How a Changed Business Model Initiated a New Supply Chain Planning Approach
This is a story about how a changing market environment and a business model that was adapting to the changes created the need for a new approach to supply chain planning.
The telecom provider business model was traditionally about delivering networked voice and data to homes and businesses, therefore not necessitating strong supply chain planning. But that has changed in the last decade due to the rapid growth of smartphones. The following is how a few telecom providers learned to react to the change, adopting a more aggressive approach to supply chain planning, and breaking through their supply chain and business performance barriers.
In the past decade, smartphones have become the primary business of telecom providers, creating a new set of supply chain planning challenges. Here are a few:
- Short product lifecycles – Smartphones can become obsolete quickly, requiring carefully managed stocks to avoid lost value and obsolescence. This challenge becomes particularly daunting in generational transitions, such as from 3G to 4G.
- High cost, value and margin products mean that inventories can significantly impact balance sheets and cash flows
- Sales usually include not just the phone, but also the service contract. In order to maximize Average Revenue per User (ARPU), telecoms need the right stock in place to avoid lost sales.
- Product availability is even more important to ARPU in commoditized market where consumers focus more on price and availability than brand preference
Several telecom carriers realized that they had a new challenge on their hands. First and foremost, they had a whole new level of supply chain complexity to manage. It required sensing demand signals across complex multichannel networks for both handset and contracts. It meant working with demand data from point of sale (POS) data from retail to identify trends and product lifecycles. And it meant dealing with classic multi-echelon issues such as multiple sources of products, equivalent item substitutions, and using postponement strategies to risk pool demand spikes.
And this new retail market was multichannel, increasing demand volatility. There were now multiple demand streams including on-line retail, company-owned stores, sales kiosks, business-to-business sales, and third-party retail outlets. It included a variety of promotional activities, such as price discounts, bundled packages, and seasonal offers (such as Christmas or back to school) that drive big demand variations.
There were IT challenges. Most organizations did not fully appreciate the retail data as a company asset, so not surprisingly there were POS sell-out and inventory data quality issues. They lacked a unified, single structured model to ensure data integrity and synchronicity. And they lacked the ability to connect the local branches under a single planning model.
Without a strong legacy of supply chain management, they also lacked a strong supply chain planning community. Supply chain simply hadn’t traditionally been seen as a business enabler. And as typical of such situations, there was a need for change management, redirecting the organization from reaction and execution to a more planning-driven culture.
Several key themes emerged from the telecom providers who took on the challenges created by the changing business environment.
First, they created an end-to-end unified data and planning model across extended business partners back to and including the OEM handset providers (e.g., Apple, Samsung). This included a single responsive system able to continually synchronize the network to meet customer expectations.
Second, they defined a profitable and dynamic assortment at the point of sale that optimally connected local requirements to the supply side. A goal was to increase the sales productivity and profitability at end point of sale.
Third, they combined a push and pull approach, adopting different strategies depending on the product. “Pull” uses a demand-driven approach to pull information from the point of sale to identify on the product needs and availability at the stores. But for products with a scarcity from the source, it was better to use a push approach. This required using allocation strategies to maximize sales or profit according to the business strategy (For more on this topic, see our blog Supply Chains that Push and Pull Different Products)
In all, more than 12 telecom carriers have made the transition so far, including portions of Vodafone, Telefónica, O2 and Movistar. Each has increased product availability to achieve a higher ARPU, significantly increased service levels (such as 97-98% at point of sales despite constrained supply) and reduced working capital investment to less than 30-40 days of inventory.