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Business Horizons (2008) 51, 235–243

Best value supply chains: A key competitiveweapon for the 21st century

David J. Ketchen, Jr. a,⁎, William Rebarick b,G. Tomas M. Hult c, David Meyer b

a College of Business, Auburn University, Auburn, AL 36849-5241, USAb Raytheon Technical Services Company, LLC, 2603 Challenger Tech Court, Suite 150, Orlando, FL 32826, USAc Eli Broad Graduate School of Management, Michigan State University, East Lansing, MI 48824-1121, USA

⁎ Corresponding author.E-mail addresses: ketchda@auburn

wrebarick@raytheon.com (W. Rebarick(G.T.M. Hult), David_J1_Meyer@raythe

0007-6813/$ - see front matter © 200doi:10.1016/j.bushor.2008.01.012

Abstract

All executives would like their organizations to perform better, and most seek ways tomake that happen. This paper focuses on how supply chains — the series of activitiesthrough which products and services are created and then distributed to customers —can enhance firm performance. For the last couple of decades, most firms haveemphasized maximizing speed or minimizing costs within their supply chains. In thecurrent business landscape, however, a broader approach is needed. We describe themain advantages of developing best value supply chains as a tool for enhancingperformance. These chains differ from traditional chains in important ways. Best valuesupply chains are used by organizations as a central element of strategy, not simply as ameans to move materials. Rather than focusing primarily on speed or cost, best valuesupply chains are designed to deliver superior total value to the customer in terms ofspeed, cost, quality, and flexibility. Our contention is that organizations that developbest value supply chains will enhance their performance. We support this contentionwith examples from leading firms that reflect a best value approach.© 2008 Kelley School of Business, Indiana University. All rights reserved.

KEYWORDSSupply chains;Best value supply chains;Strategy;Performance;Competition

1. Time, money, and supply chains

“Time is money!” warns a famous aphorism. Thissimple yet profound statement suggests that organiza-tions which complete work quickly will enjoy greaterprofits, while slower moving firms will suffer. The

.edu (D.J. Ketchen, Jr.),), hult@msu.eduon.com (D. Meyer).

8 Kelley School of Business, In

belief that time is money has encouraged the modernemphasis on supply chainmanagement. A supply chainis a system of people, activities, information, andresources involved in creating a product and thenmoving it to the customer. Many organizations attemptto integrate and closely coordinate the variouselements of their supply chains in order to enhanceefficiency. Indeed,minimizing cycle time— the time ittakes to fulfill a customer's needs— has been a centralgoal of executives in recent decades.

diana University. All rights reserved.

236 D.J. Ketchen, Jr. et al.

However, indications are that competition inthe 21st century will require a different approach.We are beginning to see the emergence of whatwe label as best value supply chains (Ketchen &Hult, 2007). These chains do not fixate on speed,or on any other single metric. Instead, relative totheir peers, best value supply chains focus on thetotal value added to the customer. More specifi-cally, best value supply chains target high qualityperformance across four competitive priorities:speed, cost, quality, and flexibility. In somecases, best value supply chains are surpassed onone or two of these dimensions by other firms'chains. However, most customers' needs are multi-faceted; few are concerned with just speed orcost. As a result, best value supply chains providesuperior outcomes in terms of overall customersatisfaction.

Based on state-of-the-art research literatureand observations of leading firms, our belief isthat firms can benefit from moving toward a bestvalue approach. The objective of this paper is todevelop a description of best value supply chainsthat can help guide firms toward enhancing theirsupply chain practices. As shown in Figure 1, bestvalue supply chains use strategic supply chainmanagement to excel across speed, quality, cost,and flexibility. These efforts require coordinationacross at least four supply chain elements: strategicsourcing, logistics management, supply chain infor-mation systems, and relationship management. Nofirm at present has all of the features we describe.However, a variety of very successful firms currentlyhave many of these features, and we anticipate thatover time some of them will realize the full potentialoffered by the best value concept. After developingthe key components of the best value concept below,we discuss how one firm, Raytheon Technical ServicesCompany, is moving toward a best value approach toits supply chains.

Figure 1 An illustration of best value supply chains

2. Overall features of best value supplychains

2.1. Strategic supply chain management

The traditional view of supply chain management isthat it is mainly a process for obtaining and movinggoods and services. According to this view, supplychains are tactical and transactional in nature, andare a cost center rather than a revenue driver. Notsurprisingly, many firms focus on individual opera-tional metrics such as dock-to-stock time andmanufacturing lead time to assess their chains.Indeed, most organizations do not track or have amethod of recording total supply chain performance.

Best value supply chains are grounded in adifferent set of assumptions and practices. Theirfocus is on strategic supply chain management, orthe use of supply chains as a means to create com-petitive advantages and enhance firm performance(Hult, Ketchen, & Slater, 2004; Upson, Ketchen, &Ireland, 2007). Such an approach contradicts thepopular wisdom centered on the need to maximizespeed. Instead, there is recognition that the fastestchain may not satisfy customer requirements. Bestvalue supply chains strive to excel along fourcompetitive priorities. Speed (often referred to ascycle time) is the time duration from initiation tocompletion of the supply process. Quality refers tothe relative reliability of chain activities. Supplychains' efforts to manage cost involve enhancingvalue by either reducing expenses or increasingcustomer benefits for the same cost level. Flexibil-ity refers to a supply chain's responsiveness to changesin customers' needs (Hult, Ketchen, Cavusgil, &Calantone, 2006). Through balancing these fourmetrics, best value supply chains attempt to providethe highest level of total value added.

The value of strategic supply chain management isreflected in how firms such as Wal-Mart, Toyota, andZara have used their supply chains as competitiveweapons to gain advantages over peers. For example,Wal-Mart excels in terms of speed and cost by locatingall domestic stores within one day's drive of awarehousewhile owning a trucking fleet. This createsdistribution speed and economies of scale thatcompetitors simply cannot match. When K-Martexecutives decided in the late 1990s to competewith Wal-Mart head-to-head on price, Wal-Mart'ssophisticated logistics system enabled it to easilywithstand the price war. Unable to match its rival'sspeed and costs, K-Mart soon plunged into bank-ruptcy. Wal-Mart's supply chains also possess strongquality and flexibility. When Hurricane Katrinadevastated the Gulf Coast in 2005, Wal-Mart usednot only its warehouses and trucks, but also satellitetechnology, radio frequency identification (RFID),

237Best value supply chains: A key competitive weapon for the 21st century

and Global Positioning Systems to quickly divertassets to affected areas. The result was Wal-Martemerged as the first responder in many towns, andprovided essentials such as drinking water faster thanlocal and federal governments could.

Meanwhile, failing to manage a supply chaineffectively causes serious harm. For example, in2003Motorolawas unable tomeet demand for its newcamera phones because it did not have enough lensesavailable (Lee, 2004). To give another example, firmswhose supply chains were centered in the Port of LosAngeles collectively lost over $2 billion a day during a2002 workers' strike. In terms of stock price, firms'market value erodes by an average of 10% followingthe announcement of a major supply chain problem(Hendricks & Singhal, 2003).

2.2. The three A's

As shown in Table 1 and described below, best valuesupply chains differ from typical supply chains in howthey approach three issues closely tied to strategicsupply chain management: agility, adaptability, andalignment (Lee, 2004). Table 1 also identifies keys formoving toward a best value approach for each issue,and provides examples of firms that have madesignificant strides along this path.

2.2.1. AgilityAgility is the supply chain's relative capacity to actrapidly in response to dramatic changes in supply anddemand. Agility can be achieved through the use ofbuffers. Excess capacity, inventory, andmanagementinformation systems all provide buffers that allow abest value supply chain to provide better service andbe more responsive to its customers. Rapid improve-ments and decreased costs in deploying informationsystems have enabled supply chains in recent years toreduce inventory as a buffer. Much popular thinkingdepicts inventory reduction as a goal in and of itself.However, this cannot occur without correspondingincreases in buffer capacity elsewhere in the chain,or performance will suffer. A best value supply chainseeks to optimize the total costs of all buffers used.The costs of deploying each buffer will differ acrossindustries; therefore no solution that works for onecompany can be applied directly to another in adifferent industry without adaptation.

Agility in a supply chain can also be achieved orimproved by co-locating with the customer. Thisarrangement creates an information flow that cannotbe duplicated through other methods. Daily face-to-face contact for supply chain personnel enablesquicker response times to customer demands due tothe speed at which information can travel back andforth between the parties. Again, this buffer ofincreased and improved information flows comes at

an expense, so executives seeking to build a bestvalue supply chain need to investigate the opportu-nity and determine if this action optimizes totalcosts.

2.2.2. AdaptabilityAdaptability refers to a willingness and capacity toreshape supply chains when necessary. Generally,creating a single supply chain for a customer isdesired because this helps minimize costs. However,adaptable firms realize that this is not always a bestvalue solution. For example, in the defense industry,theU.S. Army requires one class ofweapon simulatorsto be repaired in less than eight hours, while anotherclass of items can be repaired and returned inside ofone month. In order to service these varying require-ments efficiently and effectively, Computer ScienceCorporation (the firm whose supply chains maintainthe equipment) must devise adaptable supply chains.In this case, spare parts inventory is positioned atclose proximity to the class of simulators requiringquick turnaround, while the less time sensitivedevices are sent to a centralized repair facility. Thissupply chain configuration allows Computer ScienceCorporation to satisfy customer demands whileavoiding the excess costs that would be involved inlocalizing all repair activities.

In situations where the interests of one of thefirms in the chain and the chain as a whole conflict,most decision makers will choose an option thatbenefits their firm. This creates a need for align-ment among chain members.

2.2.3. AlignmentAlignment refers to creating consistency in theinterests of all participants in a supply chain. Inmany situations, this can be accomplished by care-fully writing incentives into contracts. Collaborativeforecasting with suppliers and customers can alsohelp build alignment. Taking the time to sit togetherwith participants in the supply chain to agree onanticipated business levels permits shared under-standing and rapid information transfers betweenparties. This is particularly valuable when customerdemand is uncertain, such as in the retail industry.

3. Specific features of best value supplychains

Beyond using strategic supply chain management andthe three As to service the four competitive priorities,best value supply chain organizations demonstratecertain characteristics in various elements of thesupply chain. Specifically, as shown in Table 1, bestvalue supply chains differ from traditional supplychains in at least four key areas: strategic sourcing,

Table 1 From typical to best value supply chains

Issue Typical supplychains

Best value supplychains

Key to making thetransition to a bestvalue approach

Example company

Approach to supplychain management

Supply chains supportstrategy by ensuringthe needed flow ofgoods and services

Firms should leveragestrategic supply chainmanagement, agility,adaptability, andalignment to createcompetitive advantages

Executives must viewsupply chains as a strategicweapon rather than asa cost center

Zara keeps pace withand creates transientfads in the fashionindustry through veryrapid productdevelopment anddistribution

Agility Moderate capacity toreact to changes

Good capacity toanticipate and reactto changes

Executives must devise acompany-specific approachto managing the costs ofbuffers

Raytheon TechnicalServices Companylocates an executiveoffice nearby keycustomers

Adaptability Focus on efficiencythrough the use ofdiscrete supply chains

Maintain overlappingsupply chains to ensurecustomer service

Executives must be willingto accept the addedexpense of duplication

Based on customer'sneeds, ComputerScience Corporationpositions some inventoryclose to customerlocations while otheritems are warehousedcentrally

Alignment Supply chain memberssometimes forced tochoose between theirown interest and thechain's interest

A rising tide lifts allboats — the interestsof supply chainmembers are consistentwith each other

Executives must viewproblems from the supplychain level of analysisrather than the firm level

When a supplier'ssuggestion savesR.R. Donnelly money,the firm splits thesavings with the supplier

Strategic sourcing Involve suppliers laterin the productdevelopment process

Involve suppliers earlyin product developmentand throughout

Sourcing managers mustadopt a holistic,“big picture” viewof their role in thecompany

Aerospace firms such asNorthrup Grummancreate productdevelopment alliancesyears in advance ofgovernment proposalsfor new aircraft

Monitor internalprocesses

Monitor performanceend-to-end

Logisticsmanagement

Treat logistics as atransportationmechanism

Treat logistics as astrategic inventorymechanism

Finding the ideal balanceof speed, quality, cost,and flexibility withindistribution systems

Dell Computersrevolutionized thepersonal computerbusiness throughby-passing retailersand distributingdirectly to customers

Supply chaininformationsystems

Participants havedata at the sametime or after aproduct's movement

Participants havedata prior to aproduct's movement

Information systems mustbe created that allow datasharing across supply chainparticipants whileprotecting each firm'sproprietary data

Wal-Mart uses satellitetechnology, radiofrequency identification(RFID), and GlobalPositioning Systems totrack inventory in realtime

Relationshipmanagement

Moderate success atmatching nature ofrelationship tothe task

Effectively matchnature of relationshipto the task

Recognizing that most supplychain relationships should bemanaged through contracts,not rich partnerships

Wendy's carefullyexamined its 225 suppliersto identify less than 40that were candidates forcollaboration

238 D.J. Ketchen, Jr. et al.

239Best value supply chains: A key competitive weapon for the 21st century

logistics management, supply chain information sys-tems, and relationship management.

3.1. Strategic sourcing

Often viewed as the inbound portion of supplychains (from raw material to the manufacturer),strategic sourcing plays an increasingly significantrole in products and services. For example, about70% of the cost of a John Deere tractor is made up ofmaterials from external suppliers. Similar compo-nent allocations can be found in many otherindustries, such as the aerospace industry wheremore than 80% of the cost of a given product isdirectly tied to the cost of materials. Given thisimportance, best value supply chains involve exter-nal suppliers early in product development. Inaerospace, teaming partners are often identifiedand secured years in advance of a governmentproposal being finalized, so the best solution toanticipated customer requirements can be devel-oped over time. Supply chains that practice earlysupplier involvement achieve on average a 20%reduction in material cost, a 20% improvement inmaterial quality, and a 20% reduction of develop-ment time (Monczka, Trent, & Handfield, 2005).Three strategic sourcing ʻenablers’ drive theseoutcomes in best value supply chains: humanresources, strategic sourcing design, and measure-ment systems.

Human resources are of course critical in almostany line of work, and best value supply chains are nodifferent. However, the knowledge and skillsneeded are specific to the chain setting. Require-ments of best value supply chains include the abilityto develop supply chain managers who view thechain holistically, meaning with a perspective ofhow strategic sourcing contributes to chain opera-tions. These managers must also have the capabilityto manage critical relationships, understand thechain's integration into the firm's overall businessmodel, and engage in value-based decision-making.Perhaps most importantly, these managers musthave the capability and foresight to integratestrategic sourcing with other critical supply chainfunctions (e.g., logistics, information systems, andrelationship management).

The development of an appropriate strategicsourcing design is critical to achieve the benefits ofbest value supply chains. Firms often build theirstrategic sourcing designs independently from sup-ply chain relationships. Such firms may end up beingefficient and effective in their strategic sourcingoperations, but the overall supply chain oftensuffers. Requirements for best value supply chains'design efforts include centrally supported man-agement teams, a focus on coordinating strategic

sourcing activities, often the co-location of strate-gic sourcing personnel with internal and externalcustomers, and coordination across the firm's busi-ness units.

The measurement system is the last of the threeenablers of strategic sourcing that helps make bestvalue supply chains superior to traditional supplychains. Most strategic sourcing (and supply chain)managers monitor the performance of internalprocesses and strategic sourcing functions. Incontrast, best value supply chains track end-to-end performance of the entire supply chain pro-cesses, including both the strategic sourcing portionand the entire supply chain, as well as the logisticsfunction, information systems, and the relationshipmanagement processes.

3.2. Logistics management

As a critical component within best value supplychains, logistics should be managed as an integratedeffort to achieve the value associated with the fourcompetitive priorities: speed, quality, cost, andflexibility. Typical supply chains use logistics as anextended transportation mechanism, while bestvalue chains integrate logistics as a strategicmechan-ism at the level of corporate strategy. Specifically,best value chains go beyond traditional logistics re-quirements by stressing a holistic logistical valueproposition, emphasizing the value of positioninginventory, and developing a flexible chain structure(Bowersox, Closs, & Cooper, 2007).

The logistical value proposition involves findingthe ideal balance of speed, quality, cost, and flexi-bility. The law of diminishing returns dictates that theideal balance cannot develop by achieving theextreme on any of the competitive priorities. Forexample, very seldom will either the highest attain-able quality or the lowest cost constitute the desiredlogistics strategy in the best value supply chains. Inaddition, the appropriate combination of the com-petitive priorities will be different for differentcustomers, situations, and product/service offerings,which is a practical realization that best value chainscan incorporate effectively. A well-designed logisti-cal effort in best value chains stresses high customerimpact, consistent performance, and optimal inven-tory management. Minimization of any one element,such as flexibility, should not be a goal of a best valuesupply chain. Rather, executives should realize thatthe optimal performance along each of the fourpriorities should be pursued relative to the valuedelivered to the customer.

The number, size, and geographical network offacilities used for logistical operations affects thefour competitive priorities. Accordingly, positioning

240 D.J. Ketchen, Jr. et al.

inventory to achieve the desired time, place, andpossession benefits at the lowest practical cost is akey feature of best value supply chains. This meansthat for a supply chain to realize maximum strategicvalue from logistics, all critical operations must beintegrated (i.e., decisions in one area will affectoperations in others). These operations include orderprocessing, inventory, transportation, warehousing,materials handling, packaging, and facility networks.

A flexible structure for the logistics function andprocess refers to preplanned contingency strategiesto prevent logistical failures. Most supply chains havelittle, if any, flexibility. For example, when the portof New Orleans shut down in 2005 due to HurricaneKatrina, many chains that were linked through theport could not function. However, the best valuesupply chains build in sufficient flexibility, and alsoadd buffers, either in the form of inventory, capacity,or cycle time, to offset unforeseen contingencies.The advantages of having flexibility include allowingfirms to be nimble in product offerings, preventingsecurity/terrorism-related failures, and being at theforefront of customer responsiveness. Best valuesupply chains plan for contingency operations, andpractice them, thereby testing their responsivenessin the face of adversity.

3.3. Supply chain information systems

As recently as 10 years ago, the average time to fulfillcustomer orders ranged from two to four weeks. In-credible changes have occurred as the result ofimprovements in the information systems now usedto manage supply chains, bringing delivery timesdown to days and, in some cases, hours. Overall,effective supply chain information systems provideimportant benefits, including cost reductions, pro-ductivity improvements, and alignment of an appro-priate product/market strategy (Handfield&Nichols,2002). Thus, the development of these systems iscritical to the achievement of best value supply chainmanagement.

The main goal of the information system is to linkall elements of the supply chain seamlessly so an“information trail” tracks a product's “physical trail”and does so proactively (Simchi-Levi, Kaminsky, &Simchi-Levi, 2004). A proactive focus is critical. Itmeans that participants in the chain should haveinformation about each step of the chain prior to theproduct's physical movement through those steps.This allows for planning, tracking, and predicting leadtimes based on actual data. Ideally, all participants inthe supply chain are continuously provided relevantinformation in real time. However, the informationsystem should also be constructed in a way that pro-tects each firm's sensitive data from being revealedto others unless necessary.

A best value supply chain develops systems thateffectively manage four types of functionality:transaction systems,management control, decisionanalysis, and strategic planning (Bowersox et al.,2007). Transaction systems are characterized bycertain established procedures, including the track-ing of the volume of transactions, and an operationalfocus (for most firms this operational focus is onday-to-day activities). At the most basic level, thetransaction system records outbound activities suchas order entry, inventory, shipping, pricing, invoicing,and customer relationshipmanagement.More sophis-ticated systems include ʻinbound activities’ relatedto each step from raw materials to finished goods,with each step of work-in-process being recorded.

Management control focuses on effective perfor-mance measurement and reporting. For example, theSupply Chain Council has developed the SCORModel, aprocess reference model that integrates the conceptsof business process reengineering, benchmarking, bestpractices analysis, and process measurement relatedto five distinct supply chain processes: plan, source,make, deliver, and return (Supply Chain Council,2007). Plan refers to processes that balance aggregatedemandand supply to develop a course of actionwhichbest meet sourcing, production and delivery require-ments. Source denotes processes that procure goodsand services to meet planned or actual demand.Makeencompasses processes that transform product to afinished state to meet planned or actual demand.Deliver refers to processes that provide goods orservices to meet planned or actual demand, typicallyincluding order management, transportation manage-ment, and distribution management. Return indicatesprocesses associated with returning or receivingreturned products for any reason. Best value supplychains use this model or similar models to rapidlydetect and correct deviations.

Decision analysis focuses on software tools thatcan assist supply chain managers in identifying,evaluating, and comparing strategic and tacticalalternatives to improve the effectiveness of eachstep in the supply chain. Common types of analysesinclude supply chain design, inventory management,resource allocation, routing, and customer-segmentprofitability. Best value chains effectively usenumerically weighted criteria in order to sort throughpossible alternatives. Analytical skills and modelsused in conjunction with strategic planning drive thelogistical operations of best value supply chains.

Strategic planning often involves organizing largeamounts of data into a coherent asset (such as adatabase) to assist in evaluating strategic alternatives.The information system needs to help decision makersassess, for example, the desirability of enteringstrategic alliances, the development ofmanufacturing

241Best value supply chains: A key competitive weapon for the 21st century

operations, and opportunities that can enhance cus-tomer responsiveness. A critical concern is how muchdata to maintain, how to make it available whenneeded, and in what format to present the data tousers. For example, very few firms know what theyhave purchased, in what quantities, at which prices,and from which suppliers for the past decade aroundthe globe. Such a database would be far too expensiveto justify in most situations. Best value supply chainsfind the optimal balance between maintaining com-prehensive supply chain information on one hand andcost considerations on the other.

3.4. Relationship management

Effectively integrating the participants in a supplychain is crucial to supply chain success. There aretwo basic ways to organize associations with othersupply chain participants. Cooperation refers tocontractual relationships, such as outsourcing orsubcontracting. Such relations are highly structured,often complex, and can require extensive negotia-tion. Terms are laid out in advance and in detail(Miles, Miles, & Snow, 2005). As discussed previously,incentives must be aligned among supply chainparticipants. Effective cooperation in the form ofwell-conceived contracts can ensure such alignment.In contrast, collaboration refers to trust-based rela-tionships centered on a sense of shared purpose. Inthese links, each partner comes to view the other asan extension of itself. Collaboration is very sophis-ticated, requires much time and energy, and is am-biguous and learning-intensive. For example, ratherthan explicitly defining exchange terms in advance,collaborative partners must postpone discussion ofreturns. This is because each side's relative contribu-tions cannot be predicted in advance, and onlybecome clear over time (Miles, Miles, & Snow, 2006).

Popular wisdom emphasizes the use of rich anddeep collaborative partnerships among supply chainparticipants. In contrast, best value supply chainsattempt to fit the approach to the problem.Managersleading such chains recognize that collaboration isnot the ʻone best way’ to address relationships. Forexample, firms should look to contracts first whendealing with suppliers and other partners becausecontracts are faster and simpler to execute than richpartnerships (Narayanan & Raman, 2004). If desiredoutcomes can be achieved without collaboration,then collaboration should be avoided. Given thecomplex problems supply chains face, however, somecollaboration is often beneficial.

Within best value supply chains, executives deter-mine the best relationship to develop betweenthemselves and a partner based on the value eachdelivers. If a product or service is commodity based,

or a fungible item, developing a strategic partnershipdoes notmake sense. Instead, a transactional focus isoften pursued. However, as skills become more andmore specialized and unique in the marketplace,executives building a best value supply chain will lookto more complex relationships to leverage the valueinherent in another firm's capabilities.

Deciding which supply chain participants arecandidates for collaborative relationships is a keychallenge for firms. Rating them along importantdimensions is one possible solution. For example,Wendy's used such a process to sort through its 225suppliers. Each supplier was ranked as ʻhigh’ or ʻlow’along two dimensions: complexity (e.g., taste,safety), and purchasing volume. The result was atwo-by-two matrix that mapped the suppliers. Ap-proximately 40 suppliers were rated as high on bothdimensions andwere therefore considered as possiblecollaborative partners. Ultimately, fewer than 10wereselected. Similarly, Colgate-Palmolive classified itssuppliers in terms of their potential for cost reductionsand their potential for innovation. Those firms thatranked high on both dimensions were viewed aspotential partners (Lambert & Knemeyer, 2004).Although Wendy's and Colgate-Palmolive used twodimensions to assess potential partners, the sameapproach could be used with multiple dimensions.

4. Toward best value supply chains: TheRaytheon approach

We are not aware of any firms that currently possessall the attributes of best value supply chains. How-ever, Raytheon Technical Services Company, LLC(Raytheon) is one of a number of firmsmoving towardproviding best value for its customers via the three Asand the four functions of strategic sourcing, logisticsmanagement, supply chain information systems, andrelationship management. The modern US militaryoutsources many supporting functions, such as cer-tain training activities and fuel provision, to privatecontractors. Raytheon is one of the “defense indus-try” firms that perform these functions.

In the Cold War era, key potential military ad-versaries were well known and their behavior wasfairly predictable. This meant that defense firms'tasks in providing support were relatively simpleand stable. However, today's current and potentialadversaries are very unpredictable. Many do notwearuniforms, and their tactics often do not fit the 20thcentury model of fair combat. In response to itscomplex and dynamic environment, Raytheon hasenacted innovative approaches to supply chain issuesin recent years. We believe the firm's experiences todate can provide insight to both academics andmanagers interested in improving their supply chains.

242 D.J. Ketchen, Jr. et al.

Raytheon is developing agility by co-locatingadjacent to its key customers. For example, a currentcontract requires Raytheon to provide a wide varietyof support activities for live combat simulations (i.e.,“war games”) ranging from repairing equipment totraining people to play the role of civilians caught in acombat area. Raytheon operates a managementfacility very close to the military office that runsthe simulations. The frequent direct contact be-tween the parties, and the working relationships thatdevelop as a result, provide unique insights into thecustomer's needs. For example, as training needsevolve, Raytheonworks with the customer directly tojointly refine and develop procedures. Issues thatcould have takenweeks to resolve via phone calls ande-mails can be resolved in hours through face-to-facemeetings.

Adaptability is vital to Raytheon's efforts tosupport combat simulations. Current insurgent tacticsin Iraq center on Improvised Explosive Devices (IEDs)that adapt cell phones and other electronics asdetonators for concealed explosives. Once insurgents'preference for these devices became clear, Raytheonhad to act quickly. The firm created a new “rapidresponse” supply chain by redeploying the mostcapable internal and external players from otherchains. Development of training tools began with thecreation of a new device which simulates an IED.Raytheon's supply chainmanagers immediately beganto work with industry leading suppliers to helpdevelop the technology needed for this device.Production work and the deployment of the devicesto training sites around the globe occurred within acompressed cycle time. Although the new rapidresponse chain was redundant with existing, reactivechains, it was needed to offer the customer the bestvalue solution to a vexing problem. Raytheon hasmaintained this redundant process in anticipation ofother rapid-response needs that may arise.

To help create alignment among the members ofits supply chains Raytheon utilizes financial incen-tives. When partners' practices and decisions saveRaytheon money while still maintaining quality, thefirm splits the savings evenly with the partners. Insituations where there are preventable cost over-runs, Raytheon applies penalties to its partners. Tomaintain a positive and collaborative culture acrossthe supply chains, the incentives are slotted at a farhigher level than the penalties. Through this incen-tive-based system, supply chain participants' finan-cial outcomes are tied together in terms of bothupside and downside risk.

Raytheon has also devised a Supplier RatingsSystem (SRS) as a tool for creating alignment. TheSRS measures a variety of performance factors in-cluding on-time delivery and quality. The system's

design is based on statistical analyses that prove thatusing providers with superior SRS ratings leads tolower total supply chain costs for Raytheon. Supplierswith superior ratings are rewarded through inclusionon Approved Supplier Listings (ASLs) that facilitatethe receipt of significant additional business. Suppli-ers with poor ratings aremonitored regularly, and areremoved from future projects if their performancedoes not improve. To ensure equity, the SRS is ajointly agreed upon process between Raytheon andits suppliers, and is jointly monitored. Overall, fi-nancial incentives and the SRS build consistencybetween the parties' interests.

Supporting the military's training needs requirespurchasing a broad and varied array of materials.Raytheon's approach to strategic sourcing centerson matching the strengths of large and small firmswith the nature of the materials needed. Largefirms provide the stability, infrastructure, andmature practices that are required to consistentlymeet customer expectations. For example, CubicCorporation provides Raytheon with laser-basedsimulators. This firm has approximately 5,950employees at 140 locations worldwide, and there-fore has the scale and scope required to provide thelarge number of systems needed. Because of Cubic'svast experience and knowledge base, Raytheonenlists the firm early in the sourcing process inorder to collaborate on designs and forecast likelydemand. Meanwhile, Raytheon draws on small firmsfor specialized skill sets and technical expertise. Forexample, Pacific Coast Systems (PCS) is a three-person company that manufactures the training IEDsdescribed above. Although PCS has unique capabil-ities, it lacked the infrastructure to fully develop thedevices. As a result, Raytheon and PCS jointlydeveloped the patented technology embedded inthe devices.

Raytheon's supply chain managers carefullyorchestrate sourcing activities, a main channelthrough which the firm adds value to the supplychains. In recognition of the importance of humanresources to strategic sourcing, these managers aredeveloped in a number of ways. An MBA levelleadership development program provides thoroughexposure to a minimum of three different Raytheonbusiness units and three functional areas in a two yearperiod. This provides individuals with the ability andforesight to integrate strategic sourcing acrossfunctional areas, cultures, and businesses. In addi-tion, Raytheon provides a series of courses designedto improve decision making. Raytheon has alsocreated competency models for each supply chainfunction. These models enable an employee toreadily identify what skills he or she needs to acquireto earn a promotion.

243Best value supply chains: A key competitive weapon for the 21st century

Raytheon relies on best value practices within itslogistics activities. One of these practices is usingmobile repair vehicles to service equipment atmultiple unmanned training locations. The vehiclesare staffed by a trained technician, contain aninventory of common repair items, and are strategi-cally located within a few hundred mile radius ofseveral customer locations. The vehicles allowRaytheon to quickly meet unpredictable demandacross awide geographic areawithoutmaintaining anexpensive permanent infrastructure. Repairs thatexceed the mobile technician's capabilities are sentto a central warehouse in order to gain economies ofscale. This approach is not the cheapest or thequickest, but it enables strong performance alongboth dimensions as well as in terms of quality and, inparticular, flexibility.

In general, the offering of better data providedby advanced information systems has improvedsupply chain execution by reducing buffers such ason-hand inventory. However, there are diminishingreturns beyond a certain level of spending on anygiven system. Raytheon has attempted to add valueto its supply chains by developing an informationsystem that blends the best elements of multiplecomputer data sources and systems. The resultantoverarching system provides data reliably, in near-real time, to all members of the supply chain,including Raytheon, its suppliers, and the customer.Moreover, all three of these entities can initiatesupply chain activities within the system. Thisenables high levels of coordination and fast deploy-ment of products and services.

Lastly, Raytheon has adopted a best valueapproach to relationship management in its deal-ings with small business partners. Although smallfirms are creative and innovative, they share certainliabilities of smallness including a lack of scaleeconomies and slack resources, as well as a limitedknowledge base. In response, Raytheon has facili-tated the formation of “small business federations”within its supply chain activities. A small businessfederation is a formal consortium composed of thesmall business partners supporting Raytheon on agiven contract. The focus of a federation is providingthe infrastructure needed for members to exchangeideas, combine their skills, and work together tosolve problems (Miles et al., 2005, 2006).

5. Final thoughts

In the recent past, the notion that time is moneyeffectively captured the value provided by speedysupply chains and the danger of falling behind com-

petitors. A new approach to supply chain manage-ment that we label as best value is now emerging as apowerful means for creating competitive advan-tages. Best value supply chains leverage strategicsupply chain management, agility, adaptability, andalignment not simply to create low costs, but also tomaximize the total value added to the customer.Relative to traditional supply chains, best valuesupply chains also take much different approachesto key functions such as strategic sourcing, logistics,information systems, and relationship management.Looking towards the future, it appears likely thatcompetitionwill becomemore supply chain vs. supplychain and less firm vs. firm over time. If so, firmsthat develop best value supply chains will be wellpositioned for exceptional success.

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