Wednesday, September 4, 2013
About Open Distribution and Modularity- Another Example: Cummins
In this week’s reading “Learning from Tata’s Nano” One word grabs my attention “Open Distribution”. According to the author, open distribution has three key characteristics:
1. increases modularity.----Product Design
2. aggressive leveraging of existing third-parties
3. creative use of information technology integrated with social institutions to encourage use and deliver greater value.
The first characteristic is particularly relevant to this week’s topic, product design. One this note, I found another great example -a McKinsey Report which illustrates the power and mechanics of open distribution model, particular Modularity. The report introduces the case that how Cummins, a U.S-based diesel engine producer, tries to satisfy the needs of less affluent customers in India. (http://www.mckinsey.com/insights/innovation/innovation_blowback_disruptive_management_practices_from_asia) .
There are three things that make Cummins chooses this approach: low price needed by customers (high price sensitivity), very diverse needs about the functionalities of the product and dispersed customers. What Cummins does is to build a “base model” and provides an array of “adds-on” that can help customize the products based on individual needs. These add-ons are made easy to incorporate to the base model, which appeals to the local, less skilled third-parties distributors. This model also reminds me of the idea we discussed last lecture :“variability” is always a bad thing for SCM. Using this modularity approach, Cummins gets to increase “production runs of common subsystem and components, and thus keep the cost low”.
In terms of the relationship between cost and modularization, one sentence in the report concludes it well:“ When modularization reflects only the need to cut manufacturing costs—rather than the problem of reaching small, dispersed segments of low-income customers through third-party channels—it typically fails to cut the cost of ownership for customers and the cost of sales in the channel.”
Another interesting point to me during the researching of “open distribution” is that, John Hagel describes Grameen Bank, the most renowned micro-credit institution which won a Nobel Peace Prize, as a pioneer to Innovate in Distribution Approaches to deliver products to the poor. John claims that Grameen Bank is one of the earliest examples of “open distribution”.
After reading all these articles about open distribution, below are three questions:
1. It says that the open distribution is cost-effective compared to direct distribution. I had hard time figuring this concept out. Needless to say, It will save companies’ assembly cost and probably decreases transportation cost as well. However, an affiliate model, using many third-parties to help assemble and finalize the products may increase more cost and increase more issues to consider: the selection of third parties; quality control, the risk to sacrifice scale of economies…
2. John says in the article that this approach enables companies to better tailor value for customers. The concepts of “personalization” and “customization” also have the same effect. How do they differ from each other?
3. The model’s potential applicability to big companies and affluent customers.
“Peace and Entrepreneurship” –BY John Hagel
Innovation Blowback: Disruptive Management practices from Asia- By John Seely Brown McKinsey Quarterly
Asking the right questions- Bloomberg Businessweek