Part I in the 'Not that anyone will read this...' series • 2 March 2007 • The SnowBlog

Part I in the 'Not that anyone will read this...' series


I don't want to seem ungrateful, since Em is so marvellous at getting positive press coverage for Snowbooks, but I did ask to be referred to as "Rob Jones, Snowbooks' shadowy Chairman" and as yet, no one has picked up on the 'shadowy' part. I suppose I should be grateful if they get the 'Jones' or the 'Snowbooks' bit right.

Now, in a rather hamfisted segue, that leads me on to mentioning something else about the whole business of passing on accurate information. Since it concerns what you might call 'strategy' and uses words like 'supply chain', I'll hide it behind the 'Continue reading' link to avoid upsetting anyone just here for the cat photos. So read on... if you dare. Phew, that's got rid of all those squares who just don't 'get' how much fun strategy can be.

So, the supply chain.... I want to talk about how the price you pay for something in a shop depends on different bits of that chain. Now, as you'll probably be aware, if you buy a book, someone somewhere will have had to print it, someone else will have written it, somebody may even have had to cut down a recycled tree to make the paper. If you think about it, each of those people will need to pass on their costs to the next person in the chain as the book makes its way from being a plant to being to being an awkward lump in your shopping bag. The reason for that is simple: anyone who isn't covering their costs will soon have to go bust and move back in with their parents. So let's assume everyone charges the next person in the chain enough to cover their expenses, plus some unspecified profit margin. That means the price you pay when you buy a book is the total cost of getting it into your hands, plus the total of all the profit margins along the way. Here, to make your life easier, is a slightly confusing diagram to 'illustrate' that point.


Now, obviously each person involved would like to make the block that represents their profit margin a little bit bigger. One way to do that is to bump up the price the consumer pays, then there's more money to go round. At least there's more to go round on each sale, but basic economics reminds us that putting up the cost might reduce the number of units sold. Clearly you don't want to get 10% more profit on each sale, but only half the number of sales. Or worse still a zillion times more profit on zero sales. So often the price to the consumer is left where it is (or even reduced) and everyone spends a lot of time elbowing everyone else for a bigger slice of a fixed-size profit pie. And if one supply-chain player manages to grab a bigger slice of that pie, it must come out of someone else's slice because the size of the pie stays the same. And being made entirely of profit, that's a very tasty pie we're talking about.

Of course, as well as the profit blocks, that diagram also has cost blocks. If you can make your cost block smaller, and get away with charging the same price, then you'll make more profit. But it's best to do that in secret, because the other supply-chain players will squeeze you harder if they know your costs have gone down. Why? Because supply-chain partners generally treat each other like pit ponies: they want those partners to carry the heaviest burden possible without keeling over dead. Anyone showing plumper profit margins clearly needs to be worked a bit harder. 

Now, in this game of squeezy-profit-death, it helps to be big and it also helps if your supply-chain partners are numerous and small. Being big helps you win games of brinkmanship that are such a refreshing and enjoyable part of supply-chain negotiations. Imagine you're a big retailer dealing with a small supplier (but it works the other way round too). The supplier accounts for 1% of your spending. You account for 85% of theirs. You can stand to lose them; they might go under if they lose you. And if there are half a dozen other suppliers lined up ready to take their place, that makes your position even stronger. It makes the consequences of squeezing just a bit too hard much easier to bear - for you, that is; obviously it's a bit more permanent for them.

Now, just in case anyone is still reading, I'll briefly mention something much more interesting than the supply chain and that's 'heaven'. Oh yes, apparently it's a marvellous place. And maybe you recall the Buddhist idea that in heaven there's food a'plenty but the chopsticks are too long for anyone to eat with. (Not sure why you can't use your hands. Maybe you get a slap round the head from god if you do.) The enlightened point being that if everyone feeds someone else then all is well. So why is that relevant? Well (and you have to picture me saying this in a Rowan Atkinson, Anglican-vicar-trying-to-be-modern-and-relevant voice) you see, the supply chain is a little like heaven. There is an equivalent to the ten-foot-long chopsticks of the parable and it's information. There are certain sorts of information that you can't use yourself, but you can feed to your supply-chain neighbour - information that they will find delicious and useful.

Leaving heaven aside for a minute, what I'm talking about is a kind of information that you can share with your supply-chain partners to help them lower their costs. The catch is that it won't lower your own. And does this information sharing take place? Unfortunately in the adversarial atmosphere of squeezy-profit-death, it tends not to.

And it really is a pity that this information isn't shared because the effects it can have are a little bit magical. Simply sharing information can allow the total amount of profit made in the supply chain to go up - and it doesn't involve charging the customer any more. How, you ask, is this possible?

Well the answer is that business is a risky endeavour and most sane firms spend some of their hard-earned money on trying to mitigate that risk. Buying insurance is an obvious example. In a typical argey-bargey-riddled supply chain, most companies are also lowering their risks by keeping reserves of both cash and stock. Uncertainty about when the next order will come in and how big it will be forces companies to hold 'buffer' stock, just on the off-chance. Uncertainty about when they'll be paid or whether they'll suddenly have to manufacture more product (because of an unexpected order), well that forces them to hold bigger cash reserves. Both of these things are expensive. In the publishing world it means printing more books than you think you need - just in case. And keeping money to one side rather than putting it to work - again, just in case.

Now you can't eliminate this sort of risk completely (short of developing scary mind powers) but if you know more about what's going on further down the supply chain (i.e. down at the customer end) then you don't need as much buffer stock or as big a cash reserve - and that saves you money. But if you're a publisher, it's difficult to know what the customer is up to: that's information only the retailer possesses. And even if you pay a company like Nielsen for info about customer sales, you would still need to know what's in the retailer's mind. Nielsen can't tell you that the retailer is about to have a purge on inventory and ship back half your unsold books.

And that's something the retailers don't always seem cognizant of. When they dump stock in your lap or put in a large, last-minute order they're not just making waves in the short-term, they're sending a message that this sort of thing might happen again, so you might want to think about increasing cash and stock reserves permanently. To sloganise that for you: uncertainty is the enemy of efficiency. Or to throw in a little metaphor: inability to forecast the future is the slug to the lettuce of business efficiency. And that slug is partly under the control of one's downstream supply-chain partners.

Which is not to say publishers should be shaking their fists at retailers while patting themselves on the back for their own virtuousness. Firstly, it's too easy to dislocate a shoulder doing that and secondly publishers are even bigger offenders. Every time we visit a printers and ask them how they work, 90% of what we hear concerns how the printers deal with last-minute, panic orders from publishers who send them mistake-laden files in the wrong format last thing on a Friday and want their order printed overnight - despite the book having been in the pipeline for ten months.

The point - if there is a point - is that squeezing your supply-chain partners on price and then changing your plans at the last minute is counter-productive. You're demanding a lower price from someone while driving their costs up. If you want your partners to lower their prices, then increase their ability to predict what you'll do next and then ask them to share the benefits with you. It's healthier for the supply chain and it promotes integration and efficiency. Counter-intuitively, if everyone behaves predictably it can actually increase the supply-chain's ability to cope with the unpredictable. That happens because in a happy and healthy supply-chain, information gets passed quickly from the customer end of the chain all the way back up to the top. That way, printers are getting ready for orders that haven't been placed yet because publishers have told them that the retailers have noticed that the customers are behaving differently. The whole chain starts reacting immediately as soon as any part of it recognises a problem.

And even if that sort of collaboration never comes to pass, it's worth understanding that to make a last minute change or to rely on rush orders is actually the same thing as asking for a price reduction because it forces your suppliers to spend more on risk-mitigation and excess capacity. And to return to the Buddhist parable, that's a little bit like deciding to feed your neighbour with your ten-foot chopsticks but not warning them first. In supply-chain terms, you could have someone's eye out like that. 


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