrastructure, as well as the total customer experience it provides. 

Apple has the proven ability to not only create products and services people want, but also deliver a seamless customer experience, whether in person or online. To any organization grappling with the task of developing a digital value chain, Apple serves as a prime, powerful example of how to do things right. 

Let’s get digital

In the early days of my career, the digital value chain meant electronic data interchange transactions—simple communications between organizations that shared inventory levels, demand data, forecasts, replenishment amounts, purchase order acknowledgements, and the like. This sort of connectivity remains powerful and necessary at many companies, but it pales in comparison to the complexity and value of today’s data chains. For example, when systems began to come about that provided the ability to view and order products and services online, it was both a novelty and an inspiration. Many business leaders struggled over the ensuing years to define a viable e-commerce strategy, having to determine the correct courses of action without much in the way of research: deciding whether to merely display products and branding or to offer the ability to place orders, how to handle online pricing, and how to manage fulfillment, among other concerns. 

It is a sad truth, but, at many organizations, e-commerce was an afterthought or simply a mechanism for brand and company awareness. The worst offenders were late in developing systems that could provide both strong functionality and a viable customer experience. At many companies, e-commerce was seen as a technology issue, so ownership was given to information technology departments. As the discipline crossed the threshold to legitimacy and became critical to business success, many leaders discovered their e-business strategies were insufficient and inconsistent when it came to product portfolio management, pricing, return policies, and shipping charges. Some companies had internal strife, with departments competing against one another. Practices such as supply chain planning, sourcing, warehousing, and transportation and logistics became far more complex. 

Finally, after years of adapting, most firms have created healthy relationships between their supply chain and e-commerce functions. However, from my own experiences in the publishing industry, I find that people still are confused about the composition and depth of the modern digital value chain and its effect on the traditional physical supply chain.

Nowadays, to make it in the publishing industry requires becoming a true media company. Publishing companies have evolved from something similar to consumer products manufacturers, who are fortunate enough to only worry about supporting integrated e-commerce sites. Now, publishers must constantly release compelling, effective, high-quality content in diverse formats: physical, electronic, and multi-platform. This content might include traditional forms of writing, applications, videos, podcasts, and games. Media businesses also must distribute and maintain content consistently and securely while respecting privacy requirements. 

Where once only the ability to produce a book was required, now these companies must master hundreds—if not thousands—of permutations in design and distribution. Effective leaders understand how best to discover and implement projects against a flood of competing technologies, ensuring they are cost effective and sustainable for years. These people have clear seats at the development table, enabling them to understand the ultimate product and platform development strategy and recognize the keys to revenue, profitability, and longevity. 

Supply and demand planning

For supply chain leaders who are incorporating digital content as part of their demand and supply planning processes, it’s great that every item distributed electronically is one fewer piece of physical inventory. The challenge is in effectively capturing the associated data and connecting interdependencies. It’s important to have answers to difficult questions such as: Does the forecast consider digital cannibalization? How much digital content should be produced? What is the total projected revenue for both physical and digital material, considering different pricing approaches? 

For successful planning of digital supply and demand, first define the master data attributes for these items, including product classes, pricing, life cycles, versions, and connections to physical product codes. Once a logical, non-conflicting hierarchy is in place, it is important to understand the unique demand patterns for the digital products, including base level, seasonal elements, pricing sensitivity, and total life cycle. In my experience, the assumption that physical and digital products always have similar demand patterns is erroneous. From a supply perspective, it is easy to think that digital products don’t require much work. However, as digital increases its impact on the physical supply chain, it is critical to create a harmonious strategy: thinking ahead for the decrease of physical products, researching new manufacturing methods, and improving network design to accommodate smaller inventories. Ultimately, the goal is to adopt a model that supports both physical and digital products. 

Within the business process for digital products, two key challenges arise in the new product development and launch arena: Customers are forced to manage many different technology platforms without much in the way of guidance, and a lack of priority alignment means digital orders often become lost during fulfillment. Mature organizations focus greatly on rationalizing platforms and structures and building environments that can support multiple platforms more readily. 

Training and product knowledge development are evolving, as systems demand more technical proficiency, striking a balance between the issues of access and entitlement, bug management, and core content. Additionally, it takes reinforcement throughout the business that digital content is not lower in the fulfillment hierarchy. Eventually, order controls and human resources and management practices will shift to increase focus on digital fulfillment. 

Finally, what constitutes successful fulfillment for a digital product or platform? Is it when the product becomes available? Whenever a customer attempts to access a given system? When a download or update occurs? Organizations must not only build new metrics beyond those of the traditional physical supply chain that accurately capture consumer desires, but also integrate holistic metrics wherever possible that represent supply chain performance across a mix of products and services. 

For fledgling digital value chain organizations, a dearth of available reporting and metrics can leave supply chain leaders ignorant of situational issues and customer frustrations until they escalate beyond the boiling point. Reporting and metrics must match the significant expectations of the digital world. This may enhance all metrics surrounding demand and supply planning, fill rate, and cost adherence for the entire operation.

It is easy to dismiss the history of e-commerce and the rise of digital media as distractions, irrelevant to other industries and supply chain aspects. However, today’s digital market strategies, management, and global requirements are forcing even the most reluctant supply chain leader to consider how the digital value chain affects his or her operations. By studying the short-sightedness of the past, we can learn from the mistakes of others and ensure the integration of the physical and the digital worlds is faster and less painful than before.

David Aquino, CPIM, is vice president, operations strategy, planning, and performance, at Houghton Mifflin Harcourt. His career as a supply chain executive has spanned many global organizations within the consumer products industry, including PepsiCo, Scholastic, Foster Grant, and Aramark. He may be contacted at david.aquino@hmhpub.com.


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