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Sunayan Banerjee Creating Value Through Supply Chain

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Creating Value Through Supply Chain Recently I was closely following one of the major engineering achievements in the Indian Automobile sector- the launch of Tata Nano. The small bean shaped car captured the imagination of hundreds of visitors at Pragati Maidan in Delhi. Scenes of people coming from nearby villages ready with their cheque books were a common sight and our television channels did every thing they could to catch the excitement. The reason I quote this at the beginning is the fact that it made me think! It made me think, why is such a small basic car getting so much of attention? Is it only because it’s cheap to buy? Or is it deeper than that? Is it not because of the immense and unique value that the car promises to its customers? The article tries to raise and answer many such questions about value and its relevance. The key take away of this article is summarized below.

In the recent times we have seen the resurgence of globalization and shrinking boundaries between nations, societies, businesses and of course people. This has led to an ever increasing importance for integrated supply chains and value creation. In a true sense, in today’s dynamic world, organizations compete through their supply chains. In a conference, Mike Eskew, Chairman and CEO of UPS, described supply chain management that seeks to optimize costs as second generation supply chains (SCM 2.0), and went further to describe the third generation supply chain management as being focused on customer intimacy, and being a synchronized supply chain where consumers have the power to pull value. This brings out the fact that SCM, CRM and value chain, all need to function in synchronously. And indeed, the third generation supply chains have to be a reality for the organizations to sustain and grow. Value The term value means something that the customers will pay for. In other words, value enables a company to reach the customer’s wallet through its products or services. The concept of “Value Chain” was introduced by Michael Porter in his work “Competitive Advantage”. Here Porter tries to explain as to how competitive advantage leads to superior business performance. He has defined value as the amount the buyers are willing to pay for what a firm provides. Value chain is a combination of the various value added activities that take place within a firm. The value chains can further be linked together between the firms to create a value system. Value can be best described by taking a simple example of a person outdoors in a cold winter night without any woolens. A single warm jacket/ sweater will be of immense value to him at that time because he is freezing in the cold. Will he have any consideration for the brand the jacket belongs to? The answer I guess is NO. Let’s go a

What is value and value chain? What is the importance of value chain and how does its presence or absence effect the

customer? How can Supply Chain and Value Chain work together to achieve greater customer

satisfaction? Where does CRM fit in this context? Case study on Tata Indigo CS


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little deeper. Say, he has cash or a credit card with him. Does it matter to him that which shop he goes in to buy himself some warm clothing? The answer is again NO. Does he even care whether the price is too high? Probably no! So even money may not be a consideration! The point is what is his need? What is his perception of value? We can work out a number of similar examples from our personal experiences where we may realize what value actually means to us, as a consumer. In their book “Blue Ocean Strategy” W. Chan Kim and Renee Mauborgne explain how companies like Starbucks, Apple and Southwest Airlines have used innovation create a niche for themselves and come up with profitable and rewarding business models. Not only this, they are so efficient in their value chains, that they are able to operate in a Blue Ocean market i.e. without getting into the cut throat price competitions with other players (avoiding the Red Ocean scenario). A Blue Ocean is based on the principle of creating new markets where no one else has ventured before. Thus, the companies can avoid getting into direct competition and price wars (the Red Ocean). The authors talk about using “value innovation” to fuel a company’s Blue Ocean strategy. However, the strategy works only if they are a part of the intrinsic processes involving improvements in operations, functionality and price (value and supply chains). At Southwest Airlines, they had a unique model of low cost convenient flying between numerous airports. The company started its operations in the year 1971. The company had over 2300 flights and employing over 31, 000 people. The company offers unique features like low cost fares and very fast turn around times. The company has standardized the fleet of jets (over 500 Boeing 737 jets) it operates and hence reducing the operational and maintenance costs. It offers unique employee benefits like free air fares and multi faceted job profiles along with a fun at work environment. The point to note here is that the company carved out a niche (Blue Ocean) through innovation and unique value creation. This became possible my remaining close to the customer’s pulse and having the knowledge what are his needs and wants. TATA has come up with a one lakh car that may again create a unique market position for the “Nano” brand and operate in a Blue Ocean market. The Value a Nano will bring to its customers will be totally different from a high end car say a Mercedes S –Class. But, because the value is as perceived by the buyer, it will be unique. Value flows from the customer to the supplier. This is contrary to a supply chain where the flow is from the supplier to the customer.


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Value can be categorized in various layered levels. At the core is the “Product Value” or the technical value derived from a source of supply. For e. g. let us again consider the TATA Nano. The product value for the buyer may be access to an economic mode of four wheel transportation. The second layer consists of the “Service Value” or the value provided by the services surrounding the product. The service value for the Nano may be the warranty the car will carry which in turn will provide an ownership experience free of maintenance costs. The third and the penultimate ring will be the “Wow value” or the factors leading to customer delight. These may consist of factors such as space (which is said to be considerably more than the Maruti-800, its nearest competitor) and ergonomics of the car, given the price point it will operate in. The interesting thing here is to note that these factors will be completely different for a Mercedes customer. The “Wow value” i.e. space in the TATA Nano won’t excite such a customer. May be a beer cooler as a standard accessory will! Toyota launched its luxury sedan “Lexus” as a different brand (not as another Toyota car) because they felt that to compete with the BMW and Mercedes brands, they need a brand which will provide a greater snob value which the “value for money” image of Toyota brand couldn’t afford.

Further, the aim throughout should be to minimize the activities that don’t add any value to the customer. These activities are waste or “Muda”. Thus we can achieve greater efficiency in the value chain. The Supply Chain Supply chain is concerned with the total flow of materials / finished goods/ services from the suppliers to the end customers. As stated earlier, in the modern business scenario, we often realize that our companies are just as good as their supply chains are. Keith Oliver coined the term “supply chain management” in the year 1982. The primary aim of SCM has always been to overcome suboptimal deployment of inventory & capacity and ensure a more integrated approach to managing the delivery processes. A robust supply chain has become inherent to all successful and profitable companies world over. Retail giants such as Wal-Mart thrive on cost effective and efficient supply chains. In a push scenario, the supplier plans about what he is producing based on the demand estimations done. On the contrary, supply chains based on “pull” phenomenon are more effective than those based on “push”. In “pull”, it’s the demand that dictates the inventory at various points. The demand is percolated through the supply chain and the

CUSTOMER DELIGHT VALUE

SERVICE VALUE

PRODUCT VALUE


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supplier ends up producing only what and in whatever quantity/ numbers are actually required by the customer. In other words, he produces what actually adds value to the customer. This contributes in reducing the “muda” in the system and saves resources. There is a very interesting phenomenon that occurs in a supply chain called the “Bullwhip Effect”. This is a common observation in forecast-driven distribution channels and supply chains. The speculative nature and dynamism of market demand leads to crusts and troughs in the demand curve which get accentuated through the supply chain. This leads to large inventories and non value adding activities throughout. Every entity in the supply chain tends to keep some safety stock to meet contingencies. This moves up cumulatively from the customers to the raw material supplier and results in excess inventory. This may also lead to stock outs at some points because of the inaccurate forecasts and speculations. As we see in the diagram mentioned below, the oscillation in the demand accentuates as we go along the supply chain from the customer to the final suppliers.

(Source: Johnson & Pike, 1999) This can be countered effectively by having a demand driven (pull) supply chain and using techniques like Kanban and Vendor Managed Inventory (VMI) to name a few. Again, the focus should be at producing what the customer really needs and provide value. Information technology can play a vital role in achieving this through timely sharing of accurate data (preferably on a real time basis) throughout the supply chain. Value Appropriation Creating value includes activities such as producing and delivering the product/ service. Appropriating value is concerned with reaping the benefits from the value created. The created value can be mathematically defined as the ratio of the benefits acquired and the cost involved. The appropriated value is what an entity in the supply chain can appropriate to itself. There are two ways to increase the value created. Firstly, by increasing the benefits and secondly, reducing costs. More the value created, more the players in the supply chain can appropriate to themselves. So, how can we achieve it? Role of CRM Are we not surprised to know about how our bank or credit card company knows so much about our preferences and needs? You may have just started to make some enquiries about a new car, and your bank’s marketing executive calls you up offering a car loan! Is this magic? Not really. Welcome to Customer Relationship Management or CRM. Customer Relationship Management (CRM) is an overall strategy that enables


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companies to manage their relationships more effectively with their customers. CRM involves two way exchange of information between the company and its customers. Using Information Technology as a tool, CRM managers track their customer’s needs, buying patterns and more. In other words, this keeps them well informed about the value the customer is looking for. This allows them in depth knowledge which can further be used to maintain product lines, develop new products, plan launches/ promotions etc. CRM is not just a technology but rather a comprehensive customer-centric approach to an organization's philosophy in dealing with its customers. This includes policies and processes, front-of-house customer service, employee training, marketing, systems and information management. Hence, it is important that any CRM implementation considerations stretch beyond technology, towards the broader organizational requirements. Once again the focus should be on identifying what the customer wants and develop products to satisfying those needs i.e. create value. CRM provides real time information to the supply chain about what to produce, when to produce and in what quantities? In other words CRM can help managers associate better with the customers and collaborate with them to create value. Case Study Before concluding, let us go through a practical scenario where we can actually work out as to how the greater value can be created through supply chain and showcase the dependency of the value and supply chains. Example: Industry: Indian Automobile Industry Company: Tata Motors Product: Indigo CS The Indian automobile industry is one happening place. In recent years, we have seen the entry of a number of foreign brands and new Indian manufacturers. Not only the Indian automobile market is doing well, the Indian auto manufacturers are also on an expansion spree. The latest example being Tata motor’s recent acquisition of the Jaguar and Land Rover brands. However, every thing is not so rosy. The steel prices are rising. Banks have raised the interest rates for car loans and the fuel prices are as usual showing a bullish trend. Companies like Tata motors are in a tricky situation. On one hand they have invested big time in futuristic projects like the people’s car (Nano) and the Jaguar/ Land Rover deal. On the second hand they are in a situation where the domestic market is not very favorable. So, what do they do? How do they counter the threats and create value? We can use Porter’s 5 forces (Michael E. Porter- Harvard Business School- 1979) model to understand the market scenario to identify and understand the various market forces in action.


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The answer is, identify the need in the market (CRM), develop it into an opportunity (New Product Development) and fine tune and optimize the supply chain so that the value can be created and appropriated (value chain). Tata motors recently launched a new Compact Sedan, the Indigo CS. The car is a shortened version of the regular Indigo sedan with its boot chopped off. Tata motors was able to pull off something as dramatic as this because they had expertise in both the segments i.e. sedans and hatch backs. This car falls in the sub- 4 meter range and hence can avail the duty exemption applicable for small cars. The car brings immense value to the customers and presents an exceptional example of creating value for customers through innovative thinking and engineering a product considering customer’s needs. How many of us buy a hatch back because we can’t afford a sedan as our first car? Tata motor was aware of this situation and hence the Indigo CS; a sedan at the price of a hatch back, thanks to the cut in excise duties. No wonder the car has been an instant hit in the price sensitive and highly aspiration oriented Indian car market. The company managed to sell 3, 322 units of Indigo CS in February 2008, a month after its launch. More than fifty percent of the Indigo sales were from the Indigo CS variant. (Source: Economic Times- 18th March 2008). However, what remains to be seen is the efficiency with which the supply chain is able to make the cars available to its customers. Presently, the car has a waiting time of 21 days in Bangalore (esp. for some specific colors). Now, that is a pretty long waiting time for a car in this segment. What the Tatas probably failed to do was to gauge the future demand accurately enough and ramp up their production capacities accordingly. Now we see a situation where the supply chain is working on a pull strategy, but there is a long lead time. So there is some problem in the supply chain that is not allowing it to be responsive to the market demand. There is not enough finished goods inventory to satisfy the demand from the market. This accentuates the importance of having a robust and dynamic supply chain coupled with a lean and flexible manufacturing set up which can respond to such situations effectively. Hence we see, value is not isolated to only one point. Even a champion product needs support from the supply chain to be really successful in the market. In this case, substantial value has been created through a product. But, the value appropriation and value chain can’t work efficiently if the supply chain is not responsive and dynamic. It’s just like the car itself. The car can’t give good performance only if it has a good engine. The transmission system is equally critical to generate (appropriate) the desired performance.

Rivalry from other players in the industry (Highly

competitive industry with a number of global brands like

GM, Toyota & Honda)

Bargaining power of suppliers (Rising steel

prices)

Bargaining power of customers (price sensitive Indian

market, cheap hatch backs)

Threat of new entrants (new entrants- both

foreign and domestic)

Threat of substitute products (Better

sedans and cheaper hatch backs?)


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Conclusion The question that arises is that how can we create a win-win situation for all the stake holders in the supply chain? How do we ensure creation of substantial value throughout the supply chain so that we have a healthy value chain to go with? How do we increase the value appropriated throughout the supply chain? The answer clearly lies in synchronizing and integrating the supply and value chains. The supply chains need to synchronize with the market dynamics and changes in customer needs relating to tastes preferences and demand. There are three major flows within a supply chain namely material, information and financial flows. All these three need to be fully integrated. CRM shall also play a key role in identifying the customer’s needs and aspirations and thus help to create opportunities for companies to create value up front. There has to be a holistic view of the end-to-end business processes and the supply chain. Also, there has to be deep understanding of the product life cycles cutting across geographical boundaries. The need of the hour is to integrate and synchronize the activities and here we go, we have the salsa called value through supply chain.

References: 1. Value chain v/s supply chain by Andrew Feller, Dr. Dan Shunk & Dr. Tom Callarman 2. Blue Ocean Strategy by W. Chan Kim & Renee Mauborgne 3. Abstract of “Trading Off Between Value Creation and Value Appropriation: The Financial Implications of Shifts in Strategic Emphasis by Natalie Mizik and Robert Jacobson. 4. Competitive Advantage by Michael Porter.

VALUE

EFFICIENT VALUE CHAIN

INNOVATION

EFFICIENT SUPPLY CHAIN

CRM/ CUSTOMER

KNOWLEDGE DELIGHTED CUSTOMER


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