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Value Chain Management - The Next Step in Supply Chain Management


Gerhard Plenert
Gerhard Plenert, Senior Principal, AMS, Inc., Fairfax, VA 22033, 703-267-8318,

85th Annual International Conference Proceedings - 2000 

Abstract. This presentation describes the operation and integration of the Value Chain. It explains how Value Chain Management (VCM) differs from and is more complete than Supply Chain Management (SCM). It describes the flow of a VCM system. And it discusses the eCommerce elements of the Value Chain. The presentation will review the Value Chain performance of companies like Dell Computers and

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.

Figure not available in text-only version of this article.

In Chart 1 we see how the traditional approach kept an enterprise internally focused and isolated from the external elements of customer service. In this chart we also see how competitive pressures applied on the enterprise made them look outward and more closely at their relationship with their supplier. 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.

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.

Figure not available in text-only version of this article.

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.

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
  • Materials
  • Machinery
  • Facilities
  • Finances
  • Energy
  • Maintenance
  • Etc.

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).

ECommerce. ECommerce (eC) or eBusiness appeared just in time to ease the burden of information exchange. EC became the mechanism for the inexpensive and efficient sharing of resource data across all the elements of the supply chain. With web based internet information exchange tools like HPTL and XML it wasn't long before enterprises were again able to establish a competitive stance.

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.

Figure not available in text-only version of this article.

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 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.

Book References:

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.

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