Wednesday, September 25, 2013

How Suning Redesign its Position in its Supply Chain Network

I would like share with you an interesting example about how a company redesign its supply chain network by redesign its role in the network.

Supply chain networks describes the flow and movement of materials & information, by linking organizations together to serve the end-customer. [1] When designing a supply chain network, a company need to decide what's the locations of its suppliers, warehouses, retailers and factories, and decide how to transport its products across these locations.

Supply chain network design is important mainly for two reasons:

  1. The network design is usually considered as a long-term strategy. The companies should be cautious about their decisions on where to put their factories, warehouse, or even retail store since all of them require considerable investment, and difficult to change.
  2. According to one of this week's reading, the network decides almost 80% of the logistic cost, just like the product design decides almost 80% of the product. It means that no matter how efficient is your day-to-day logistic operation, a company could at most reduce 20% of the cost, after the network design is done. 
Even though the network design is a long-term strategy, under certain circumstances, companies may need to redesign its supply chain network. For example, a California-based company want to expand its business to the eastern area, and it may need to build new warehouse in that regions. Another example is that when a company try to downsize its business, it may need to shut down some factory and warehouse, and design how the product will be delivered to the regions that are originally served by these shut-down warehouses and factories.

Suning,  one of the largest electronic applicant retailer in China, is facing network redesign problem. The behavior of the customers has been reshaped by the development of the e-commerce in China during the last decade. Customers used to purchase television, microwave, air condition or other electronic applicants in the store. However, currently the customers tend to shop online (like taobao, 360buy) since the product online are much cheaper and much easier to compare the price. 

Instead of defending the attack from the e-commerce, Suning choose to become one of them. Suning established in 2009, and starting selling its product online. However, compared with a start-up firm, it's much tougher for a traditional company to embrace itself with new technology like e-commerce. The most serious problem Suning face is cannibalism. For the same electronic applicant, the price on the website is cheaper than the price at store, sometimes up to 1,000 RMB. The following is what most customers will do: they go to the store, take a look at the products, try it, and then write down the name and purchase them online. Part of store revenue are taken by the online sell, and it makes some retailer store hard to cover its operation cost. 

A traditional network design model will suggest Suning to close some of its stores. The objective of the tradition model is to minimize the logistic cost. If the demand for a regions reduce to a certain level, the company should shut down the retailer store at this region, and use the nearby store to serve the customers at this area, in order to reduce the cost. The disadvantage of this model is that it only tries to solve the problem from a operational level, instead of a strategy level, and it may ignores the bigger picture.

In 2013, Suning restructured the organization, and announced that they would implement an Online-To-Office (O2O) strategy. In the old structure, the e-commerce and retail store are two parallels department, and they are doing the same things - try to sell things to the customers. After the company's reform, these two departments become two components along the same value chain. Like IKEA, they are changing the retail store into an experience center. People could touch, try and test the products in the store, and they could either purchase at the store and online. The company also make the price of the products at stores the same as those online. In this case, the price no longer is a factor that determine where the customers will purchase the products. For those customers who like to touch the real things, they will go to the store, and for those who don't like to go outside could simply make some click on their computer.

Suning repositions itself as a service provider, both to the customers and the suppliers. Suning is trying to establish an opening platform, and they are actively looking for strategic partner to join. For example, one of the electronic applicant manufacturer want to sell its products online, but doesn't want to invest tons of money in it. Then it could put their products on Suning's website. Suning plan to provide technical support, and even customers service for their partners' product. In addition, if a manufacturer want to open experience store for its products, it will requires lots of investment, and high risk. The strategic partner can choose some stores from Suning's 1500 stores, and display the product in the way they want it. They could also use this way to promote its product.

Since Suning just started this new strategic recently, we are not sure how successfully it will be. After the announcement of the new strategy, the stock price of Sunning went up nearly 100%. It seems that the majority hold optimistic attitude towards the change. Criticism think that Suning may fail because its information system is not sophisticated enough to support all these complicated operation. 


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