VALUE CHAIN MANAGEMENT



Value Chain Management 210
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Value chain management (VCM) is 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. In other words, efficient and effective value chain management optimizes value for the customers' customer. The following sections discuss the development of VCM, integrated supply chain planning and scheduling, full resource management, cycle time responsiveness, chain-wide resource optimization, and information integration.

DEVELOPMENT OF VALUE
CHAIN MANAGEMENT

Using the previous definition as a basis, it is helpful to review how VCM was developed. Traditional industries focused on vertically integrated operations. For example, if you manufactured a product, you wanted to control the material sources, the transportation, the warehousing, the production, and possibly even the retailing of your product. The theory held that more vertical elements that were under your direct control, the more efficiently you were able to perform.

International competitive pressures caused organizations to realize that they simply were not good at everything; thus, they began to focus on what they did best. In other words, 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 this process more complex.

The trend toward operational diversification focused organizations on developing a supply chain whereby 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 unresponsiveness to customer demands. Time-to-market became the buzzword of successful competitive positions; the organization that managed its supply chain most effectively tended to have the competitive advantage, at least in terms of customer responsiveness and order fulfillment.

Soon, managers realized that time responsiveness was not the only important element in customer satisfaction. The supply chain linkages-the links among upstream suppliers, manufacturers, and downstream distributors-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 efficient way. Sometimes this includes the elimination of elements of the supply chain; for example, Web marketing has eliminated the need for retail outlets. Amazon.com is a well-known example of eliminating the need for physical "bricks-and-mortar" retail locations. Another example is Atomic Dog Publishing. This textbook company leases online textbooks to students for a semester. Because the texts are online, Atomic Dog has cut out an intermediary between text development and customers; in other words, Atomic Dog manages its value chain through disintermediation by eliminating the need for college bookstores.

Returning to the definition of value chain management, we can now look at the key aspects that are incorporated in VCM. These include:

INTEGRATED SUPPLY CHAIN PLANNING
AND SCHEDULING

The planning process for managing the supply chain is easy and has existed for many years. Systems like material requirements planning (MRP), manufacturing resource planning (MRP II), distribution requirements planning (DRP), theory of constraints (TOC), just-in-time (JIT), critical path method (CPM), and program evaluation and review technique (PERT) have performed the planning process effectively for the last 30 years. However, under these environments, capacity has been treated largely as an afterthought, and therefore scheduling has been plagued with performance challenges. The introduction of capacity management tools like finite capacity scheduling (FCS) into the existing planning environments has allowed the development of schedules that were optimizable both in timing and in cost. Most planning systems still do not include these scheduling elements, but rather focus on achieving delivery performance through the utilization of an overriding expedite process. FCS enhancements are a key piece in the development of efficient VCM environments.

FULL RESOURCE MANAGEMENT

Traditional environments focused on managing only the material resources, assuming all the other resources had an infinite capacity. This logical fallacy came from the limitations of the planning systems previously discussed. In a centrally-controlled environment where authoritarian rule existed, the expediting process could make this management style operational. Unfortunately, in a multi-stage supply chain integration, the scheduler needs to make sure that capacity limitations are considered at all steps in the supply chain. Expediting across the links of the supply chain was extremely difficult, if not impossible. For example, the constrained resource at one link in the supply chain may be entirely different than the constrained resource at another step in the supply chain. For one step, the constrained resource could be labor while at another step it could be truck capacity. Therefore, a scheduling system that analyzed and constrained all the resource elements at all steps became a critical piece in VCM.

CYCLE-TIME RESPONSIVENESS

Total cycle time measures are needed because they have, in many cases, become more important than cost when it comes to competitive advantage. Strategic positioning requires a supply chain to be able to supply a customized product at speeds quicker than anyone else, even if the product is not customized. Therefore, a measure of cycle-time performance, measuring the time from when the order for a customized product is placed until it is delivered to the customer, becomes as important as price.

CHAIN-WIDE RESOURCE OPTIMIZATION

Value chain management adds the evaluation not only of all the traditional resources like labor, materials, machinery, etc., but also the optimal management of time and financial resources. Realizing that the supply chain has more steps than existed in the traditional vertical model in which a single firm integrated many supply chain processes and functions within a single organization, the profit margins of each step have become smaller as firms became disintegrated in order to focus on one or only a few core competencies. This "disintegration" has created the need for profits to be available at multiple points throughout the value chain because each step in the chain needs to share a smaller piece of the overall margin pie. In order to accomplish this, value chain management focuses on value-added optimization (also referred to as waste elimination). Some organizations have interpreted this to include the elimination of steps in the supply chain, like the elimination of retailers at Amazon.com and elimination of the need for college bookstores by Atomic Dog Publishing. The efficient performance of all the remaining links in the supply chain is also carefully evaluated by each link.

INFORMATION INTEGRATION

VCM is meaningless if a near-total sharing of information does not exist among all elements of the supply chain. This incorporates multiple levels of information, from the operational information (which includes capacities and work loads), to the strategic levels (which include vision and mission statements). This sharing of information has to be fully accessible and interactive, which often suggests some sort of Web-based database. Each link of the supply chain will need to be able to evaluate the efficiencies and performances of all the other links in the supply chain. However, this information network should not be available to elements outside of the immediate supply chain, like competitors. The shared information within the chain will primarily be utilized by each of the elements of the supply chain for their specific planning and scheduling. It will also be utilized by the sales/marketing functions to generate realistic schedules for the customer and end-consumer of the supply chain process. An overall finite capacity scheduling process that projects realistic and feasible schedules while simultaneously optimizing cost and timing will be necessary.

In summary, 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. Going into the future, VCM will become increasingly important as pressures to globalize mount, competition shrinks industry profits, and new market entrants challenge existing competitors.

SEE ALSO: Cycle Time ; Lean Manufacturing and Just-in-Time Production ; Supply Chain Management ; Cycle Time

Gerhard Plenert

Revised by Scott B. Droege

FURTHER READING:

Chopra, S., and M.S. Sodhi. "Managing Risk to Avoid Supply-Chain Breakdown." MIT Sloan Management Review 46, no. 1 (2004): 53–62.

Cooper, R., and R. Slagmulder. "Achieving Full-Cycle Cost Management." MIT Sloan Management Review 46, no. 1 (2004): 45–53.

Lee, H.L., M.L. Fisher, A. Raman, and V.G. Narayanan. "Smarter Supply Chains." In Harvard Business Review (On Point Collection. Boston: Harvard Business School Press, 2004.

Lejeune, M.A., and N. Yakova. "On Characterizing the 4 C's in Supply Chain Management." Journal of Operations Management 23, no. 1 (2005): 81–100.

Plenert, G. Making Innovation Happen: Concept Management Through Integration. Boca Raton, FL: St. Lucie Press, 1998.



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