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Advanced Sourcing: Transforming Supply Chains into Value Systems


Eberhard E. Scheuing, Ph.D., C.P.M.
Eberhard E. Scheuing, Ph.D., C.P.M., NAPM Professor, St. John's University, New York, NY 11439, 718/990-6770.

82nd Annual International Conference Proceedings - 1997 

Abstract. Supply chains involve sequential exchanges where organizations cooperate but plan and act separately. In advanced sourcing, all players become interdependent elements in a value system who jointly and concurrently create value for mutual benefit. This paper presents a strategic approach to transforming supply chains into value systems through mutual "in-plants" and linked alliances.

The Nature of Supply Chains. Supply chains link the efforts of several organizations to create value and satisfy the requirements of external customers. Achieving this purpose of creating value requires:

  • ongoing, open communication between the players,
  • careful coordination and orchestration of efforts, and
  • compatible systems and operational linkages.

(Figure 1: Supply Chain Linkages is not available in this text-only version)

As Figure 1 illustrates, purchasing plays a pivotal role in supply chains:

It manages upstream linkages to the organization's supplier community through:

  • supplier selection and monitoring,
  • continuous improvement of supplier quality, cost, and cycle time, and
  • supplier suggestions and involvement.

It interacts with internal customers by:

  • understanding and serving their requirements,
  • advising them, and
  • participating on cross-functional teams.

It needs to interact with external customers by:

  • understanding their operations and requirements
  • offering suggestions
  • providing the link to the supplier base.

But a supply chain is also a chain of dependency. Downstream links depend on upstream players with regard to:

  • quality,
  • support and service,
  • timeliness, and
  • cost.

On all of these dimensions, downstream links can only be as good as their upstream counterparts. Inasmuch as suppliers are an organization's external resources, it is essential to extend the concept of the enterprise to include upstream supply chain links through:

  • upstream audits,
  • supplier training and assistance, and
  • reengineering of interactive processes.

Shortcomings of the Supply Chain Approach. In spite of their crucial importance to an organization's success, supply chains often suffer from inadequate:

  • transparency,
  • communication,
  • coordination,
  • efficiency,
  • agility,
  • creativity, and/or
  • speed.

Visionary leaders therefore develop a new perspective that reconfigures their organizations' supply chains as interdependent systems and improve their performance by:

  • communicating openly and frequently with other players,
  • achieving "buy-in" to shared goals from all members,
  • fostering a sense of shared destiny,
  • orchestrating integrated efforts, and
  • sharing jointly achieved gains.

Key Elements of Systems Thinking. The essence of systems thinking is to see interrelationships rather than linear cause-effect chains. Its building blocks are:

  • reinforcing or amplifying feedback processes,
  • balancing or stabilizing feedback processes,
  • delays which make the consequences of actions occur gradually, and
  • leverage to produce significant, enduring improvements (Senge, 1990).

The Power of Integrated Supply Systems. An Integrated Supply System is a highly interactive network of organizations who commit to a shared vision and jointly build competitive advantage. It performs optimally if all players interact concurrently rather than sequentially. Purchasing plays a key role in leading these dynamic, ongoing interactions.

Figure 2: Purchasing in An Integrated Supply System is not available in this text-only version

Characteristics of Value Systems. Because the different types of players realize their high degree of interdependence, power is more evenly distributed among the participants in value systems. As shown in Figure 2, the field of actors is considerably enlarged beyond the original cast of suppliers, purchasing, and customers. It now includes other internal and external players, such as labor unions, investors, competitors, and government agencies. They experience a sense of shared destiny and thus take joint, integrated action. They share pains and gains, risks and rewards, knowledge and assets.

By sharing information and coordinating their decisions, the members of integrated supply systems avoid suboptimizing outcomes at each other's expense as is so often the case in supply chains where inventory-shifting burdens one player to the benefit of others in a win-lose zero-sum game. Cross-functional, interorganizational teaming and creative application of information technology result in streamlined processes and optimum resource utilization. The system only produces what it can sell, drawing strength from a variety of alliances with suppliers, customers, and/or competitors as well as between suppliers. Surprising synergies result from discovering and leveraging each other's resources and capabilities.

A Strategic Approach to Building A Value System. According to Moore (1996), a Business Ecosystem is an economic community of lead producers, their suppliers, customers, competitors, and other stakeholders. Under the leadership of one or more central organizations, they coevolve their capabilities and roles in concert with shared visions. Moore sees a business ecosystem cycle that consists of three phases:

  1. Continually thinking beyond company, industry, and other boundaries to find unmet needs, unused ideas, and compelling paradigms of how to put it all together.
  2. Putting together ideas, players, and customers to create whole systems delivering new benefits to members.
  3. Accelerated reorganization of the economic landscape, promoting new combinations and self-organizing systems created of previously fragmented capabilities and formerly unmet needs.

To transform a traditional supply chain into a value system, an organization needs to first conduct a thorough, hard-nosed SWOT analysis that assesses its own situation, the capabilities of its supplier base, and the future needs of its customers. Thoughtful reflection on its own core competencies, combined with bold "out-of-the-box" thinking that anticipates future trends, technologies, and opportunities, can produce a breakthrough vision of a synergistic configuration of resources aimed at providing superior customer value. Essential to this task is comprehensive inventory of internal and supplier resources and capabilities. A powerful tool in this process is a strategic retreat for innovative thinkers drawn from purchasing and other internal functions, facilitated by an experienced, creative leader. Selected representatives of partnered external stakeholder groups may also be invited to this important event as "friends of the family." If this group coalesces into a team that not only creates but also owns and lives the vision, it will form the nucleus and governing force of the new value system.

Once the vision for the new value system and its purpose have been clearly articulated, the nucleus team driving its implementation must identify prospective system members. While current suppliers and customers are obvious initial candidates, the nucleus team needs to consider what individual players can and will bring to the party. Inasmuch as any system is only as good as its constituent parts, weak parts endanger the functionality and success of the entire system. Because the purpose of the system is to create and deliver superior customer value, the nuclear team needs to select and attract superior players as partners in its emerging network.

Toward this end, the team has to cooperate with partners from other relevant functions and develop both a persuasive presentation and a convincing document to "sell" itself as the nucleus of the proposed coalition. It must be able to articulate and communicate clearly the differences between the supply chain and value system approaches as well as outline their respective benefits and drawbacks. The new paradigm must first be "sold" internally to gain "buy-in" and support from top management and other units of the organization and to be able to present a unified front in dealings with other organizations. Then the nucleus team needs to take this "show" on the road, visiting the selected partners and persuading them to participate in the value system.

With this task accomplished, the nucleus team shifts its focus from forming the coalition to orchestrating its cooperation for mutual benefit. It places representatives of supplier organizations as "in-plants" in customer organizations to work side-by-side with its employees, and vice versa. It initiates and choreographs joint market research, strategic planning, and new product development. It fosters the formation and growth of member alliances that integrate the talents and assets of several players into cohesive subsystems and then combines them into broader mega-alliances. And it facilitates the allocation of tasks and alignment of resources for maximum value creation. The nucleus team thus becomes the conduit and clearinghouse for information and benefit sharing among all participants which is likely to create a strong momentum for joint and mutually beneficial growth.

Outlook. While supply chains have hardly outlived their usefulness, they can involve considerable waste of resources and time due to the sequential nature of their interactions, independent decision making by suppliers and customers, and inadequate communication between the players. The value system approach recognizes the interdependence of the different participants in a value creation process and leverages their diverse resources and capabilities for maximum customer value and mutual gain. By sharing information and responsibilities, the participants enhance each other's competitiveness and performance.


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