HOW WILL DISRUPTIVE TECHNOLOGIES AFFECT YOU AS A SUB-SUPPLIER?

SUB-SUPPLIERS HAVE BEOME CAPTIVE SUPPLIERS.

If you are a sub-supplier of components to large global manufacturers, you have probably been finding that they have kept asking you for lower prices, shorter lead times as well as lower order sizes. Danfoss, a global manufacturer of valves and fluid handling components for industrial applications, put it this way a few years ago

But there have been opportunities as well. Large global manufactures have offered partnerships to selected sub-suppliers, increased cooperation in product development and larger total business volumes.

However, to become one such partner you may have felt that you needed to “get married and undress” i.e.: sell certain products only to your business partner as well as be open about your total cost structure.

You may have found yourself a somewhat secured but also captive supplier in the value chain reaching from raw material producers to end users.

YOUR VALUE CHAIN IS BEING DISRUPTED.

However, your traditional value chain is threatened to be crushed or disrupted by at least 3 megatrends sweeping through businesses all over the world:3D-manufacturing and E-Commerce and The Internet of Things.

Traditionally raw material producers supplied materials to component manufacturers who in turn supplied components to finished goods manufacturers. Finished goods were sold through wholesale to retail and finally bought by consumers.

3D-manufacturing is rapidly moving from small scale development projects to on-site, just-in-time component manufacturing for OEM-equipment and may in future have major disruptive effects to sub-suppliers of components.

Product standardization is rapidly becoming less important and 3D-Manufacturing threatens component manufacturers as finished goods manufacturers, wholesale, retail and even consumers may be able to produce the products they require “on-demand” at the right quality, quantity and cost.

FOCUS AND GO GLOBAL.

E-Commerce and the Internet has already shown itself as a major disruptive force not only to global brands but also to small local retailers like clothing and book stores. E-Commerce threatens wholesale and retail as consumers may be able to buy the products they require direct from the finished goods manufacturers “where they are and when they want”. Thus physical location is rapidly becoming less important — but also for product and component manufacturers.

Getting closer to your customers is key if you want to keep as well as get new customers.

Getting closer to the customers has traditionally meant establishing sales offices, legal companies or entire production facilities in the countries or regions where customers are concentrated.

This has traditionally been a barrier for small and medium sized companies but not so anymore according to a February 2015, McKinsey Quarterly article, “Harnessing the power of shifting global flows”:

“Smaller enterprises add a new dimension to global competition as they begin expanding across borders. Internet platforms are empowering these “micromultinationals,” enabling them to find customers, suppliers, funding, and talent around the world at lower cost…. digital platforms can cut the cost of exporting by 83 percent as compared with traditional export channels.

If you are a manager of a small or medium sized business digitization thus opens new possibilities, but it works both ways — foreign small and midsize competitors can also reduce their contact costs towards your customers.

If you want to stay competitive you need to continuously develop and market goods or services that fulfil important customer needs better than competition — unless you want to end up in pure price competition.

Therefore, segmenting and focusing your business on few customer segments each sharing similar needs is important if you want to be able to use your resources efficiently and increase in profitability.

Focusing on fewer customer segments reduces the available market close to you thus in order to grow and be profitable you need to think about going global.

BECOME LEAD-INNOVATOR

If you are a sub-supplier to e.g.: OEM and your components collect or can collect valuable digital information, The Internet of Things may offer you the opportunity to disrupt the value chain and become the lead-innovator. The data that you collect can of course be used to predict maintenance failures and disruptions to proactively prevent or reduce downtime of the OEM-products. But it can also be used to inspire new types of products, services or approaches that bring value to the end-user

Thus getting closer to your customer is going to be key to be one of the future winners — not so much in order to sell products that you currently produce but rather to get deep and profound insight into your customer needs and behaviors, collect (big) data from many sources and thereby deduct (by use of algorithms) how to develop the new OEM-solutions that fulfil customer needs better than competition.

LOCAL FULL-SERVICE PARTNER, GLOBAL NICHE PLAYER OR LEAD INNOVATOR?

Irrespective of whether you choose to become a local full-service manufacturing partner, or you choose to focus and become an independent, global niche player or you choose to be lead-innovator, you should consider how to best apply the 3 disruptive technologies of E-Commerce, 3D-Manufacturing and The Internet of Things to your business.

Peter Sørensen is an internationally experienced strategy consultant, business manager, board member and business broker. Peter helps BtB managers and/or owners increase the profitability or realize the value of their business.