EBusiness + Supply Chain Management = Value Chain Management
Gerhard Plenert, Senior Principal, AMS, Inc., Fairfax, VA 22033, 703-267-8318, Gerhard_Plenert@amsinc.com
86th Annual International Conference Proceedings - 2001
Abstract. Supply Chain Management integrates networks of companies into a structure that allows them to optimize performance as a collective unit. The integration starts with the vendor's vendor and ends with the customer's customer. There are three key measures which identify the successful performance of the supply chan:
- Cycle time performance
- Operating cost minimization
- On-time performance and customer satisfaction
Information exchange within the supply chain is critical for it's successful operation. This requires an openness and trust between all the entities of the supply chain. It also requires a mechanism for the efficient transfer of this information.
Traditional methods of information transfer, like fax, phone, or even eMail, are too slow. Internet, intranet, and extranet information accessibility allowing all entities in the supply chain to monitor the performance of every other entity, is critical to international competitive success.
This presentation will discuss the eCommerce elements of the supply chain. It will discuss what the competitive supply chain of the future will look like.
Supply Chain Management (SCM). Traditionally a company would focus inward for performance and customer satisfaction. The attitude was that suppliers and shippers were an independent entity of their own, one which the enterprise could not reasonably be held responsible for. The result was that if a customer had a problem in receiving their goods, they had to make independent calls to producers, shippers, warehouses, and sometimes even suppliers, in order to identify the real source of shipment delays.
In Chart 1 we see how the traditionally the enterprise was internally focused and isolated from the external elements of customer service. In this chart we see how competitive pressures applied on the enterprise made them look outward. They developed relationships with their suppliers and customers. In supply management, the enterprise was starting to take some responsibility for the performance of the supply chain. They were starting to integrate the lead time needs of their suppliers into their own schedules so that they could offer the customer a more realistic estimate of deliveries.
Note: Chart 1 is unavailable in the text-only version of this document.
As time went on, an increased competitive strategic opportunity was identified when organizations realized that by centrally controlling all the steps in the customer performance process, and enterprise could do a better job of satisfying the customer. From this realization grew the philosophy of supply chain management. A focal enterprise, generally the one involved in taking the order, would now take control of the interlocking network of activities that would get the customer the promised product on time as committed. Planning was performed which would allow reasonably accurate estimates of the lead times necessary to perform the process. These lead times included supplier, shipper, and warehousing lead times. Supply Chain Management was born.
Supply Chain Management is the efficient movement of materials from the vendor's vendor through to the customer's customer. The focus of the supply chain is on the material movement relationships that exist between each of these links in the chain. The planning process was seen as in Chart 2 where each of the producers had taken responsibility for the product from the supplier through to the customer.
Note: Chart 2 is unavailable in the text-only version of this document.
Competitive pressures internationally caused organizations to realize that they weren't good at everything. For example, manufacturers were not necessarily good at warehousing or shipping. Organizations started to focus on what they did best, they focused on their core competencies. This shift away from vertical integration encouraged organizations to look outside of themselves for services. For example, a manufacturer would have a shipping company do all their packaging and shipping. This introduced more steps in the vendor to customer linkage, making the management of the supply chain more complex.
The trend toward operational diversification focused organizations on developing a Supply Chain where an organization would establish a relationship with shippers, vendors, and customers, so that all the linkages in the supply chain could be effectively integrated. These interrelationships became extremely complex to manage. Initially, the management of these relationships and linkages was primarily performance based. Having too many linkages in the supply chain would often cause poor responsiveness to customer demands. Time-to-market became the buzzword of successful competitive position. The organization that managed its supply chain the most effectively tended to have the competitive advantage.
Soon management realized that time responsiveness was not the only important element in customer satisfaction. The supply chain linkages also had a cost element and resource efficiency element associated with them. This realization generated a need for Value Chain Management, which is the management of all the linkages of the supply chain in the most resource efficient way. Sometimes this encouraged the elimination of elements of the supply chain. For example, web marketing has eliminated the need for retail outlets.
ECommerce. ECommerce (eC) or eBusiness appeared just in time to ease the burden of information exchange. However, conventional wisdom, up until very recently, claimed that eCommerce will change everything; that the big corporate dinosaurs will face extinction; that life as we know it will not survive. To understand this concept better, let's take a look at what eCommerce really is.
In 1969 the United States Department of Defense established ARPANET (Advanced Research Agency Network) in response to a need to have an open line of communications between all nodes of a communications network. They didn't want the network to be dependent on a single physical line of communication. They wanted the communication system to be free and independent, allowing the network to stablish flexible information routes regardless of any disruptions of any type. The result was a network of computers and communications lines that allowed universal access across multiple transmission routes. Originally intended as a military communications system, the network quickly developed into a messaging system that included civilian messages. By 1983, ARPANET had become MILNET and the remains of the original network became known as the Internet. By the mid 1990s the original four ARPANET sites had blossomed into 6.6 million Internet computer sites worldwide.
The Internet network of computers still required the users to be able to identify which computer node they wanted to address. This frustrated a British physicist Tim Berners-Lee who was trying to search for specific pieces of information without knowing which computer node to address. He established links called hypertext which helped users identify the information they were looking for. By 1990 he linked hypertext to an on-line addressing system called Uniform Resource Locator (URL) and he called the link the World Wide Web (WWW). In 1991 he made the WWW freely available to the public, and the internet age exploded.
By 1996, about 40 million people around the world were connected to an internet with 627,000 domain servers. By the end of 1997, more than 100 million people were connected and the internet had grown to 1.5 million domain servers. World wide internet commerce sales revenue had reached $10.6 billion. Internet traffic doubled approximately every 100 days for the last three years of the 1990s. By 2001, internet revenues are projected to reach $223 billion.i What had started as a simple, computer linked, message switching system was rapidly expanded into a system used to perform business transactions.
We have entered a new competitive era of business development — web focused businesses. Not only were traditional business transactions performed through the use of the internet, but new methods of business and new types of business were rapidly developing. New companies have sprouted up in all the traditional avenues of marketing and operations. And the old dinosaur companies have felt the pain of rapidly loosing market share to these new upstarts. In order to hold on to markets that they traditionally dominated, these dinosaurs are now painfully moving into web based enterprises as well, even if it sometimes seems excessively expensive. This new era of business has been labeled eCommerce, or, as the more IBM indoctrinated would refer to it, eBusiness.
Initially, the definition of eCommerce follows the lines of the definition of commerce in general. ECommerce is the exchange of value across enterprises or between enterprises and consumers. But with eCommerce, this exchange is performed electronically. This exchange can include orders, bills, payments, entertainment, or information in many forms, including capacity information. And this is enabled by some simplistic, yet profoundly significant internet-related technologies like internet protocol, web browsers (free tools available to everyone), HTML/XML, and web application servers.
Conventional wisdom states that the dinosaurs of today's industry are:
- Too big
- Too cumbersome and therefore too slow to change — difficulty in reacting
- They have tiny little brains compared to their size — not smart enough to realize the changes around them
- ECommerce has made brick and mortar (storefronts, branches, buildings and equipment) became a liability rather than an asset
The comet called eCommerce had taken on breathtaking pace. The internet was adopted faster than telephones, radios, televisions, video recorders, or CDs. It is exhibiting a growth rate of 100% plus annually. Internet traffic internationally has been doubling every 100 days (first the year 2000). In 1998 there $300B in U.S. eCommerce which will expand to $970B in U.S. eCommerce by 2002 (Giga Information Group).
What kind of new life forms will emerge that will be adapted and suited to this new eCommerce environment? The ".com" type start-up firms soon became the new players, rapidly assaulting the market share of the traditional dinosaurs. The belief was that innovation would lead to many changes in the food chain, that you would have disentermediation in many cases, reintermediation, the rise of infomediaries, the rise of the virtual enterprise — whole new forms of business were being created. The characteristics of these new business are interesting and defy conventional wisdom. For example, when compared with the dinosaurs:
|High Earnings||No Earnings (on average)|
|Low Multiples||Infinite Multiples|
|Low Market Cap||Stratospheric Market Cap — belief in that what they are doing has some scalability|
Investors believe that the .coms are the future; that the .coms will be dominating market share in such a way that in spite of low or even negative profits, they hold the key to future industry domination. This has created a new investment model, one where investors are investing based on market share growth, and future corporate growth potential, rather than on current profitability levels. The dinosaurs are focusing on profitability, but loosing the market share war.
The Management of Resources. Managing the supply chain was an important strategic competitive step. But it was no longer sufficient to allow an enterprise to differentiate itself from its competitors. There was more to the supply chain than just the movement of materials. There was a whole list of resources which were being ignored in the SCM management process. For example, the planning systems were a collection of estimated lead times which did not compensate for seasonality, or surges in sales. Therefore, these estimates were often inflated to make sure that, even in the worst case, the product would arrive on time. Unfortunately, this averaging process damaged the competitive stance of the company. Sometimes it would be more advantageous to give an inaccurate short lead time, and gain the business, then to give an accurate lead time that was too long to satisfy the customer. It wasn't long before the planning lead times were recognized for what they really are; worthless! The result was a need for a scheduling system that would generate real schedules based on real orders and real capacities. These schedules would need to analyze realistic resource capacities at all steps in the supply chain, including the suppliers, and the shippers, as well as looking at the internal capacity levels. From this need Finite Capacity Scheduling (FCS) was born.
When looking at resources other than just material movement, it soon became apparent that other metrics had to be employed that would motivate the appropriate responses throughout the supply chain. This measurement technology opened up an entirely new world of measurement optimization, bringing into account resources like:
- Labor by labor category
The new measurement philosophy realized that it was possible for someone to increase productivity in one area, for example increase labor productivity, and, because this increase could force the inefficient use of resources in another area, the increase in productivity could actually decrease profitability.
Another metric change was the need for measures of performance that spanned across the entire supply chain, rather than measures that just focused on the focal enterprise. The entire supply chain required performance efficiencies, as well as an equitable sharing of the profit margins. This need for new metrics also created a need for open information sharing. Previous tools like EDI were too one-directional in their information flow. Interactive information exchange where supply chain members were able to see the capacities and schedules of everyone in the chain, had become critical. Intranets became Extranets which incorporated information exchanges between chain partners.
The biggest element that was lacking from the SCM systems was the resource efficient scheduling processes. This included resource efficient procurements. Additionally, these schedules had to be real time schedules, not a collection of average lead times. Realizing these needs would take SCM into a new world of Value Chain Management (VCM).
Value Chain Management (VCM). The data transfer technology was in place with tools like eC; and the resource evaluation methodology was in place with tools like FCS and Enterprise Resource Planning (ERP). The only missing piece was trust. And this was perhaps the hardest element. The relationships between the Value Network members requires a free, open, and accurate exchange of information, and this would require a new level of trust between the members of the chain.
The supply chain flow of materials in Chart 2 now needed to be expanded into a resource information exchange where information flowed in all directions, as seen in Chart 3. Here we see that the flow of the VCM Network is bi-directional.
Note: Chart 3 is unavailable in the text-only version of this document.
Value Chain Management (VCM) has been defined as the integration of all resources starting with the vendor's vendor. It integrates information, materials, labor, facilities, logistics, etc. into a time responsive, capacity managed solution that maximizes financial resources and minimizes waste == i.e. optimizes value for the customers' customer.
Value Chain Management increases the number of steps in the supply chain by focusing on core competencies. VCM attempts to optimize the integrated efficiency of these steps in the management of resources, including the response time and the cost resource.
The key metrics of Value Chain Management will include:
- Integrated Supply Chain Planning and Scheduling Performance
- Cycle Time Responsiveness
- Chain-Wide Resource Optimization
- Information Integration
- Rapidity of Information Exchange
Driving Towards a Next Generation Enterprise (NGE). The Next Generation of Enterprises are not individual, isolated entities competing against each other. They are value networks of enterprises competing against each other. These networks will become extremely complex because of the focus on core competency specialization. The performance of the scheduling process will become the competitive driver. Open data exchange in all resource areas will be critical. Companies like Dell computers and Amazon.com have discovered that in-spite of the increased complexity created by the core competency focus, the web based marketing approach has allowed them to eliminate links in the value network thereby improving cycle times, reducing costs, and increasing customer satisfaction.
Summary. The next generation of enterprises will be found in the value network. Web based networks of enterprises are forming rapidly in an attempt to make a competitive stand, beating out the companies that are still focused on supply chain solutions. Value based performance is no longer a future theory, it is a present necessity.
- Plenert, Gerhard, Making Innovation Happen: Concept Management Through Integration, St. Lucie Press, Roca Baton, LU, 1998.
- Plenert, Gerhard, World Class Manager, Prima Publishing, Rocklin, CA, 1995.
- Plenert, Gerhard and Bill Kirchmier, Finite Capacity Scheduling, John Wiley and Sons, 2000.
- Plenert, Gerhard, 1999 APICS Education and Research Foundation Study: Performance Measurement Systems and How They Are Used As Employee Motivators, APICS, Falls Church, VA, 1999.
Endnotes: i Helms, Marilyn M., "Electronic Commerce", Encyclopedia of Management, Gale Group Publishers, 1999, pp. 237-241.