Industry
TCS Pace
TCS Pace™: Speedier Digital Transformation & Innovation in Business
Highlights
Visionary enterprises are converting supply chains from cost centers to revenue centers as an integral aspect of their ecosystem transformation.
The primary method for generating revenue in a supply chain is the servitization—also called commercialization—of its existing capabilities and assets.
There are three key steps in a supply chain’s transformation to a revenue center: Identifying assets and capabilities to be commercialized, getting feedback and support from sales and marketing, and selecting technology that can scale.
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Introduction
Conventional wisdom around supply chains now exists at an inflection point.
After decades spent in relentless pursuit of efficiency, corporations know they cannot return to a pure just-in-time strategy for which they tailored infrastructures, data, and relationships. Nor can they justify the costly redundancy of remaining in constant readiness for another unanticipated global crisis. Rather, they must find balance between efficiency and resilience amid an escalation of threats like pandemics, climate change, and warfare; while also navigating international relations and emerging trends in global manufacturing.
To best manage these infinite variables, corporations are transforming supply chains from linear inflexibility to flexible ecosystem models. In the process, they’re also discovering how to leverage their extensive networks in a surprisingly profitable way. One of the most essential traits of an ecosystem is encouraging creative forms of cooperation—even with direct competitors—when it serves a common good. This collaborative sensibility is inspiring visionary enterprises to include a radical innovation in their ecosystem transformations: converting supply chains from cost centers to revenue centers.
“There's an opportunity for companies that have developed capabilities or have accumulated assets in specialized pieces of the supply chain to think about what they possess and turn that into revenue,” says Mark Newberry, a TCS partner leading its supply chain practice in the Americas. This revolution in the supply chain’s role is achieved primarily through the servitization—also called commercialization—of these capabilities and assets. And this method of extracting value represents a breakthrough in new business practices within the context of an ecosystem.
The supply chain’s future starts with ecosystems
A supply chain that operates in an ecosystem has become essential to the right balance of efficiency and resilience in an uncertain world.
But its collaborative concept may still draw initial resistance from stakeholders who don’t want to share more proprietary data than is strictly necessary with partners, vendors, or customers. And breaking free of a linear supply chain in which information moves slowly through tiers of suppliers—or depends on ad hoc communications between people—comes with advantages that more than justify providing greater visibility into traditionally confidential information.
For instance, even if an enterprise stops short of servitization and the direct revenue it generates, their ecosystem can still contribute to the bottom line. TCS witnessed this in partnership with one major manufacturer of luxury cars as it embraced the idea of giving its dealers greater visibility into production lines for low-volume models like a flagship SUV that costs well over $100,000 in the U.S. market. While it’s unlikely a customer who wants an out-of-stock car will wait months for a special order, she may be willing to wait until the following week if the dealer can say one is scheduled to roll off the line in three days.
You need to decide right upfront how you're going to approach the commercialization of products you have.
Creating servitization in supply chains
Fully digitized ecosystems form an ideal foundation for the servitization of assets such as data, which can be viewed like the oil of operations.
In this analogy, the refinement of crude not only produces gasoline and diesel but rubber, plastics, and other byproducts that can be sold; in other words, it can be used for much more than fueling internal combustion engines. A tire manufacturer might, for instance, use customer data for its own purposes while also packaging it for sale to independent dealers so they can target potential customers with offers for the right products at the right time.
But commercialized data is only one aspect of potential servitization, especially when an enterprise already operates its own supply chain network. Woolworths, the Australian chain of supermarkets, has branded its revenue-generating service as Primary Connect. The international network, which consists of road, rail, and ocean transport services, along with 3PL (Third Party Logistics) warehousing, currently serves over 1,000 customers. Each year, it moves nearly 500,000 individual loads in eight million pallets collected from over 4,000 locations.
With Woolworths’ core business as a retailer of groceries, Primary Connect has a particular expertise moving perishable goods, a capability that’s attractive to a customer base that includes direct rivals. This might sound counterintuitive from a competitive perspective but is an effective strategy for maximizing cube utilization and eliminating the waste of empty miles. Many companies might view their competitors as enemies on the highway when they’re not and the two should, in fact, work as collaborators on the highway by utilizing and optimizing resource capacity. When one company’s partial truckload can be combined with another company’s partial truckload, they share in the cost reduction and the value that represents. This could create a significant shift from cost to revenue in a country like the United States, where 30% of trailers operate at a 100% loss because they’re empty, and where rival retailers Target and Walmart are already working together to keep trucks full.
Servitization is playing an unusually critical role in the future of another major business that has commercialized its global supply chain infrastructure with the ability to scale up or down according to a customer’s immediate needs. Although currently producing a secondary revenue stream, this servitization will likely become the organization’s primary business as its core service of managing paper documents faces reduced demand in a time of digitization.
Servitization can be as flexible as an enterprise and its customers require. A retailer that only needs the full capacity of its distribution center for three months during the holiday shopping season can lease out space it doesn’t need throughout the rest of the year—along with offering logistical services like picking, packing, and delivery. Scenarios like this provide examples in which competitors can cooperate in mutually beneficial “frenemy” arrangements. For instance, the supermarket chain ASDA uses retail locations in Britain to serve as a convenient pickup center for products delivered from an array of sources that includes rivals. In addition to revenue generated from servitization itself, ASDA’s in-store sales have seen a significant boost as the arrangement creates additional foot traffic.
As enterprises gain experience and achieve success through the servitization of their own assets and capabilities, they will also have the opportunity to create additional revenue by consulting for other enterprises that want to commercialize supply chains.
AI in servitization will drive exponential value with intelligent composable supply chains elevating the ecosystem play and business models for tomorrow.
Transforming supply chains to revenue centers
Servitization generally entails—at a minimum—the creation of a new business unit.
This is true even when a commercialized supply chain essentially packages an enterprise’s normal operations. And at this early stage when such ventures are forging new ground, it’s unlikely an enterprise’s supply chain will get more than one chance to succeed. This means it’s best to work with a single transformational partner that has the vision and know-how to take the project in one seamless journey from strategy to implementation.
At its highest level, the transformational process from cost center to revenue center includes three critical steps:
Identifying which assets and capabilities can be commercialized. Says Mark Newberry, “You need to decide right upfront how you're going to approach the commercialization of products you have, and whether those products are capabilities, like a unique ability to do something with your supply chain, or if those products are assets like data that might be part of an ongoing operation.”
Since FedEx’s primary business already operates as an integral element of global supply chains, it found an opportunity to generate new revenue from the data it collects while shipping 20 million packages each day. With a new business unit called FedEx Dataworks, it uses this data to power a centralized platform that helps customers optimize their own supply chains.
Gaining feedback and support from sales and marketing. Supply chain executives at Cardinal Health understood its core capability—the distribution of pharmaceuticals and medical supplies—could be adapted and packaged for others. And they knew Cardinal’s existing certifications and familiarity with regulations would make servitization of this capability particularly attractive to companies in the healthcare industry. But they needed help shaping these new services into a product that sales and marketing could understand and sell.
“After you know what you want to sell, start involving your internal sales engine and prepare to to adjust the first set of decisions,” says Newberry. With the input of key internal partners who helped shape the offering, Cardinal was soon selling its warehousing and transport capabilities to a hospital network that was required by the states of California and Illinois to store a minimum level of personal protective equipment (PPE).
Selecting technology that can scale. An ecosystem resource planning platform can provide complete visibility of the supply chain to all participants—similar to the full view of airspace an air traffic control system can give every air traffic controller in the region. An off-the-shelf solution of this type doesn’t yet exist, so such a platform would need to be created on a custom basis—making critical an enterprise’s choice of partner as it creates an ecosystem that supports servitization.
Artificial intelligence (AI) will naturally play an increasingly critical role in every element of a supply chain’s technology. “AI is infused throughout the supply chain on multiple levels with multiple components,” says Dheeraj Shah, a managing partner and global head AI Advisory at TCS, “whether it’s small like improving the process of picking, packing, and loading trucks or large like reimagining the entire forecasting and replenishment process for improved customer experience. AI in servitization will drive exponential value with intelligent composable supply chains elevating the ecosystem play and business models for tomorrow. There is no limit to AI’s potential.”
After the revolution
As ecosystems supporting servitization develop, these new businesses will take on their own identities.
An enterprise may not see the need to brand the commercialization of its supply chain’s assets and capabilities. Cardinal Health, for instance, simply saw the opportunity to package and sell its warehousing and distribution services to other companies in the healthcare industry. But for corporations with extensive capabilities and assets—as in the case of Woolworths’ Primary Connect and FedEx’s Dataworks—servitization can generate so much business they justify the creation of unique brand identities.
In either instance, this new iteration of a supply chain, optimized within an ecosystem and generating revenue, is not only positioned to maximize efficiency and resilience but to create profit, giving it much more power within the organization. And changing forever the very definition of a supply chain.
