Value Chain = Supply Chain + Demand Chain

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<p>Value Chain = Supply Chain + Demand Chain: New Approaches to Creating and Capturing Sustainable ValueFanny Thublier(1), Terry Hanby (2) and Yongjiang Shi (2) Arts et Mtiers ParisTech 75013 Paris, France (2) Institute for Manufacturing University of Cambridge, Cambridge, CB3 0FS, UK (1)</p> <p>AbstractThe purpose of this research paper is to develop a Value Chain conceptual model based on a combined Supply and Demand approach. Drawing primarily from the literature on Supply Chain, Demand Chain and Value Chain, modern definitions for these concepts are developed. Based on these findings, a new equation in the value world is introduced: Value Chain = Supply Chain + Demand Chain. The resultant model recognizes the growing importance of the end-consumer in the design and management of these chains and considers both the effectiveness and efficiency relationship in the Value Chain. In addition, different value perspectives for the Value Chain are suggested with particular focus on sustainable value creation and capture issues. It is anticipated that this model will be developed further in the specific context of the luxury market using case studies to develop and refine the proposed Value Chain model.</p> <p>Keywords: Value Chain, Supply Chain, Demand Chain, Consumer, Customer. IntroductionWhile external forces such as economic, ecological, technological and regulatory developments are increasingly altering the global landscape, new industry trends now affect the value chain. As well as information and product flow issues, one of the main challenges for todays manufacturing is undoubtedly to be both efficient and effective. From now on, to succeed in tomorrows mass-customized market, companies must be more and more nimble and responsive in creating unique value propositions that increase that so called value for the customer (Band, 1980). Thus, the meaning of the term value is shifting from a purely financial industry-oriented perspective to a consumer/customer-driven one. Whereas, suppliers, producers and customers (distributors, retailers) traditionally determined their own marketplace direction, nowadays, they are faced with the necessity to first start with the end-consumer requirements and then build proactive and knowledge-based relationships as well as infrastructures to deliver maximum value. In light of these facts, what is the role of the consumer in the Value Chain and what are the implications for the future design of the Value[1]</p> <p>Chain? To answer these questions this paper starts by examining future industry/consumer trends as well as external forces and opportunity areas. Based on the analysis of these elements, the next step is to develop new models for Supply Chain and Demand Chain. Indeed, the value of a product/service is maximal when simultaneous supply chain performance and demand satisfaction are reached: in other words, Supply and Demand Chain collaboration is the key to Value Chain survival. This preliminary finding leads to the development of a new conceptual model for the Value Chain. More specifically, the focus is on an end-consumer approach in the sustainable creation and capture of value through a new value equation: Value Chain = Supply Chain + Demand Chain.</p> <p>Literature reviewSupply Chain The literature on the Supply Chain provides a range of definitions for that term so that there is currently no single, common definition. Despite this it can be seen that there has been a growing complexity of the supply chain structure over time and that three main classes of model can be identified: - a classic linear model This model first appeared in a US Outlook article (Oliver and Webber, 1982) and attracted considerable attention (La Londe and Masters, 1994; Quinn, 1997; Handfields and Nichols, 1999; Chopra and Mendel, 2001). In todays industrial context, the definition which seems to be most commonly used is that a Supply Chain refers to the integration of internal business functions and the flow of materials and information from the point of entry into the firm until they are delivered to the end-consumer. Typically, three building blocks can be identified: Inbound Operations, Production and Outbound Operations (see figure 1).</p> <p>Inbound Operations</p> <p>Production</p> <p>Outbound Operations</p> <p>End-Consumer</p> <p>Figure 1: the Classic Supply Chain Inbound operations refer to reception, warehousing and control of raw materials, Operations are manufacturing activities that transform the inputs into the final product and Outbound Operations are activities that deliver the finished product to the end-consumer (warehousing, order fulfillment). According to David F. Ross (2006), the main focus of this kind of Supply Chain is to: Supply the right product at the right time with as little waste as possible. In other words, the classic linear chain can also be qualified as Lean Supply Chain. This linear[2]</p> <p>Supply Chain focuses on cost reduction, continuous improvement of processes, outsourced support functions and responsiveness and is product/service-centered - a linear model with integrated processes units : the SCOR Model Based on a linear approach of the Supply Chain, that model focuses more on management processes rather than Supply Chain structure and members. Specifically, the Supply Chain Council (2005) proposed a reference model for benchmarking supply chain processes and designing IT solutions for Supply Chain Management. This model distinguishes several processes: Plan, Source, Make, Deliver, and Return (see Figure 2). Through the interaction of these five processes in a firm, supplier, suppliers supplier, customer, and customers customer, the Supply Chain members can communicate effectively.</p> <p>Figure 2: The SCOR Model (Supply Chain Council, 2005) Process Plan Source Make Deliver Return Description Processes that balance aggregate demand and supply to develop a course of action which best meets sourcing, production and delivery requirements. Processes that procure goods and services to meet planned or actual demand. Processes that transform product to a finished state. Processes that provide finished goods and services, typically including order, transportation and distribution management. Processes associated to return or receive returned products. Table 1: Description of the SCOR Model processes</p> <p>- a network approach (Lambert et al, 1998) As the concept of Supply Chain Management evolved, the term Network came into use. It was developed in response to the fact that firms were generally part of a number of supply chains and had several customers and alternative suppliers. Attributes of network structure include the centrality of an actors position (Brass and Burkhardt, 1993; Ibarra, 1995), the extent of network closure (Coleman, 1990) and the degree</p> <p>[3]</p> <p>of disconnectedness (as a structural whole) between contacts (Burt, 1992). These factors all contribute to network integration. Lambert et al. (1998) physically divided the supply network structure into an upstream supply network including tier 1 to initial suppliers and a downstream supply network including tier 1 to the end-consumers. This perspective views a focal firms whole supply network by comparing performance in its multiple supply chains in order to identify potential competitive problems and opportunities as well as to identify overall process improvements through supply chain thinking. This perspective views the focal company and members of the network in static positions and thus aligns well with Porters (1985) Value Chain proposal that understanding a firms position in respect of its relationship with its supplier, channel, and buyer value chains is a crucial step in determining the appropriate direction of the many trade-off decisions it faces. Thus, the concept of Lean Supply Chain evolved towards the one of an Adaptive Supply Chain.</p> <p>Figure 3: The Supply Network Model (Lambert et al., 1998)</p> <p>Demand Chain The marketing concept can be considered as the necessary precursor to the Demand Chain concept. The marketing approach advocated that companies should plan their production in the context of consumer wants and needs and not just manufacturing capability. This new philosophy recommended focusing on the customer. In the 1980s, the emphasis in marketing strategy began to shift from activities that led to a single sale to ones that help to foster the development of a long-term relationship between customers and their suppliers. The concept of demand chain effectively emerged in 1997 when Fisher considered the limits of a purely cost/efficiency-focused Supply Chain. Christopher (1998) went further and suggested that:</p> <p>[4]</p> <p>It should be argued that it [Supply Chain Management] should be termed Demand Chain Management to reflect the fact that the chain should be driven by the market, not by suppliers However, the problem of such an assertion is that simply changing the name does not change the behavior. Since then, the Demand Chain concept has attracted tremendous attention but, as with the Supply Chain, no universally agreed definition has emerged. For example, some authors define it as a part of the supply chain and emphasize the market mediation function (Eschenbacher and Knirsch et al. 2000, Treville and Hameri 2004), whereas other authors prefer to treat it as a separate chain that considers demand from market to suppliers (Huttunen et al. 2000, Korhonen et al. 1998, Williams et al. 2002). So, what is the best relationship between Supply Chain and Demand Chain? Langabeer and Rose (2001) established a comparison between the Supply Chain and the Demand Chain (see Table 2) suggesting that an effective approach to demand chain management requires that organizations first of all understand their market and then identify core processes and capabilities that are required for success. Supply Chain Efficiency focus Processes are focused execution Cost is the key driver Short-term oriented, within the immediate and controllable future Typically the domain of tactical manufacturing and logistics personnel Focuses on immediate resource and capacity constraints Historical focus on operations planning and controls Demand Chain Effectiveness focus Processes are focused more on planning and delivering value Cash flow and profitability are the key drivers Long term oriented, within the next planning cycles Typically the domain of marketing, sales and strategic operations managers Focuses on long-term capabilities, not shortterm constraints Historical focus on demand management and supply chain alignment</p> <p>Table 2: Supply Chain and Demand Chain (Adapted from Langabeer and Rose, 2001) Walters and Rainbird (2006) offer a model that integrates the two chains. To them, first understanding the Demand Chain (and more exactly the customer value drivers) may be used to identify the critical focus areas for an organization. These can then be used to adapt the supply chainfor the benefit of the whole Value Chain.</p> <p>[5]</p> <p>Value Chain The term value chain was first introduced by Michael Porter (1985) to describe the range of inter-linked activities that a business uses to make and sell its products/services and so make profit. However, as for the Supply and Demand Chains, a plethora of models have emerged to describe the Value Chain as showed in Table 3. Definition Value Chain = Primary activities + Support Activities Brown, 1997 Industry perspective: tool to disaggregate a business into related activities Evans&amp;Berman, 2001 B to B Value Chain model: Value Chain itself activity based and benefits created and offered to Physical customers, and value deliver chain that all the parties providing value Walters&amp;Lancaster, 2001 A Value Chain is a business system which creates end-user satisfaction and realizes the objectives of other member stakeholders. Walters&amp;Rainbird, 2006 Value Chain = Supply Chain + Demand Chain Lord Sainsbury of Value chain = activities from R&amp;D to Turville, 2007 after-sales service through production Rayport&amp;Sviokla, 1995 Virtual Value Chain = value-adding information activities Lee&amp;Yang, 2000 Introduction of the concept of Virtual knowledge Value Chain Hansen&amp;Birkinshaw, A value chain is a comprehensive 2007 framework to break down innovation into three phases and six critical activities. Value Chain classification Sullivan&amp;Geringer, 1993 Two types of Value Chain: natural value chain and contrived value chain Gereffiet al., 2005 Five types of Value Chains depending on the firm and the context: market, modular, relational, captive, hierarchy Table 3: Value Chain Classification and definitions In this paper, three important Value Chain models are described- Porters (1985), Lord Sainsbury of Turvilles (2007) and Walters and Rainbirds (2006). Each one of these models is based on different but very influential ideas. For instance, Walters and Rainbird (2006) put the end-consumer in the center of their model, whereas Porter (1985) and Lord Sainsbury of Turville (2007) place greater emphasis on industry activities and, consequently, adopt a manufacturers point of view. Such different conceptions show how the market and the industry perspectives evolved over time and what the principal unresolved issues are in todays value chain.[6]</p> <p>Porter, 1985</p> <p>- Porters (1985) complex linear model Porter (1985) was the first to argue that every firm is a collection of activities that are performed to design, produce, market, deliver and support its products. A firms Value Chain and the way it performs individual activities are a reflection of its history, its strategy and the underlying economies of the activities themselves. In other words, a Value Chain can be described as the value-added activities of an organization. In his model, Porter divides these activities into two categories, primary activities and support activities. The primary activities are dedicated to creating and delivering products as well as after-sales assistance. The support activities support the primary activities and can be described as all the activities that help to increase the effectiveness or efficiency of the primary activities. Firm Infrastructure Human Resources Management Technology Development Procurement Activities such as finance, legal, quality, management. R&amp;D, process automation, and other technology development used to support the value-chain activities Activities such as recruitment, development, and compensation of employees. Function of purchasing the raw materials and other inputs used in the value-creating activities.</p> <p>Inbound logistics Operations Outbound logistics Marketing and sales Service</p> <p>Receiving, warehousing and inventory control of input materials Value-creating activities that transform the inputs into the final product. Activities required to get the finished product to the customer, including warehousing, order fulfillment Activities associated with getting buyers to purchase the product, including channel selection, advertising, p...</p>