One of the advantages of the start-up venture capital culture of America’s west coast is that you get to read what really smart people think makes business tick. One of my favourites is Tomasz Tunguz, of Redpoint Capital.
Tunguz worked on Google’s AdSense online advertising tool – which makes Google billions of dollars a year in advertising revenues – before he left to become an investor.
There are many reasons for Tunguz and others to share ideas and information online. One of the big drivers is that this is how they advertise their venture capital funds to the next generation of smart people developing the businesses of the future.
Reading what they have to say is a must for legacy businesses such as wholesale, because these clever new people are after your customers – all of them.
In a recent article, Tunguz described a game he played at business school called ‘the Beer Game’. The rules are simple. Four groups of students get to play brewer, bottler, distributor and retailer in the beer production supply chain. The professor gets to play the consumer and hands a note to the retailers saying how many bottles he or she would buy. Each of the four groups gets to plan how much to brew, bottle, distribute and stock, and they have to pass pieces of paper up and down the supply chain. But upstream demand and downstream orders are delayed by two weeks.
Tunguz says: “The retailer, acting on slow information, overcorrects just a little bit. Then the distributor overreacts just a little bit more. Then the same for the bottler. The brewer is pulling out his hair when sales boom one week and go into total freefall the next. It happens every time. Small changes on one end of the value chain create huge disruption on the other.”
This must be immediately recognisable to wholesalers. In the competitive UK grocery market, they do a great job at absorbing the supply levels, so most of the time there is good availability in stores. In business school, the latency between feedback from the customer and decisions about product management or marketing is solved by using proxy metrics.
But what are the proxy indicators in the wholesale channel? More importantly, how many people are even aware what the major drivers of the key performance indicators are? Do they buy into them?
Most retailers would have no understanding of how making their orders more effective could create havoc up-channel. Yet the whole issue could be made redundant by some clever start-up. Marketing expert Seth Godin argues that most of the cost in everything that we buy is in the risk. A pair of mass-produced shoes costs $3. Custom-made, the same shoes cost $200.
McDonald’s hit a peak moment of productivity with a limited menu and little in the way of customisation. Now, it has invested in mass customisation.
“Things that are made on-demand by algorithmic systems and robots cost more to set up, but once they do, the magic is that the incremental cost of one more unit is really low. If you are organised to be in the mass customisation business, then the wind of ‘custom everything’ is at your back,” writes Godin.
That is why every wholesaler needs to pay attention to UK snack supplier Graze. Last month, the FT reported that it pulled a third of its range from a supermarket after its research showed that customers did not like it.
Anthony Fletcher, Graze’s chief executive, told the FT: “We are happy to be aggressive early on. We say, ‘we have the data, it is clean, let us act.’ Retailers have never got into that.”
Consumers’ tastes change quickly. None of Graze’s top 10 products this autumn were in its top 10 a year ago. Its algorithms simply sidestep latency, partly because Graze’s cost of product failure is close to zero, Fletcher claims.
What is coming next looks very scary to the existing grocery supply chain model.