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Watch Case of the New Cookie Video from Open Axis Group
Republished with permission from The Beat
GUEST: Jim Davidson On The Case Of The New Cookie
This guest column is by Farelogix president and CEO Jim Davidson.
During a recent airplane ride, I began to think about travel distribution as the pure supply chain it is. For a few minutes, I decided to view travel through the eyes of an entirely different industry, with a straightforward supply chain point of view.
It just so happened as I was thinking about all this, the flight attendant was announcing the available food on board. Suddenly there it was: a beautiful, shrink-wrapped, calorie-filled mega-bite cookie. Sold! For purposes of my experiment, the world of travel was now officially replaced by the delicious world of baked goods.
In this taste-satisfying world, the "airline" no longer sells airline tickets. Instead, it is a well-established manufacturer of cookies--kind of like Sara Lee, for example, because nobody doesn't like Sara Lee, right? But for pretend purposes, we'll call our company Mae's Munchies.
Let's give the Mae company some background. Historically, Mae has produced only two types of cookies: chocolate chip and sugar. The products are sold through a wide variety of selling outlets, such as mega chain supermarkets, local grocery stores and even some self-service candy and food machines. Mae also has a handful of company-owned stores that only sell its brand, but by far the majority of sales take place through intermediaries.
From a distribution perspective, Mae uses three very well-established trucking and logistics companies to get its product packaged, transported and delivered worldwide to all of the retail outlets and grocery stores. For purposes of our example, we'll call these three trucking companies Red-Co, Blue-Co and Green-Co.
Still with me? Good, because this is where things get interesting.
Let's now imagine that in order to stay competitive and to differentiate its product offering, Mae is introducing a high-end gourmet chocolate truffle cream cookie. While a bit more expensive to manufacture, this cookie is targeted primarily to higher-end gourmet supermarkets and specialty stores at a different price point. It's not expected this cookie will sell well through small local stores or self-service machines.
Now of course, in order to accommodate the new cookie, the supply chain needs to do some adjusting. Red-Co, Blue-Co and Green-Co need to add refrigerated trucks to their fleet and alter their routes a bit. And the sellers of the cookie--meaning the grocery stores--will need to accommodate the new cookie in refrigerated product displays. Naturally, to make this happen, there will likely be some negotiation and modified commercial terms among the various players. But none of that should be too painful. Right?
Oh, wait. We're analyzing the travel industry, remember? So let's replay this scenario using the unique dynamics of travel, and see what happens. (Watch out, this could get messy.)
Remember the part of the story where Mae advises its distribution partners of the need for refrigerated trucks? Well, in the travel version, Red-Co, Green-Co and Blue-Co initially respond claiming they have no refrigerated trucks (and because of this, does Mae want to cancel the new product entirely?). When this doesn't fly in the industry, the distribution partners change their tune, claiming to be "happy and willing" to support the new cookie. They will absolutely get some refrigerated trucks in the future ... but they cannot say exactly when. Oh, and Mae must immediately sign a contract for the future refrigerated trucks, or risk dramatic price increases later.
Frustrated, Mae attempts to overcome this problem by providing its own refrigerated trucks. But it is immediately told by Red-Co, Green-Co and Blue-Co that this is not allowed. And furthermore, Mae's best retail outlets are slapped with a convenience fee whenever Mae attempts delivery through alternate trucking firms. Ouch!
The picture gets even worse. The distribution partners advise Mae that the trucking companies--not the retail stores--have full control over the cookie display cases in the grocery stores, which, by the way, will not be capable of displaying the new cookie product until an unknown point in the future.
Let's stop there. It's exhausting, isn't it? At this point, Mae may just decide it's not worth even bothering to differentiate its product. The company's primary distribution partners are attempting to negotiate and lock in pricing for the new cookie, even though none of them can even demonstrate how the cookie will be displayed for sale in display cases that have not even been developed. Transportation is a major issue since refrigerated trucks that meet Mae's specifications are not even on the distributors' respective product plans. Furthermore, any attempt to bypass its distribution partners will result in financial penalty not just for Mae's Munchies, but also for the grocery stores.
There's plenty more to the story--such as the fact that, contrary to standard supply chain dynamics, the trucking companies are actually paying financial incentives to grocery stores--but no doubt you've heard enough. It is clear that when subjected to travel dynamics, Mae's Munchies loses complete control over its own product and how it is sold. It is logical that the company would question the value proposition of the current distribution model.
I know our supply chain process has some unique features, but the business schools that specialize in teaching efficient supply chain management and optimization certainly are not teaching the travel industry model.
It all just seems rather odd, don't you think?
~ Jim Davidson is CEO of Farelogix, a distribution technology and services provider which enables alternative distribution models for airlines
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