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Why the Leaders Love

Value chain management has existed as a concept for years. By Tam Harbert

VALUE CHAIN

fter years of paying lip service to terms such as "integrated But only now it is heginning to supply chain." "value-driven emerge as a practicality, driven supply chain" and 'customer value chain," supply by new technology enablers and chain practitioners appear by the toughest downturn in to be starting to put the decades. Here's a quick glimpse concepts into practice. As the world comes fa of which companies are closest out of its worst recession in decades, a \ handful of leading companies is shifting "" to the value chain visionand the supply chain paradigm in ways that could why a value approach to supply significantly change the hasis of competition. chain management makes In particular, they are heginning to emhrace what we will simply call value chain management. eminent business sense. The shift represents a new level of supply chain maturity, says Charles Poirier, a partner in CSC Consultings supEXHIBIT 1 ply chain practice. Poirier has created a Value Chain Is Far Along Supply Chain Maturity Model supply chain matuThe "innovators" are poking rity model in which through or jumping over the wall to III and IV (tomorrow's market). he has placed "Value Chain Full Network Collahoration" at the Connectivity IV fourth level. {See Exhibit Most have achieved Value Chain Level 11 (today's market). 1.) Companies that have Collaboration reached that advanced level are the recognized supply chain leadersApple, Dell. Enterprise Procter & Gamble, WalIntegration

Functional Process

IntraEnterprise

InterEnterprise

External

Total Business System

Source: Charles C. Poirier, CSC

Harbert is a and technology' journalist based in Washington. D.C. She can be reached at tharber^comcast. net

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MANAGEMENT
supply side through to corporate quality and cuslonier senice operations. It is designed to provide customers with a lotal quality experience spanning collaborative planning, product design, maniifaciL[ring, product ijuality, order management, delivery jnd customer service. Tbe entire value cbain organization now accotints for about 10,{)()() of the corporation s employee base of approximately 60,000 worldwide. Of necessity, the value chain typically uses a new organizational model with new processes and metrics, all of wbicb are designed to make improvements systematically and strategically rather than individually and tactically. Rather than simply controlling costs of goods and services, the goal is to deliver what the customer wanls in a profitable manner, thereby expanding business and increasing revenue. At Cisco. for example, the value chain operation includes a formal "customer listening" function, using real-time, state-oftbe-art tecbniques to gather botb technical and nontechnical feedback. Tbe move to a value cbain orientation is not a onetime shift, but ratber a gradual transformation. It is led. or at least endorsed, by tbe CIO and implemented by a bigh-ievei supply chain executive witb broad industry experience and broad responsibilities aeross the corjorate organization. (The accompanying sidebar profiles this emerging leader.) But wby the heightened emphasis on value cbain management nowparticularly wben tbe ideas bave been around for years? To be sure, tbe economic downturn is a powerful driver of change, giving assertive supply chain leaders the leeway to act more forcefully. Today's hard business climate has prompted at least some companies to re-evaluate their operations from lop to bottom, says Robert Hud/.ki, president of Clreybcard Advisors LLC. Wbile some simply batten down tbe

Mart, and Cisco among the more prominent names. In adopting a value cbain management approach, a company begins to view its supply chain holistically-as an integrated continuum that spans the breadth of the company, from design to procurement to manufacturing to sales to distribution. The company's management team recogni/es tbat tbe supply chain extends far beyond the company's walls: hack to its suppliers and tbeir suppliers and lorward to its distributors, customers and even to the customers' customers. This is tbe essence of value chain management. At Cisco, a widely recognized supply chain leader, ihe \aliic chain upcration spans everything from the

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hatches and wait out the storm, a few firms see this as golden opportunity to invest and put in place processes and organizational capabilities to be more competitive when business improves. In other cases, growing business complexity is precipitating the shift. At Cisco, for instance, the company has become markedly more global in its customer reach. Also, it is no longer a business-to-business provider of communications gear for large enterprises. Today, Cisco has a thriving consumer-products business and small-

returns on invested capital, the same company applying a well-managed customer value chain could more than double those returns in just two to three years. "People usually see that its a no-brainer," says Rudzki. The problem is that most companies aren't looking, "They never see the business case because they just don't look beyond the tactical indicators." But the biggest benefit transcends mere numbers, adds Joseph Cavinato, Institute for Supply Management professor of supply chain management at the Thunderbird School of Global Management. It's a strategic competitive advantage. 'Cisco is looking at this as a whole new busisupply chain holistically as an integrated continuum ness model," he says. "They don't concern themselves with costs as that spans the breadth of the company. much as they do with the bigger picture of how to be successful to mid-sized customer segments, which means greater with customers so they can continue to win more busicomplexity in distribution channels and more direct ness and make very good margins.' interactions with many more customers. Cisco's supply chain leaders confirm this. Kevin In addition, technology has begun to enable some Harrington, the Companys vice president of global of these processes, observes Joel Sutherland, manag- business operations for customer value chain manageing director of the Center for Value Chain Research ment, says Ciscos core operating metrics are at ail-time at Lehigh University Rather than develop custom sys- highs-and that those numbers all stem from satisfying tems, companies can now buy off-the-shelf technology customers, "For us, customer value chain management is that supports an integrated supply chain. Whats more, the function that brings sales and service together for the a plethora of Web 2.0-based tools are allowing greater overall customer experience," he explains, "We are tr>'ing communication and collaboration across the supply to anticipate what is required before the customer asks." chain. At the same time, technologies such as radio fre- That's where the customer listening function fits in. quency identification (RFID) are enabling better tracking of goods and shipments. Changing the Organization's DNA This article explores the contours of the emerging Value-chain management can require major surgery on value-chain management organization, examining the the company^ operating structure and business processstrategic and operational benefits it can produce, the es. But before wielding any knives, a company needs to organization and processes it requires, and the corporate define its goals, cautions Rudzki of Greybeard Advisors. Companies should first determine what they are trycLtltLirc in which it can thrive. ing to accomplish and make sure ever\'ont' understands those goals and the part they will play in achieving them. Benefits of a Value Chain Approach When practiced effectively, value chain management Otherwise, changes in structure and process will be inefincreases revenue and profits, lowers eosts and Increas- fective. "Don't think that just slapping a new title on the es efficiency and productivity. Most importantly, it same old stuff is going to make a difference, ' he says. leads to higher levels of customer satisfactionmeanHowever, changos in processes and structure will he ing that those customers are less likely to turn to the ineffective if the cor]^)orate culture resists change. The competition. extended integration dictated by value chains within A customer value chain improves both the income the coqioration and outside of itamong suppliers and statement and the balance sheet, sometimes dramati- customersis anathema to most companies. Most busically, says Rudzki, whose firm advises its clients on how nesses still operate in silos, with senior managers held to transform their supply chains. Whereas a typical responsible only for the performance of their own divimanufacturing company employing traditional supplier- sion. According to the latest data from an annual survey side supply chain approaches might show 6 to 8 percent conducted by Supply Chain Management Review, CSC

In adopting a value chain management approach, a company begins to view its

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and Michigan State University, not enough supply chains deal effectively with other functional areas of the corporalion. Only about one third of the respondents to the 2009 SC'AI/i survey, for example, indicated that they had a high level of integration with their finance and IT counterparts

in the organization. Ihe degree of integration with the product development folks was even lower at 27 percent. Therefore, in order to realize the full benefits of value chain management, C-level executives must be ready and willing to shake things upto redefine time-honored

The Face of the New Supply Chain Executive

1 takes a new breed of supply chain executive to effectively implement and manage a value chain. The most fundamental qualification is a broad business background, enabling the person to clearly see and understand how the supply chain supports business growth. Angel Mndez, senior vice president of customer value chain management at Cisco, has broad experience In a variety of industries, including high tech, aerospace and finance. He holds a master's degree in business administration as well as a bachelor's degree in electrical engineering.

that against making a profit. "Sometimes the company will eat some costs to keep a customer happy. Sometimes it will disappoint a customer in order to make sure profitability is good," says Kevin O'Marah of AMR Research. "That's business thinking. That's value-chain thinking." In addition to broad business knowledge, the value chain chief needs superior management skills to be able to work effectively with other top executives, including the CEO. Some longtime observers of the profession argue that the best supply chain officers can ease CEOs' fears about sharing information with partners and customers. It is the supply chain officer who really understands why this is so important and how it will benefit the company. "They have to be [confident enoughl to walk into the CEO's office and talk to him as an equal," says Joseph Cavinato of the Thunderbird School of Global Management. The value chain leader also has to have collaboration and negotiation skills. When the role is on an equal footing with that of other C-level executives, it can cause friction with other departments and lead to power struggles, particularly with sales and marketing as the supply chain organization becomes more involved with the customer. As the supply chain expands into other people's areas of responsibility, some "advanced socialization" is in order, says Cisco's Harrington. It helps when a CEO like Cisco's John Chambers is clearly behind the change and has imbued the company with a collaborative operational model. "It requires a clear articulation of what you're trying to do and what's at stake for the company in terms of improvement and upside. And, candidly, it requires an adult conversation with executives that moves far beyond protecting turf and having a fiefdom mentality." The new supply chain role also overlaps with the traditional chief operating officer role. In fact, the chief supply officer role may be morphing into the chief operating officer role. Plenty of companies have vice presidents of operations who head up the supply chain, notes Joel Sutherland, managing director of the Center for Value Chain Research at Lehigh University. "Companies are recognizing that that term - operations - is not accurate anymore," he says. It's only a short step from there to the CEO suiteas a very few elite supply chain leaders have proved.

Kevin Harrington, who reports to Mndez and is responsible for all custoiner value chain management business operations, has 20 years of experience at different high-tech companies, holding titles including president, chief operating officer and vice president of operations. Jake Barr, director of supply network operations at P&G, began his career in finance and risk analysis and worked in a variety of P&G business units during his career. And James Mallard, vice president of global procurement at U PS, worked his way up through the company's finance division before moving to supply chain operations. Mallard emphasizes the importance of understanding profitability. He manages $20 billion of UPS's annual spend, buying everything from pens to aircraft. He focuses on how the supply chain impacts the company's earnings, and he's training his 100-plus employees to think that way too. "We've changed the mindset that we don't just buy we optimize earnings," he says. At the same time, cash flow gets his attention. "How quickly am I paying? How can I speed up the supply chain so there's less cash involved? How do I lower inventory so there's less cash exposed? Should I lease or buy equipment? These are the kinds of decisions that the leading-edge supply chain executive thinks about in day-to-day activities," says Mallard. Today, supply chain staff need a mix of a skills individuals with backgrounds in finance, sales, engineering, for example so they can comfortably interact across functional disciplines. This broad range of experience translates into a different mindset, with a stronger grasp of the need to make trade-offs. For instance, while the overarching goal is to satisfy customers, true value chain leaders balance

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structures. "Supply chain by its very nature cuts across functional silos," says Kevin O"Marah, chief strategy officer at AMR Research. "That does not fit well in the traditional functional org structure, where sales owns this, manufacturing owns that and distribution owns that." Of course, such monumental changes don't happen all at once. "It's a fairly large meal to consume in one sitting," says Rudzki. "Most companies can't make the jump from siiocd hebavior, even if they do each thing fairly well. They need a transformational road map." When Cisco set out to transform its supply chain in 2005, the company started by modeling its customer value chain organization on the Supply Chain CounciTs SCOR model, using the Plan. Source. Make. Deliver, Return phases. To accommodate its growing global footprint iind its reach to a wider mix of customers through more channels, Cisco set up structures such as the customer listening activity and appointed a vice president responsible for each of the major SCOR functions. (See Exhibit 2.) "It became very evident that there were many other ancillary functions thai were important to the customer," says Angel Mndez, senior vice president of customer value chain management. The company has since added several others as its value chain organization has matured, says Mndez' lieutenant, Kevin Harrington. But that maturation has been "an iterative process," he notes. "We make commitments, deliver on those commitments, then we set our next-step goals." be says. The most important organizational changes that Cisco made were to give the value chain operation responsibility for front-end order management, customer service and overall customer satisfaction and quality, says Harrington. In this respect, Cisco has moved beyond what other companies have done organization-

ally, observes O"Marah. By putting quality, customer fulfillment and service within the value chain organization, "they've really put structure behind the strategy." Learning to Share Along with changes in organizational structure come changes in business processes. According to CSC"s Poirier, supply chain leaders like P8fG. Wal-Mart and Cisco are taking supply chain visibility to the next level. They're asking iheir customers lor more than just a forecast. Through programs such as shopper loyalty cards and with access to more and more detailed point-of-sale data, customers bave reams of information on what their real-time needs are. WalMart, for example, provides its huge database of pointol-salc intormation to consumer goods suppliers such as P&G. So value-chain practitioners are working closely with key suppliers and customers in sales and operating planning (S&OP) activities so they can see actual demand and assess what can be supplied, says Poirier. "S8OP has become a very- hot topic," be says. "All of a sudden I think a light bulb went oif for some o these people, and they realized, *hey, there's money in this for both of us. " It's a tectonic shift of perspective, from making product and pushing it out to the market to looking at the market first and then supplying what's needed. By linking up with retailers, companies can sense changes in demand as they happen. P&G calls it "joint value creation,"' says Roddy Martin, senior vice president and research fellow at AMR Research. "Tlic new challenge for the supply chain is in fact getting and translating real demand data." This is one of five key capabilities that supply chain leaders typically have in place, says Martin. (Sec Exhibit 3.}

Supply chain leaders are also co-analyzing data among their oun departments and with key supEXHIBIT 2 pliers and customers. Cisco's Customer Value Chain Management Organization "They have much more useful information on CVCM Teams Collaborate Across the Customer Value Chain consumption in their \ Customer databases than theyVe y and Field \ Plan y Source ^ Make > Quality ^ Delivery Innovation been using." Poirier says. / Support Ihey are letting outTechnology siders in to help them Demand Global Manufacturing & Quality Customer Product Management Supplier ^r.^^/ ^ Logistics analyze it. to help them Operations Operations and Planning Management ^P'"^'"""^ Corporate use the data to idenQuality tify customer needs and determine where they Global Business Operations can add value. However, Source: Cisco Systems Inc. this ean be another area

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Five Capabilities of Value Network

1 Accurate demand forecasts through joint value creation/demand visibility into markets, segments, customers A reliable, compliant and predictable product supply network supporting the end-to-end demand-driven supply chain. Operationalized innovation from embedded innovation capabilities: qtiality by design (QbD), design for manufacture, supply, and market Profitable and balanced trade-offs across the value networkleveraging sales and operations planning (S&OP) as a core process and tielwork design and operations as a core capability The agility to profitably shape demand across the supply network

Source: AMR Research: Value Chain Transformation, June 29, 2009

Companies tbat are embracing the value chain are already pulling ahead of the pack, according to Supply Chain Management Review's annual survey of supply chain progress. That gap is only going to widen. Organizations without a well-managed value chain "will be frozen out of the sales to tbe best customers, because companies like Cisco and PcG are locking them up," says Poirier. Other observers say sucb companies will be Knowing Your Customer Another important aspect of value chain slraleg) is the relegated to second- or third-tier status, and ultimately need lo segment customers according to what those cus- may be in peril if they do not or cannot focus on meeting kjmcrs valueand then to tailor the value chain to meet consumer demand profiiably. [he needs of those various segments. "A loi of companies Tbe recession is hastening tbe demise of tbe old supw ere giving away a lot of service lor which they were paid ply-chain paradigm. Whether establisbed companies will nothing, and tbe customer didn t really care, " says CSC s be quick enougb to replace it with a more competitive Poirier. "iNow. companies are looking at their customers model is an open question. In tbe past, severe economand asking, 'What do you really want that you are willing ic downturns bave killed off the companies that bave to pay for? Then I will match ibat service witb where I adhered to outdated business models. The fear factor place you in my segmentation.'Tbat s wbat I see tbe lead- right now. according lo Thunderbird professor Cavinato: ers doing." That may mean "liring" the customers tbat The possible emergence of industry game-changers aren't willing lo pay for what your company is providing. agile, asserti\'e new entrants that apply tbe new value Cisco has created virtual customer value teams to sup- chain concepts with rigor and discipline. It has happort specific customers, says Harrington. These are par- pened before. It can easily bappen again.
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where corporate culture is a barrier. One of the biggest inhihilors of moving lo an integrated value chain is the rcsislJiifcoflen from the C'KO's oHiceto sharing iniornialion. Al tlif same time, best-practices supply cbain leaders are redesigning iheir metrics lo IOCLIS on salisfying the customer in ways that arc profitable lor the htisiness. Your organization and process changes will accomplisb little if you're still measuring things according to iradilional slrucUire and lunclion, notes O'Marah. Instead, ibe AMR Researcb analyst advises, companies need to inslilutf metrics that measure factors ibal cul across junctions, such as profitability per shipment, and then 1 1 si't up the IT systems to traek tbose metrics. Then 1 you can reward the value-chain leam for improving those metrics, "if you dont have ibe data to do tbat, you cant reward teams for doing it," O'Marab says.

ticular customers "tbat we're trying to transform witb," be says. "They are pushing us and we're pushing tbem. Tbey are part of our whole innovation engine." The customer value team is part of tbe account team and is responsible lor anticipating customer needs and dealing with any operational gaps that stand in the way By communicating with tbe customer and bringing all the information needed for that communication, the teams can "make the right operational dance happen." says Harrington, because "so much of that o])eralional glue lives inside o the supply chain. ' For example, a customer value team can "take the spin out of a sales call. Instead ol having a sales leader standing in front of a customer and thinking on his feet because tbe customer jusl threw him a cur\c ball." the cttsinmer \'aluc team is ihere to provide accurate information. It may be information that will answer tbe customer's question. It may be inf()niiation thai will correct a customers misunderstanding or niisperceplion. Because tbat customer value team is made up of people from (.]tia!ily, fulfillment and ser\1ce ftinctions. it can properly weigh irade-olTs that will be good for the customer and good for Cisco, notes industry observer O'Marah. Ratber than having those ftinctions operating separately and trying to fulfill iheir own cost-containmcnl missions, tbey are ail reporting to tbe same organization, meaning tbat those trade-offs arc made al a higher level.

Value Chain and Leadership

 2009, Supply Chain Management Review, Reed Business Information, a division of Reed Elsevier, Inc. All Rights Reserved. Copyright of Supply Chain Management Review is the property of Reed Business Information and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use.