There is a very good article in the New York Times (good because it echoes something I have been saying for some time) about cutting out the middlemen.
“When the founders of a start-up that sells eyeglasses online, Warby Parker, began investigating why designer glasses cost several hundred dollars, they discovered that everyone in the process was taking a cut: designers, manufacturers, brands, wholesalers and retailers. But what if they left out most of those people? ‘I had been to the factories and knew what it costs to manufacture glasses and knew the cost didn’t warrant a $700 price tag,’ said Neil Blumenthal, a founder of the company.”
‘Cutting out the middlemen’ is simply another way of eliminating the non-value adding waste from the value stream.
Designers and manufacturers create value; brands, wholesalers and retailers don’t. They simply add cost.
The non-value adding links in the supply chain also tie up inventory and, worse, slow the cycle time.
“Because they are not dependent on third parties, these e-commerce companies can also introduce products much more quickly. Crane and Canopy, for example, releases new duvet covers and sheet sets every other week and designs textiles based on current trends on Pinterest and elsewhere, instead of planning collections seasons ahead of time like most brands, said Karin Shieh, its co-founder.”
Of course, the companies discussed in the article are simply retailers, albeit internet based ones, and don’t add value. They exist largely because they are purveyors of Chinese made stuff. A local manufacturer can (and should) eliminate the e-tailers, as well and sell directly on line.
It would be a huge mistake to think that this only applies to consumer goods. In fact, middlemen are middlemen, and waste is waste. Any company that is selling to distributors, through reps, or through anyone or anything that is taking a cut before the product reaches whoever uses it is in the same boat. Don’t miss the boat!
Manufacturers are far too often so internally focused that they miss the opportunity in the overall supply chain. Of course, the manufacturing companies themselves encounter stiff internal resistance to cutting out the middlemen. I have run into it many times in the course of my consulting, where there is a sales and marketing staff that makes its bread and butter (and always has) by selling to middlemen.
Make no mistake – eliminating the non-value adding links in the downstream supply chain is just as much a critical element of a lean effort as eliminating wasted steps in the factory, and the sales folks can be just as resistant to change as the factory people; and they are often more eloquent in their explanations of how and why ‘we’re different’ and why the fundamental laws of economics behind lean thinking somehow don’t apply to them.
A couple of interesting aspects of the inevitable and growing change in supply chain construction: For one, the article says, “Another is avoiding design patent conflicts when working with factories that also work with big brands (though Mr. Sakuma said making minor changes to designs, like a different leg on a sofa, was enough to avoid conflicts).”
My experience is that it takes a lot more than “minor changes to designs”. Manufacturers selling to brick and mortar retailers often run into huge problems when they sell direct, or to an on-line retailer, no matter how the design is changed. They are often told that such a move means the loss of the brick and mortar customer’s business … and Walmart is the worst.
The other implication is far less harmful – at least in the short term. That is the fact that the economists are wholly ignorant of the changing economic model and the implications of lean. When manufacturers sell on-line directly to customers, the profits are greater for the manufacturers, while the prices are lower and selection is greater for end customers.
That win-win is the results of eliminating the wasted middlemen and their associated costs and profits. It really means a big productivity boost – same goods with fewer people involved in getting them from raw materials to customers. The productivity gain comes from fewer service jobs – distribution and retailing.
The economists won’t see the big improvement in productivity in manufacturing supply chains because they see the world as siloed as the most hard-headed manufacturer. The manufacturers won’t have fewer jobs, but the supply chain will. It won’t be calculated as the manufacturing productivity improvement it is.
Politicians won’t see it because, well, politicians don’t see much. They will only see lost jobs and lost tax revenues, and will not do much to help – notice how quickly they jump to make Amazon pay sales taxes … heaven forbid online retailers have an advantage over the waste of brick and mortar.
So the world is changing – getting leaner – and everyone will be impacted. Any manufacturer who thinks that they and their traditional sales processes won’t be affected is very foolish indeed.