A Well-Designed and Managed Supply Chain Can Give You the Competitive Edge

supply chain graphic

When customers look at a mattress in a department store showroom or on a website, they see the tip of the supply chain iceberg — the result of what is often the collaboration and coordination of hundreds of workers at multiple companies spread around the globe. This complex and tightly interconnected network can have significant implications for the price, quality and availability of products that customers ultimately see at the end of the chain.

 Changes in international trade policy, such as tariffs and other restrictions; fluctuations in the price of raw materials, secondary material inputs and the availability of alternatives; and labor conditions are just a few of the factors that can impact a company’s supply chain.

 In this article, we’ll discuss the core concepts and principals of supply chain management in general as well as how they apply to the mattress industry specifically, from sourcing and production to sales.

 The supply chain of the mattress industry isn’t particularly unique relative to other manufactured goods. It requires sourcing raw materials and intermediate products, manufacturing finished products, and delivering products to consumers. But embedded within these broad categories of activities are numerous decision points and avenues for differentiation and competitive advantage.

To outsource — or not 

The decision where to source raw and intermediate materials, and even finished products, is central to the overall supply chain calculus. Companies theoretically have a wide range of options when it comes to how much of the production process they wish to directly control as well as where and with whom to outsource the activities they do not control directly.

 A company could choose, for example, to own the sources of the raw materials it requires to produce its mattresses and the facilities to manufacture everything to the finished product. Or it could simply provide designs, product specifications and desired quantities to contracted manufacturers that are responsible for providing the finished product. This is how Nike has “produced” its shoes for years. Going a step further, a company could simply serve as a point of sale for finished products from a variety of other companies, such as a department store or e-commerce platform like Amazon.

The decision where to source raw and intermediate materials, and even finished products, is central to the overall supply chain calculus.

Outsourcing some or all of the production process has pros and cons. Outsourcing makes sense when a supply chain partner can do a better job at one of the company’s business functions — or do it more cheaply — and when the company doesn’t have time to develop those abilities internally. A company gives up some control over its supply chain when it outsources, but it can see benefits in both price and quantity when a partner can produce products of a higher quality or produce them more efficiently, thereby saving money.

A general rule for any industry is that companies should avoid outsourcing core business functions. If a company derives its competitive advantage from the quality of its in-house manufactured mattresses, for example, it shouldn’t outsource those activities because it can lose internal knowledge, as well as build up a potential competitor. In the case of Nike, however, the company’s primary functions are the design, branding and marketing of its shoes, not the actual manufacturing. Of course the company wants to make sure the products it sells are manufactured with high standards, but it primarily sells shoes based on how they look and which athletes endorse them.

The location of supply chain partners also is an important consideration. A company in San Diego might get a good price on intermediate materials from a supplier in Boston, but it has to consider the time and costs involved in transportation. When supply chain networks stretch across international borders, companies need to consider known obstacles — transportation distances, customs duties, language barriers — and also unknowns such as currency fluctuations, geopolitical conflicts and, as illustrated by recent events, global trade wars.

Even when a company outsources noncore functions, it still can maintain some level of control over the production process. Often this is done by requiring certain quality and timeliness standards and, of course, agreeing in advance on the price to be paid for the raw, intermediate and finished products it purchases from supply chain partners. Some companies will go so far as to work directly with the management of their suppliers to help implement cost-saving and process-improvement measures through strategies like Lean Six Sigma.

Another strategy for mitigating outsourcing risk is diversification. A diverse set of suppliers can mitigate against a single supplier failing to meet commitments or going out of business, for example. If suppliers are spread around the globe, it can mitigate trade issues that might impact individual countries.

Managing production

When thinking about a supply chain, one might imagine a steady process of sourcing raw and intermediate materials that are then processed into finished products and stored in a warehouse until they are shipped to retail stores and sold to consumers. A hypothetical mattress company might produce and sell 1.2 million mattresses a year, so one could assume it produces 100,000 each and every month to ensure a steady supply.

Of course it’s not as simple as this in the real world. For example, sales are better some years than others, depending on factors like the overall economy; and there are seasonal variations in demand within a given year. A company that fails to take such considerations into account might find itself paying for costly warehouse space when demand is low or missing out on potential sales revenue when demand is high and it isn’t adequately stocked up.

One solution for handling variable demand patterns is demand forecasting, in which companies attempt to predict the level of demand for their products in advance to help guide production levels. Demand can be forecast by considering historical sales data, the competitive landscape, and current and expected economic and market conditions. For example, a company whose primary competitor has recently gone out of business and who anticipates strong economic growth in the near future might expect its sales to be greater than average.

Just-in-time manufacturing takes inventory management to the next level by manufacturing a product only when an order has been placed. Instead of a customer going to a store to select a mattress they take home with them the same day, they would perhaps select a mattress model based on a showroom piece they liked. The company would then produce the mattress for delivery or pick up at a later date. The same concept applies in the online world.

The benefit of just-in-time manufacturing is that companies can far more accurately predict required production inputs and reduce inventory costs. An obvious downside, however, is that customers have to wait to get their purchase. Depending on the price point and the industry, customers may see greater value in waiting for a product made specifically for them. Consider an analogous example in the restaurant industry between a buffet and a meal ordered at a gourmet restaurant.

The retail landscape

One of the most significant recent trends in supply chain management of the mattress industry has been the emergence of online platforms as a legitimate source of competition for traditional brick-and-mortar stores. According to Second Measure, a San Francisco area firm that analyzes consumer spending data, more than 100 companies sell mattresses online, led by big players like Casper, Leesa, Nectar, Purple, Saatva and Tuft & Needle.

“All the hype over mattresses by mail has not been good news for bedding’s brick-and-mortar sellers. One of the nation’s largest, Mattress Firm, was under bankruptcy protection (in fall 2018), closed 700 stores, and lost its CEO in April (2019). The company owns Mattress Barn, Sleepy’s, Sleep Train and other brands,” says Kathryn Roethel Rieck in an article for Second Measure, published in July 2019. “Yet, even with its sales declining, Mattress Firm and its brands brought in six times more than Casper’s website and branded stores did in the first quarter of (2019). In fact, the first-quarter online sales from the top six online mattress sellers combined only equal 62% of Mattress Firm’s sales.” Indeed, Second Measure’s data shows that sales for the major online players have plateaued.

All the hype over mattresses by mail has not been good news for bedding’s brick-and-mortar sellers.

One major challenge faced by online retailers is the inability of consumers to try before they buy. This is less important in some industries than others. Consumers might be comfortable buying a computer, power tools or appliances online based on their specifications and reviews. When it comes to home entertainment, there’s a robust online market, but many consumers still like to go into Best Buy to see a TV or hear a sound system before making the purchase. Considering we spend roughly a third of our lives in a bed, it’s easy to see why it can be difficult to sell mattresses online as opposed to in a brick-and-mortar store where people can actually lie down before putting money down.

In a story for NPR’s All Things Considered from January, Alina Selyukh explains how Casper came up with a way to address that challenge. “Casper wasn’t the first company to sell mattresses on the internet,” Selyukh says. “And it wasn’t the first to squish giant bedding into a box for cheaper shipping. Casper’s success story was about changing how people think about shopping for a mattress, persuading them to buy an item they’d sleep on for years sight unseen. The free trial of ‘100 nights risk-free’ and a generous returns policy were two of Casper’s most revolutionary moves.” Unfortunately for Casper, people return their mattresses a lot, and that generous return policy isn’t cheap. An estimated 12% to 14% of Casper’s mattresses are returned. Of the more than $92 million Casper reported in 2018 losses, $81 million came from refunds, returns and discounts.

Chain coordination

Even when a company is solely responsible for everything from supplying raw and intermediate materials to retail sales, communication and coordination require a great deal of collaboration among different units. But this type of complete vertical integration is rare in any industry, and the mattress industry is no exception, with supply chains stretching across multiple organizations and international borders.

Technology can and should play a significant part in any organization’s efforts to keep all parts of its supply chain moving as efficiently and cohesively as possible. These technologies include telecommunications options like webcasts, for example, but also more supply chain-specific tools such as inventory tracking software.

For the uninitiated, supply chain management might seem easy to gloss over as insignificant but necessary process details. But in reality, it can be a critical source of competitive advantage. Companies that put time, thought and effort into designing and managing a well-honed supply chain can improve the customer experience, reduce costs and mitigate financial and logistical risks, all of which can set them apart from competitors in a crowded mattress industry. 

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