Cut Costs Using the Alibaba Supply Chain Strategy

By Anna Duin | August 21, 2017

Supply chain leaders can learn from Chinese e-commerce goliath Alibaba Group’s groundbreaking ideas, particularly when it comes to lowering costs and differentiating their operations. In just a few years, Alibaba has ascended to the top of the online commerce industry. Based on transaction volume, which totaled US$248 billion last year, the company is already larger than Amazon and eBay combined. It drew global attention in 2014 when it raised an initial public offering of US$25 billion, the largest in history.

Analysts attribute Alibaba’s success primarily to its innovative business model. Unlike its American competitors, the Chinese corporation doesn’t sell products directly, which enables it to significantly slash operating expenses. It doesn’t charge transaction fees but makes money by selling advertising space to merchants selling goods on Taobao, its Chinese marketplace.

Learning from the Alibaba Supply Chain Strategy

As supply management practitioners plan for 2016, they can learn from some of Alibaba’s innovative strategies. These include:

  • Developing a long-term strategy for differentiation
  • Connecting with partners
  • Drafting supply chain processes
  • Leveraging mobile technology
  • Encouraging sales for greater selection
  • Capitalizing on advertising opportunities.

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Differentiation Strategy

How Alibaba does it: Alibaba’s strategy for differentiation has enabled it to pull ahead of its competitors. It operates as a middleman, connecting only buyers and sellers, avoiding the need for physical warehouses.

How you can do it: Too many organizations lack long-term strategies that could set them apart from competitors. To differentiate your company, conduct a geographically-based cost analysis and pass those savings onto consumers.

With regional-pricing quotes, supply chain managers can determine a company’s least expensive supplier for each of its needed resources based on its unique location. For domestic purchases, local suppliers often offer the best price. However, larger suppliers serving a global market might offer a volume discount that beats the price of local suppliers. Designate the best-price supplier for your region as a primary provider, and then use runner-up suppliers as backups in case of a supply shortage from your primary provider. Your brand’s best differentiator is beating competitors’ prices thanks to geography-based cost savings.

Partner Connections

How Alibaba does it: Alibaba enables small merchants and suppliers to reach thousands of new customers like never before. It allows any user, whether a consumer or merchant, to interact and trade with any other consumer and business in its network. In particular, it has opened the direct-sale door for many merchants in Asia, a market that Amazon and eBay have yet to penetrate successfully. Alibaba knows supplier and customer satisfaction is vital to its continued success. Its middleman approach shows it’s aware of suppliers’ struggles.

How you can do it: Supply management leaders should look at their organizations much the same way. Where can you alleviate pain points for suppliers and both internal and external customers, for example? How can you remove barriers to interaction, connection, and sales? One way is to understand the customer journey. First, imagine what it’s like for customers to interact with your brand throughout the procurement process and across multiple channels. Then, determine the stages in which your organization can meet customer needs without assuming the logistical, transportation and administrative costs associated with directly supplying resources.

Supply Chain Process

How Alibaba does it: Alibaba emphasizes buyer protection, an important issue in this era of e-commerce rife with shady sellers. When an Alibaba customer pays for a good or service, the funds make a pit stop in the company’s escrow account until the customer receives the order. Concerned customers can request pre-delivery product inspections. Only when the buyer confirms satisfaction does Alibaba forward payment to the seller, thus greatly reducing fraud on its site.

How you can do it: Map your supply chain from start to finish. To start, look at the costs at each step, fulfillment ratios, and customer-satisfaction numbers. You may have to stand back and work on your business rather than in it to streamline and to exceed expectations.

To do this, you’ll need to understand how suppliers function before ever interacting with your company. While you probably know your first-tier suppliers well, consider your relationship with suppliers on the second or third tier. How critical are they to your supply chain? Where are their factories, and how established are they? Consider what might happen to your business if one of these lower-tier suppliers failed because of a natural disaster, financial collapse or civil unrest. Too often, procurement organizations rely on the unsustainable model of first-tier suppliers managing lower-tier suppliers. For example, 40 percent of businesses buying within the United Kingdom have no information on their second-tier suppliers, according to research from Achilles, a U.K.-based supply chain risk management firm.

Map your supply chain using a database for information storage. Seek to give customers peace of mind by enabling them to request information about everyone involved in their supply chains. Think of this as a system of cascades: When the buyer makes a purchase, your organization sends a request to your first-tier supplier, who sends a request to the second-tier supplier, and so forth.

Build your database gradually by requesting that companies send information up the chain. This enables your business to identify risk-prone supply chains, address bottlenecks and avoid relying on companies with long lead times or unethical business practices. Work beyond your business by collaborating with suppliers: By helping you map your supply chain, they can also map their own supply chains with this information. Collaboration can reduce the cost and time expenses associated with supply chain mapping.

Mobile Technology

How Alibaba does it: Part of Alibaba’s long-term strategy focuses on adapting its e-commerce sites to mobile platforms. It has already embarked on the strategy: In June, Alibaba acquired Alipay, an electronic-payments affiliate, and a cloud-computing services arm to accommodate the more than 600 million Chinese web users who are increasingly migrating to smartphones.

How you can do it: A challenge for any decentralized operation is sharing information among teams. To remedy this, invest in a mobile-friendly supply chain management platform. To compete in 2016, your team needs to plan, forecast and track shipments in real time. If we can learn anything from Alibaba, it’s that mobile technology is now.

Sales and Selection

How Alibaba does it: While many U.S. brands encourage Black Friday shopping by offering specials and discounts, Alibaba CEO Daniel Zhang created his own shopping holiday, Singles Day. The Nov. 11 holiday, which began in 2009, is now the single biggest shopping day in the world. In 2014, the e-commerce giant transacted more than US$9 billion in sales in China during the 24-hour period.

How did Alibaba persuade shoppers to bite? By offering an incredible selection. Singles Day this year included 6 million products from more than 30,000 brands from 25 countries, including P&G, Burberry, Estée Lauder, Macy’s, and Apple.

How you can do it: With an eager customer base and a huge array of products, Alibaba is spurring purchases on itself-started holiday. Although not everyone can invent holidays for business reasons, Alibaba’s strategy can teach us a bit about driving sales. Greater product selection draws more customers who see products they need, which drives sales, which in turn drives profits. Between greater sales volume and boosted profits, Alibaba has more money to reinvest into the operational aspects of its business, such as pursuing supply chain improvements and further broadening supplier partnerships.

Advertising Opportunities

How Alibaba does it: Every time you watch an advertisement on YouTube, the advertiser pays between 10 cents and 30 cents per ad per view. Although this might seem like small change, it isn’t when considering that many YouTube videos generate millions or even hundreds of millions of views. Alibaba, in an all-cash transaction, recently acquired the “YouTube of China,” the Internet television platform Youku Tudou. The acquisition represents an opportunity for Alibaba to increase its media capabilities and potential for advertising, as the brand surely will run ads for its online marketplace on the video platform.

How you can do it: While buying YouTube probably isn’t an option for your brand — even if Google were to sell — Alibaba’s purchase underscores a chronic problem for supply chain companies: visibility. To boost your customer base and reduce the hassle of acquiring new customers, be on the lookout for advertising opportunities.

Depending on your target customer, this could be in the form of ads in business publications or more general advertisements, such as television or YouTube ads. Remember, your per-customer operation costs decrease when they’re divided among more customers.

Revolutionizing Supply Chain Management

In Alibaba’s post-IPO days, business analysts doubted whether the company’s stock value could reach US$150 billion in 2015. But it was closing in on a net worth of US$145 billion as of September. Alibaba’s founder, Jack Ma, rewrote our industry’s best practices. Ma knew he needed to do things differently to dethrone other big players. He understood it required a bold new strategy, an intimate familiarity with logistical processes, a trusting connection between supplier and customer and the technology to be mobile and on-demand. Don’t be afraid to operate differently, and your supply chain management operation could be the next great disruptor.

Learn how you can cut supply chain costs for free.


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