Agile Value Configuration: Leveraging the Internet to Reinvent the Enterprise
Eberhard E. Scheuing, Ph.D., C.P.M., A.P.P.
Eberhard E. Scheuing, Ph.D., C.P.M., A.P.P., NAPM Professor of Purchasing and Supply Leadership, St. John's University, New York, NY 11439, 718/990-6161, Ebscheuing@aol.com
86th Annual International Conference Proceedings - 2001
The Opportunity. Strategic sourcing improves corporate performance through long-term partnering with selected suppliers and the streamlining of procurement processes. By merely extending the traditional business model, though, it fails to challenge the underlying assumptions about the distribution of roles between the different players in supply chains — suppliers, purchasers, internal customers, and external customers. In fact, it inherently presumes that configuring these players as sequential links in a chain is the appropriate way to do business and utilize the resources brought to the table by the different players. This current paradigm is illustrated in Figure 1.
Figure1: Links in traditional supply chains (unavailable in text version of this document)
But the speed, efficiency, and transparency of the Internet facilitate, if not encourage, radical rethinking of these traditional relationships. The Internet can:
- link all players in value networks through instantaneous communication;
- trim inventories by replacing guesswork with real-time information;
- provide demand, cost, and capacity information to optimize planning and efficiency; and
- share capability information that leads to the optimal allocation of resources.
The Need to Revisit Value Creation Processes. Traditional supply chains reflect traditional thinking:
- the enterprise designs, makes, and markets products;
- suppliers provide the inputs requested by the enterprise;
- external customers buy the outputs of the enterprise.
This traditional paradigm presumes that both suppliers and external customers are essentially passive participants in the value creation process which is controlled by the enterprise. It understates and overlooks the contributions that these players make to the process. It places purchasers into their traditional role of executing decisions made by others (internal customers) without adding value to the process. It also presumes that performance improvements will be incremental and will not be initiated by purchasers.
In the unforgiving business environment of the 21st century, it is no longer sufficient to just incrementally improve corporate performance year over year. Rather, leaders need to revisit the underlying business model by asking a number of penetrating questions:
- Who are the enterprise's customers and what do they want?
- What are they willing and able to contribute to the value creation process?
- What are the enterprise's unique capabilities (core competencies)?
- Is it still appropriate for the enterprise to manufacture and/or assemble finished products?
- Should products be produced in anticipation of demand or in response to customer orders?
- How important are speed and responsiveness to the marketplace?
- How can they be enhanced?
- What are the capabilities of suppliers and how can they best be utilized?
- To what extent should product design, production, assembly, and customer service be transferred to other firms?
- What is the best combination of external and internal capabilities in the value creation process?
If purchasers are to lead the transformation of their enterprises to higher levels of performance and international competitiveness, they must ask these questions. And, no doubt, the answers to these questions will trigger the radical redesign of their enterprises' basic business models. But purchasers really do not have a choice in this matter. Since their enterprises' spend represents more than half of revenues, they are already the key players in their companies' value creation processes. Whether they want to or not, they have to be and will be vital change agents in their firms.
After all, traditional value creation processes tend to be quite inefficient and ineffective:
- internally and externally, purchasing is still very transaction-intensive;
- suppliers are kept at arm's length, receiving and responding to RFIs, RFQs, RFPs, and P.O.s;
- enterprises invest heavily in productive equipment and inventories which increases their cost and decreases their flexibility;
- logistics companies are treated as mere carriers, and inbound and outbound shipments are rarely coordinated;
- wholesalers and retailers are viewed as passive channels; and
- contact with ultimate (external) customers is at best restricted to salespeople.
In other words, traditional supply chains consist of sequential (internal and external) links that are largely independent of each other and are not integrated for maximum benefit. Firms operating in this mode rely on their products for their bottom line performance. But this antiquated model has fatal flaws that can readily be exploited by fleet-footed competitors who trade in its asset-heavy inertia for a revolutionary agile value configuration approach.
The Agile Value Configuration Model. Here is a job description for the new Purchaser Extraordinaire (PE):
- Anticipates market and technological developments;
- Builds close working relationships with selected suppliers;
- Creates a comprehensive database of supplier capabilities;
- Develops a learning organization that thrives on continuous change;
- Examines the firm's basic business model and questions tradition;
- Focuses on the firm's core competencies and unique resources;
- Generates borderless teams and lively discussion;
- Hires unconventional thinkers and passionate revolutionaries;
- Intricately integrates key suppliers into the value creation process;
- Jettisons daily transactions, such as purchase orders;
- Knows customers requirements and capabilities intimately;
- Leads the transformation to a value creation network; and
- Masters the power of the Internet and relishes change.
This skills profile approximates that of a Sourcing Process Leader at NYNEX (now Verizon) as it was transforming itself to this new model. Obviously, this kind of individual is not commonly found in traditional procurement organizations. But today's Chief Procurement Officers know all too well that they need to move in this direction and have to find and/or develop these change leaders in their organizations.
Figure 2 illustrates the contrast between the old and new business paradigms (based on an article in Forbes that reported on the book MetaCapitalism by Means and Schneider).
Figure 2: Contrasting the Traditional and e-Business Models (unavailable in text version of this document)
Where the traditional manufacturing firm emphasizes investments in plant, equipment, and inventories and treats suppliers as providers of specified materials and components, the e-business model inverts this pyramid, focusing on intellectual capital and market relationships instead of control over things. E-businesses outsource most or all of their production to a new breed of highly capable suppliers who often design and build complete modules or entire products.
This makes our Purchaser Extraordinaire (PE) the choreographer of a complex ballet of superb specialists. Drawing on a deep understanding of customer requirements on the one hand and supplier capabilities on the other, (s)he orchestrates partner contributions into a powerful symphony whose performance draws rave reviews. Agile value configuration thus means linking carefully selected and continuously developed suppliers into a virtual value creation network that can respond rapidly to changes in the marketplace. In essence, this involves reinventing the enterprise — a process that has been described as a "hollowing out" because it transfers essential productive capabilities to external sources. While this creates new levels and forms of interdependence and bids farewell to the notion of a vertically integrated self-sufficient firm, it also produces previously unheard-of freedom from the tyranny of physical assets and incredible flexibility in reconfiguring components of the value creation process.
Leveraging the Internet for Agile Value Configuration. Fortunately, every Purchaser Extraordinaire (PE) has a powerful silent partner at his/her disposal who works tirelessly to provide the firm with an invaluable first-mover advantage. This often underestimated, invisible ally is the Internet which provides 24/7/365 access to information and resources.
The Internet enables value leaders to design breakthrough reconfigurations of the capabilities of participants in value networks as market conditions warrant. Independent third parties, known as Internet Solution Providers or ISPs, offer the ability to identify and combine talents and resources of organizations in different industries, countries, and time zones to produce and deliver high-quality outputs anywhere in the world.
Figure 3: Value Creation in a Value Network (unavailable in text version of this document)
Figure 3 illustrates this new opportunity. The Purchaser Extraordinaire is shown as the Value Configurator [VC] at the hub of a complex network of collaborative relationships. His/her activities are supported by the web-hosted capabilities of a third party Internet Solution Provider [ISP] who acts as an honest broker in facilitating information and payment flows as well as resource commitments and sharing between the participants in this network. Suppliers [S] provide design, production, and assembly capabilities. Intelligence providers [I] offer online market information and in-depth analyses which are continuously updated. Logistics companies [L] facilitate the physical movement of goods between the participants in the value network and offer value-added services, such as inventory management, merge-in-transit, and spare parts as well as repair services. Customers [C], rather than merely being recipients of value system outputs, contribute their own design and assembly/repair capabilities as appropriate.
Purchasers Extraordinaire as Value Configurators. It's been a long climb from corporate outcasts to hard-charging leaders. But resilient, courageous, visionary Purchasers Extraordinaire are driving their organizations' transformation into value creation networks. They help reduce physical assets and inventories to free up capital by transferring them to supplier partners. And they use the full power of the Internet to gain new agility, customer value, and marketplace success for their companies.
- Akasie, Jay, "Ford's Model E." Forbes, July 17, 2000, 30-34.
- Bovet, David and Joseph Martha, Value Nets: Breaking the Supply Chain to Unlock Hidden Profits. New York: John Wiley & Sons, 2000.
- Michaels, James W., "Meta Capitalism: An Economy on Steroids." Forbes, July 17, 2000, 23-26.
- Scheuing, Eberhard E., Value-Added Purchasing: Partnering for World-Class Performance. Menlo Park: Crisp Publications, 1998.