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Direct-to-Customer: The need for dynamic supply chains

In a world that has been disrupted by a global pandemic and now a European conflict, we have seen firms execute years of digital transformation practically overnight. Putting the customer-first, companies have reevaluated their supply chains with focus on nearshoring, spreading supplier risk and relocating distribution centers. One of the surprising and unpredicted outcomes, driven by the customer-first priority, has been a move toward direct-to-customer (DTC) business models driving the need for dynamic supply chains.

Businesses are competing with their traditional channels in a drive to better understand their customer, act upon and meet customer expectations. Companies want to know more about their customers’ motivations and purchasing habits, what they think about the company’s product, and, most importantly, what makes them happy so that they can produce a better, more desirable product. No longer satisfied with the filtered, incomplete, and often misleading information provided through distributors and retail outlets, companies are establishing direct channels, that in many cases, upend successful business models and require a re-engineering of operating processes.

It is not just retail companies that are going DTC. Traditional manufacturers that were dependent on distributors, such as beverage maker Diageo have introduced direct sales online. So have apparel manufacturers such as Under Armour and Nike, which consolidated retailers as they expand direct channels. Digitalization and personal experiences are blurring the differences between B2C and B2B customer expectations. As we have written extensively at the Digital Supply Chain Institute (DSCI), today’s customer—what we call the New Customer—has vastly different expectations and understanding the New Customer requires a more comprehensive data-driven approach.

DTC is all about putting the customer first and driving supply chains to become customer present. Digital supply chains are a necessity as DTC becomes pervasive.

Just a couple years ago, DTC would have been an impossible challenge for many organizations. Digital transformation by all businesses, large and small, requires connectivity and automation throughout the supply chain. However, the most important characteristic of the digital transformation of supply chains may be that they are adaptable and dynamically reconfigurable to adjust to changes in the market whether those be customer whims or seismic events like war or a pandemic.

In fact, today’s supplier networks have evolved so dramatically that we at DSCI believe it is more appropriate to think of today’s digitally connected supply chain networks as three-dimensional constellations that can be dynamically reconfigured to meet rapidly changing market conditions.

Dynamic supply chains are, quite possibly, the most significant supply chain transformation since the advent of offshoring.

What are the practical implications of DTC enabled supply chains? Here are a few observations:

Emergence of dynamic supply chains: The New Customer will be the center of DTC business models. While this may seem obvious, few businesses have truly put the customer first, let alone being customer present. The ability to recognize demand signals and dynamically adjust supply chains to those changes puts the customer first. Data management tools in conjunction with artificial intelligence (AI) and machine learning (ML) will enable dynamic adjustments to meet customer needs which may include changes in distribution, suppliers and shifting product between channels to optimize sales. Characteristics of dynamic supply chains include:

• Tightly integrating demand with supply: Access to real demand data will allow synchronization across the business. This in turn will enable automated workflows across the business and throughout the distribution and supply chain. With tighter workflows, partners, and internal operations can adapt quickly to market changes and adjust manufacturing, supply and distribution including suppliers and routes to market.

• Changing channel prioritization: Cross channel management and workflow consistency is required, but certain channels may take priority over others. Furthermore, workflow could be significantly different as one channel deals in truckloads and another delivers smaller quantities. In one channel, an SKU may represent a truckload or pallet, and, in another, a case or bottle. These changes will permeate the supply chain and force wide-ranging changes.

• Shorter supply chains: Global sourcing reduced cost but created long and inflexible supply chains. Market adjustments took months. Now that timely feedback is possible, businesses are rapidly building shorter more flexible supply chains that closely link supply with demand to optimize sales. With the move to nearshoring, firms will no longer be faced with the inflexibility that offshore manufacturing with months in transit create.

New business models: Managing demand signals dynamically requires an adaptable and digitally linked business model that drives near-shoring, multiple supply sources and optimized distribution to meet the New Customer demands. New business models will likely include:

• New systems to support business model changes: Businesses that once sold by the truckload or pallet will reengineer systems and processes to handle the new channels. Financial systems will need to change to support when goods are sold (e.g., when they are shipped to the customer instead of when they leave the warehouse for the distributor). Warehouses will need to be physically changed to handle smaller quantities, logistics and inventory management will be updated to deliver to new points of sales and marketing will need to address the New Customer.

• Inherent channel conflict: With DTC there is intentional disruption of traditional routes to market with downstream impact to supply chains and distribution. Supply chain networks, that represent structured supplier relationships are giving way to constellations of value that are more dynamic and can be quickly adjusted to market shifts that may range from a supplier not being able to deliver to a customer who requires a different product. DTC performance demands data sensing with rapid adjustments to product sourcing, distribution, and mix.

• New business relationships: As DTC channels are established, different and new business relationships will be created. Dynamic tuning of supply chains will become pervasive. Existing partners will be evaluated for fit in new business models and new partners will emerge. This will force the re-engineering of operational processes and workflows.

New leadership and talent: Working directly with the customer will require new skills whether those be call center, business development or account management. New leadership skills are required to adapt to DTC business models with greater emphasis on collaboration and dynamic business model changes. There will be focus more on workflow management and linking demand and supply dynamically. The talent that holds your supply chain together today will be less important in the future as automation and the use of AI and ML become ubiquitous. In the future, critical talent will more likely be those that understand the consumer and customer deeply and build the models and write the AI and ML rules.

Governance: To ensure compliance with internal policies and external regulation, governance will be essential. Digitally extending the enterprise to manage end-to-end workflows with intelligent sensors along with AI and ML tools will require risk management, data privacy and data security policies to be updated and for many, developed. For example, how do you recognize if your AI algorithms are behaving as designed or keep an auditable inventory of those algorithms so that they can be evaluated for compliance? Digitalization opens new opportunity for activity that must be monitored and proactively addressed.

DTC transformation is driving the need for dynamic supply chains. Those businesses that adapt their business to exploit digital capabilities and technologies will be those that grow market share and outperform competition.