A friend of mine, Ed Kless, recently posted at VeraSage a small article on the Stan Shih Smile Curve. The essence of the Stan Shih Smile Curve is to show the rate at which value is added to a product over the supply chain.

Stan Shih Smile Curve.jpg

From the curve, it becomes readily apparent that the most value is added at the ends of the supply chain. That is, the development of the concept and the research necessary to bring a product to market (say, a new cellular phone) adds more value to the end product than the branding effort or the design effort. Similarly, marketing, sales and after-market service adds more relative value to the product than does distribution.

 

Smack-dab in the middle--and at the bottom of--the Stan Shih Smile Curve is manufacturing. Of all the processes in the supply chain and a product's life cycle, the actual manufacturing or production adds the least value to the product itself. This is readily apparent because, if the design is fixed and the distribution is in place, it really makes little difference which competent manufacturer produces the product--and whether the product is manufactured in the U.S. or in some foreign country.

 

On either side of "manufacturing" on the Smile Curve are two very important elements that deserve attention, however. The "design" phase is critical because the relative complexity or simplicity of a product design, its use or lack of use of standardized components, and its modularity of design may play an important role in determining the manufacturers that may be capable of producing the product in sufficient quantities, with high quality, and on-time for delivery.

 

The "distribution" phase is also critical to product success and value-add. The ability to meet customer demand without overburdening the supply chain with inventory is an important value-add to the supply chain. Equally as important is the ability to capably manage changes (long-term) and fluxuations (short-term) in market demand with market-dampening, profit-killing stock-outs or (again) excess inventories in the supply chain.

 

Wherever your organization lies in the supply chain, understanding your role in adding value to the products and services you deliver will help you better develop win-win propositions for your trading partners.