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supply chains

From Value Chains to Networks

Supply chain management is a familiar topic with manufacturers, wholesaler/distributors, and retailers. The opportunity for improving service levels and cutting costs through better purchasing decisions has moved from simply buying at lower costs in larger quantities while controlling quality towards a structuring the efficiency of the whole chain.

One of the reasons for this shift in perception is that the result of removing uncertainty at each stage leads to lower business risk. This in turn allows a reduction in the working capital needed to be invested in items such as safety stock- remember the 'Beer Game' as described by Peter M. Senge in "The Fifth Discipline, The Art & Practice of the Learning Organization". This is a cost reduction opportunity, which is available for sharing across the chain.

Similarly, through greater trust between partners, there is interesting scope for significant improvement in operating margins by removing unnecessary steps in the administrative process, e.g. the move to supply when convenient and bill on use, being adopted in both the oil and computer industries.

Further steps along this route involve, first of all, the greater sharing of information (which, in itself, may be a significant risk and one that, therefore, needs proper screening of the potential partners involved). All parties can then agree the allocation of roles within the chain and any re-arrangements could be implemented in a way that enables that chain as a whole to adapt. Becoming more competitive will also allow the chain to move in the direction of greater customer satisfaction and hence greater total volume, revenue, and margin.

The way in which the greater rewards available through better co-operation are shared out, needs agreeing beforehand otherwise traditional competitive behaviours can be expected to start to reassert themselves when the process of trust building is likely to go into reverse  (Nalebuff and Brandenburger Co-opetition Harper Collins 1996). However, chain redesign is only the first in a series of steps. The next stage is to consider where the various roles in the chain are best owned and managed. This could lead in several directions e.g. to a partial or complete outsourcing, to the creation of a JV or even a full strategic 'partnership' arrangement.

THE NEW VIEW

But in order to be effective the Supply Chain must answer ten key questions:-

1. How do we calculate the total potential profit of offerings?

2. Which of our assets create profitability?

3. Which investments yield highest profits (path)?

4. What information (and which information systems) most increases profit?

5. What does each function and process contribute to profit?

6. CURRENT OFFERINGS - What mix of ingredients yield the highest profit?

7. NEW OFFERINGS - What new blends of ingredients yield the next highest profits?

8. What is the maximum possible revenue given the resources?

9. What are the ingredients of our offerings that drive price up? Down?

10. What does the channel contribute to profit?

questions courtesy of “Ahead of Time”, Chapter 1

A good open two-way information flow is essential for the best solution to emerge and, indeed, the likely direction of change will be an evolutionary shift, at least in the information driven part of the global economy, from chains to network. Given that this is where both economic employment and growth is increasingly to be found, the importance of this understanding this process, which may be central to western economic development over the next decade, cannot be underestimated.

The petrochemical industry has developed an integrated global supply chain whereby the basic chemicals, like ethylene, are produced by the major chemical companies, often in partnership with Middle Eastern oil and gas producers and the feedstock chemicals are shipped to other plants controlled by the company, only being actively traded when manufactured into the form of plastics or other related products.



References:

Thomas Vollmann and Carlos Condon of IMD in Building a Smarter Demand Chain  - FT Supply Chain Supplement June 1999

Don Tapscott Creating Value in the Network Economy

Charles Poirer Advanced Supply Chain Management , Publishers' Group West; ISBN: 1576750523

John Gattorna ed. Strategic Supply Chain Alignment , Gower Pub Co; ISBN: 0566078252

The Executive's Guide to Supply Management Strategies : Building Supply Chain Thinking into All Business Processes by David A. Riggs, Sharon L. Robbins (Contributor)  AMACOM; ISBN: 0814403859

Customer-Centered Supply Chain Management : A Link-By-Link Guide
by Fred A. Kuglin - pub. 1998 AMACOM; ISBN: 0814404081

Managing the Global Supply Chain by Philip B. Schary, Tage Skjott-Larsen pub. 1995 Copenhagen Business School Press; ISBN: 8716132785

 

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