When you hear the phrase “supply chain,” what comes to mind? At ShipBob, we think of the supply chain as a network of organizations working in sync to improve the flow of materials and information across the production process. The goal of an effective supply chain should be to cost-effectively coordinate upstream and downstream production entities to achieve high customer satisfaction.
Let’s look at a traditional supply chain:
Suppliers → Manufacturer → 3PL warehouse → Customer
(The arrows represent the direction of flow of materials and information.)
A standard supply chain starts with the purchasing of raw materials from suppliers, with the key objective of paying the lowest price possible. For example, companies often place bulk orders of materials to save money. The excess raw materials get stored in warehouses until they can be used by the manufacturer.
Correspondingly, the manufacturer focuses on lowering unit costs through large production runs, fewer machine changeovers, and product standardization. At the end of the production run, the inventory of finished products needs to be transported to 3PL warehouses before they can be sold to the retailers and end customers.
So, what’s wrong with the above supply chain?
Each unit working with functional independence is successfully meeting its objectives; however, the working capital of the company is being used to produce inventory and then store that inventory at the 3PL’s warehouse. If the product fails to generate demand, the company will have to write off all of the leftover inventory.
At the end of the day, the sales objective — to create competitive differentiation through product variability, customization, and reduced lead times — is at odds with the production and manufacturing objectives of long production runs and product standardization.
In the example above, the 3PL functions as (1) a storage facility for finished inventory and (2) a distributor of inventory to end retailers and/or customers. The 3PL works to optimize the activities within its four walls, which include cost-effectively warehousing the finished inventory and shipping the product when an order comes in.
It is disconnected from the upstream activities of purchasing and manufacturing, as well as the downstream activities of sales and reducing the delivery lead times.
The example above is representative of the supply chain of most companies — uncorrelated to the actual demand for the product. In a day and age of shortening product life cycles and volatile demand, this supplier-driven supply chain model just doesn’t work.
A better supply chain
You need to flip your supply chain on its head and put the customer first. In this new model, the 3PL integrates with sales and distributes inventory across a network of fulfillment centers.
When an order comes in, it gets shipped from the fulfillment center closest to the end customer to reduce delivery times.
When the product gets shipped out from the ecommerce fulfillment center, information can be transmitted upstream to the manufacturer, telling them to produce a unit to replace the one that shipped. Information from the manufacturer is transmitted further upstream to the purchasing, which now knows to replenish the raw material consumed by the manufacturer.
Each part of the supply chain is now synchronized based on demand forecasting. This minimizes the build-up of inventory between the different stages of the supply chain, and the entire supply is more responsive to the demands of the customer.
This agile, responsive supply chain — in which information flows between the upstream and downstream business processes, and activities are based consumer demand — is far more competitive and effective than the traditional supply chain.
By sharing information between all stakeholders in the supply chain, we have substituted the build-up of inventory with information and responsiveness. Contrary to a traditional supply chain, we have a “demand chain:” the customer makes a demand that initiates a coordinated process and flow of information.
ShipBob’s mission is to successfully implement this “demand chain” for ecommerce businesses. We do that by:
- Integrating across all of your selling channels and marketplaces to capture your sales data.
- Using your sales data to strategically distribute your finished inventory across our fulfillment center network, allowing us to fulfill your sales requests quickly.
- Pushing your sales data upstream to help you coordinate purchasing and production.
This strategy has two advantages:
1. Increasing customer satisfaction by making your supply chain responsive. Storing inventory at the fulfillment centers closest to your customers allows us to fulfill orders more quickly and cost-effectively. Compare this to a typical 3PL, whose warehouse in the middle of the country can efficiently store inventory, but is ineffective at reducing delivery lead times.
2. Reducing the cost of the overall supply chain. By substituting inventory with information, you can make more accurate purchasing and production decisions. This reduces the capital spent on raw inventory, optimizing your supply chain to make it cheaper and more agile.
As the power shifts towards more price-conscious consumers and competing products start to look more similar in features, a more effective and responsive supply chain will be one of the ways to differentiate from the competition.
At ShipBob, we strive to be a supply chain integrator and partner, not a typical 3PL. That’s why we’re building a more effective, flexible, and responsive supply chain. If you’re interested in transitioning your traditional 3PL and supply chain relationships to an innovative, cost-effective, and tech-first solution, reach out to request a demo and pricing quote — my team and I would love to chat.
Learn more about how partnering with a modern fulfillment company can help your business scale, and get tips for choosing a fulfillment partner. Download “How to Choose a 3PL for Your Ecommerce Business.”