How Do I Drive Value Through a Value Network?api.ning.com/.../CasestudyDemandDrivenValueNetworkDDVN.pdf · • Design networks—Focused on external collaboration with design partners

Value Chain Strategies Report

November 2007

Supply chains are becoming value networks. How do companies design value networks to gain competitive advantage? What are the best practices? And, what determines value? In this Report, we share answers to these questions to help you drive greater value for your company.

by Lora Cecere

How Do I Drive Value Through a Value Network?

© Copyright 2007 by AMR Research, Inc.

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Acronyms and Initialisms

APS Advanced planning and scheduling

B2B Business to business

DDSN Demand-driven supply network

DDVN Demand-driven value network

ERP Enterprise resource planning

OEM Original equipment manufacturer

PLM Product lifecycle management

ROI Return on investment

S&OP Sales and operations planning

SCM Supply chain management

SCP Supply chain planning

The BottomLine

Value Chain Strategies Report | November 2007 1© 2007 AMR Research, Inc.

How Do I Drive Value Through a Value Network?by Lora Cecere

Companies face the challenge of changing their culture to fully gain from the

new evolution of SCM: demand-driven value networks.

Few supply chain professionals would deny the need to design a supply chain to drive value. Yet, ask them what value is and how to design for it, and the room will clear quickly. Why? Most supply

chains are inherited, not designed, so those that work with them can make little head-way on their own.

Despite these challenges in supply chains, the fundamental question of what drives true value still stands. In the past, supply chain designs focused on physical flows to improve costs. Today, supply chain teams design to improve time to market for new products, harvest opportunities through tax efficiency, meet corporate sustainability goals, bal-ance risk with opportunity, and manage product complexity. All of these components need to be balanced without well-defined processes.

Complexity increases when companies realize there is not just one supply chain but many, each requiring design, modification, and continuous alignment to the business strategy. As companies strive to improve supply chain performance and align operating strategy to business strategy, the design of the supply chain response becomes the foun-dation of these initiatives.

This Report is designed to make you successful in this venture. We based our findings on work we’ve done with more than 40 companies to define organizational strategies, interviews with 17 companies that have successfully defined an operational strategy to drive value, and insight from 9 major systems integrators. We share insight on how to define value in a value network, methodologies for classifying value networks, and case studies on improving value. We end with a guide to the transformation process, includ-ing rules of the road to help your organization with its journey.

ExecutiveSummary

Value Chain Strategies Report | November 2007 2 © 2007 AMR Research, Inc.

What is a value network?

To understand where we are in the evolution of supply chain management (SCM) prac-tices, it‘s helpful to take a step back and reflect on history. While manufacturing pro-cesses and organizations are nearing a century of development, customer-facing supply chain processes and organizations are much newer and much less well defined. For this reason, we find that in all but a few companies, SCM practices and organizations are inherited, not designed.

In the late 1980s, SCM processes evolved with a focus on efficient supply. The goal was to improve procure-to-pay and order-to-cash transactions and direct material manage-ment while reducing costs. Depending on the nature of the business, the processes for these improvements stemmed from three dominant process flows:

Discrete manufacturers• in industries like automotive, industrial, and aerospace transformed supply chain processes to focus on procurement and supplier manage-ment.

Distribution-centric organizations• , such as those in wholesale distribution and retail, defined supply chain practices based on inventory and transportation manage-ment.

Process-based manufacturing organizations• in industries including chemical, con-sumer products, and life sciences designed supply chains as an extension of manufac-turing processes, with a focus on finished goods inventory management.

In these concurrent efforts, the participants shared no common template or supply chain processes across industries. Instead, organizations built deeper processes and organizations within the dominant silo of their particular industry.

The evolution to networks

From 2000 to 2005, supply chain management was focused on making the right tradeoffs between make, buy, source, return, and deliver processes within the four walls of the enterprise. This new focus on cross-functional coordination gave rise to supply chain planning (SCP). During this change, demand processes were passive, focused pri-marily on improving manufacturing forecasting.

As companies matured, these flows widened to include not only product information, but also intelligence on cash-to-cash cycles, inventory management, embedded product innovation, and channel demand sensing. As companies began this journey, the most mature processes were extended past the four walls of the company to focus on exter-nal, customer-focused networks.


Three primary networks emerged:

Demand networks• —Sensing demand and translating customer insights into actual channel demand to maximize selling opportunities

Design networks• —Focused on external collaboration with design partners and sup-pliers to drive open innovation processes with a broader base of partners

Supply networks• —Networks of suppliers focused on providing services and prod-ucts against buy-side contracts and purchase orders

Based on this evolution, AMR Research defined the concept of demand-driven supply networks (DDSN) as a set of processes and technologies that senses and responds to near real-time demand signals across a network of employees, suppliers, and customers. As organizations mature in this model, the three networks of demand, design, and sup-ply coalesce.

The shift to value networks

We coined DDSN in 2002. Five years later, we sit at the point of the next change. Traditional supply chain processes are shifting from a supply-based focus on transac-tions and inward-focused metrics to an external focus on the design and management of relationships. In other words, supply networks are morphing into value networks. We call this transition demand-driven value networks (DDVN).

Demand-driven value networks are holistically designed to maximize value across the set of processes and technologies that senses and orchestrates demand based on a near real-time, zero-latency demand signal across multiple networks of employees, suppliers, and customers.

There are three primary differences between a supply network and a value network:

Focus• —Supply networks focus on supply, while value networks focus on delivering value.

Primary technologies• —Supply networks are based on transactional technology, while value networks are based on relationship enablement.

Metrics and reward systems• —Supply networks are inward and inside-out focused. Value networks work from the outside in.


What is value?

To sustain improvement in shareholder value, companies that take advantage of demand-driven value networks make continual cross-functional and intercompany tradeoffs to achieve balance. Alignment of operational and innovation excellence focused on the market opportunity is a prerequisite, and the cross-functional alignment required to make these tradeoffs is the primary change management challenge. The stages of this development are outlined in Figure 1.

supply

product

demand

product

demand

Leader

Laggard

Ope

rati

onal

Exce

llenc

e

Innovation ExcellenceLeaderLaggard

supply

supply

demand

product

product

supply demand

Reacting OrchestratingCollaboratingAnticipating

Figure 1: Leaders balance operations and innovation excellence

Source: AMR Research, 2007


For DDVN leaders like those profiled in this Report, the focus is on sustained improve-ment in shareholder value. As companies make this journey, the progression can look like one of the four profiles outlined in Figure 2, with the goal of long-term sustainable value.

Poor operations and innovation Poor operations and good innovation

Good operations and innovationGood operations and poor innovation

GENERAL MOTORSas of 7-Aug-2007 Splits

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ions

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1965 20052000199519901985198019751970

APPLE INCas of 7-Aug-2007 Splits

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Figure 2: Making the right tradeo�s to drive shareholder value

Source: Yahoo! , 2007


Design value networks to maximize value

The first step toward DDVN excellence is recognizing that value networks need to be designed and managed. While most companies define network design as a yearly or ad-hoc process focused on the definition and management of physical networks, DDVN design is more comprehensive, balancing the requirements for eight embedded value drivers:

Agility, flexibility, and complexity•

Cost to serve and customer service•

Embedded innovation and processes to drive success for new products to market•

Growth (profit, margin, and revenue) •

Margins (landed costs and cost tradeoffs)•

Sustainability•

Tax efficiency•

Risk•

With added supply chain and product portfolio complexity, the need for network design has increased. Leaders continuously hone value network designs on a quarterly basis in sales and operations planning (S&OP) sessions. Value network strategies are increasingly important for staying competitive.

To become a leader, think like a leader

The process maturity of many of these value drivers is evolving (see Table 1). For most organizations trained to think only about efficiency and costs, making tradeoffs among the primary value drivers is a cultural transformation.


Table 1: Making conscious tradeoffs to drive value

One Side Sustainability Tax Efficiency Risk Mitigation Cost to Serve Landed Cost

OwnerOffice of Risk

Management FinanceOffice of Risk

Management Sales Supply Chain

Maturity

Technologies

Other Side Compliance Agility Innovation Growth Profitability

OwnerOffice of Risk

Management Supply Chain R&D Strategy Finance

Maturity

Technologies

Emerging WellDefined


Casting off traditional supply chain paradigms focused on efficient physical networks to a construct that balances these eight value drivers is a fundamental challenge to changing the supply chain culture. To make this shift, companies have to learn traditional supply chain processes to then unlearn them—setting the stage to develop DDVN processes.

This organizational relearning creates a new wave of continuous improvement centered on the tradeoffs of the value drivers. It requires education and change management. It also requires a business leader with a clear business strategy. However, the challenge is that the leaders of these eight value drivers are in different organizational silos with dis-similar objectives that lack alignment.

Today, most organizations are focused on enterprise-centric objectives focused on bal-ance sheet improvements. Common examples include lean strategies to eliminate losses at the expense of outside-in customer service and demand agility. To become a DDVN leader, the organization must become outside-in by focusing on market presence in the demand network and go-to-market strategies. The best example of an outside-in cor-porate transformation is A.G. Lafley’s transformation of P&G on the two moments of truth (for more on this, see “Moments of Truth”).

To clearly understand total supply chain costs, companies must start with cross-func-tional alignment. In AMR Research benchmarking efforts, we found that only 20% of companies had a clear understanding of total end-to-end supply chain costs. Most companies do have a clear understanding of costs within the silos of make, deliver, and source, but not total supply chain costs. Additionally, they lack the technology and process capabilities to make the tradeoffs across these silos. To manage a value network transformation, companies must understand these tradeoffs in order to reach cross-functional alignment against the business strategy.

As companies expand, regional operations become global and linear processes, which become complex networks. This increases the need for excellence in cross-functional pro-cesses and information management—SCP, S&OP, new product innovation, and supplier development—and gives rise to the evolution of global supply chain centers of excellence.


Need for an operational strategy

While most companies focus on process definition and continuous improvement, the absence of an operational strategy makes it difficult to align organizationally on the emerging processes outlined in Table 1.

Most companies start with process definition. However, process definition without an operational strategy is doomed for failure. Less than 3% of companies in our research have a clear operational strategy on any two of these eight value drivers. The majority of this Report is focused on how to build and execute this operational strategy.

Effective value networks are all about relationships. While many companies espouse operational strategies built on a foundation of network collaboration with trading part-ners, they find that collaboration cannot become actionable. Instead, the companies become stuck in a win-or-lose value proposition. Effective collaboration depends on the definition of a sustainable win-win value proposition underpinned by appropriate trust and transparency. This win-win value proposition is sustainable if there are two condi-tions: equal balance of power between the two companies and alignment of aspirations and capabilities. Often, the aspirations and capabilities gap is typically the greatest for the network partner with the greatest power (see Figure 4).

Business StrategyWhat are the right things to do to increase company value?

Demand-Driven Value Network StrategyWhat are the right ways to support the business strategy?

What are the right tradeo�s between value drivers for each value network?

Right ProductPlatforms

Design theSupply

Response

BuildOrganizational

Systems andManage Talent

Align SupplyRelationships

Align DemandRelationships

Demand networks,joint value creation

strategies

Continuousimprovement,

capabilities required

E�ective supplynetworks, execution

of buy-sidestrategies

Supply chainnetworkdesign

Design networks,innovation

methodologies

Business ProcessHow do I do the right things right?

Figure 3: Developing an operating strategy



Supply ChainAspirations

Supply ChainCapabilities

Channelfacing

Consumer productscompany withgrocery retailers

Consumer productscompanies withstrategic retailers

Consumer productscompany withstrategic retailerslike Wal-Mart

Power increases

Figure 4: Alignment of aspirations and capabilities in value network design— consumer products example


Consider the example of consumer products selling to retail. While many consumer prod-ucts companies would like to empower collaborative relationships with retail companies, they find the balance of power and the gap between retail aspirations and capabilities are just too great for the retailer to make good on its promises. For more on this topic, see “Improving On-Shelf Availability: Look in the Mirror—It’s Closer Than You Think.”

As a result, the consumer products company needs to move from a focus on collabora-tive practices to one of joint value creation. This means quarterly open-book discussions of the total value network impact of changes in practices with the recognition that the two companies do not have equal power positions. For the consumer products com-pany, a more sustainable collaborative value proposition can be achieved through a defi-nition of collaborative practices with its suppliers.


The importance of cost to serve

As companies design value networks, they realize that a customer is not just a customer. Customer service and special requests needs to be rationalized using cost-to-serve prac-tices. Th ey also realize that network design needs to extend through the customer net-work to drive a profi table demand response. One of the easiest methods is to manage customer profi tability through cost-to-serve analysis.

Th e most successful companies start with an outward-facing view and then design demand, product, and supply rhythms, cycles, and tempos to match this business strat-egy. To do this well, companies need to be able to understand cost and performance tradeoff s and constantly redesign with changing business strategies.

However, when 575 companies were asked about cost-to-serve analysis in an August study by AMR Research, we found that only 26% of companies used the technique. For those that do, the ROI is nine months. Th e return is even greater for smaller com-panies or companies that perform the analysis frequently and systemically as part of a cross-functional process, like S&OP or new product innovation.

Have not heardof the term

29% Heard of it,but not surehow it di�ers31%

Understandgeneral concept

31%Working

knowledge ofpros and cons

9%Currently engagein cost-to-serve

analysis26%

No plansat this time

18%

Not using, but planto add within 12 months

17%

Not using, but plan toadd within 24 months

10%

Knowledge of the term“cost to serve”

Current usage of “cost to serve”

Analysis will focus onthese 150 companies

with cost-to-serveinitiatives.

Figure 5: Market awareness of “cost to serve”



Surprisingly, most companies, despite the fact that they have implemented ERP and advanced planning and scheduling (APS), are blind to how to make value network tradeoffs to manage customer requests. We found that even within companies with fully implemented ERP and APS systems, data needed to be pulled from as many as 40 disparate sources. Likewise, the greatest variability in cost drivers—and the reason to perform this analysis frequently—is in three areas: raw material volatility, transporta-tion, and special customer requests.

Q. Which of these cost drivers cause the most variability in your business and analysis of cost to serve?Sample size = 150 companies who engage in cost-to-serve analysis

1-3 rating 4-7 rating 8-10 rating

Averagevariability(out of 10)

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A/R processing

Warehouse Mgmt.

Damage

Order management

Inventory handling

Mfg. conversion

Returns

Inventory carrying

Customer service

Product mix

Order quantities/freqs

Energy

Special request

Transportation

Raw materials 14% 52% 34%

14% 52% 34%

20% 48% 32%

13% 73% 15%

21% 57% 22%

25% 59% 16%

32% 47% 21%

32% 52% 16%

30% 56% 14%

35% 53% 12%

42% 43% 14%

42% 51% 8%

41% 48% 11%

45% 47% 9%

51% 38% 11%

53% 40% 7%

1=Little variability 10=Large variability

Figure 6: Variability of cost drivers



Aligning value networks

Value network design begins with two questions:

How many value networks do I have? •

What should my operating strategy be for each one? •

Once you have those answers, organizational alignment comes next. Value networks are defined by a combination of customer-focused segmentation and cycle alignment. To illustrate the principles, we share two case studies. The first focuses on customer/chan-nel segmentation, and the second on cycle alignment.

Case study 1: customer-focused strategies

Rawlings Sporting Goods, founded in 1987, initially specialized in baseball but now manufactures softball, basketball, football and golf products as well. In 2004, the com-pany operated based on one supply chain design. In analyzing the market (with the help of On-Point Group), Rawlings determined it had focused value networks based on three distinct customer types. Recognition of the needs of the three customer seg-ments—value-based consumers, highly customized buyers, and special designs for local team sports—drove a network redesign based on an outside-in strategy.

Special design

Highly customized

Price buyersand commodity

Customersegment pro�les Value proposition

Driven by costWhite pants and stock shirts

Not only professionals, but also major schools and youth traveling teamsFashionistas

Unique, time-sensitiveHave some uniform budget

Less than $20 per uniformSome style performedImmediate availability

Specialist support requiredStyle and fabric selection guidesFour to six week delivery maximum

Willing to pay up to $60 eachAccuracy guaranteedDelivery a must

Figure 7: Customer-focused segments

Source: On-Point Group, 2007


To drive demand for the highly customized, higher margin products, the company placed ads at sports parks and participated in trade shows. To stimulate demand, Rawlings guaranteed delivery within two weeks with a money-back guarantee and developed training guides for institutional sales.

To ensure alignment with make and source processes, it converted a major U.S. factory to a highly focused and efficient make-to-order facility. This operation had two weav-ing lines for double color and tricolor trims, six flexible work centers by each style, and robotic color control to ensure quality. It also partnered with a local fabric company to make custom-dyed cloth on demand.

Likewise, the price and commodity production was moved from a U.S. factory to a Rawlings facility in Costa Rica. By having predictable demand and high volumes, the company was able to effectively operate a longer, lower cost supply chain.

As a result, the company saw margin growth in all three customer categories. Custom products, a new business that was started based on this analysis, grew to $50M within one year and stabilized with 45% margins.

Case study 2: cycle analysis

Cycle analysis allows companies to understand the relationship between product, demand, and supply lifecycles. In consumer electronics, where product lifecycles are growing shorter than the time to develop new products and competitive pressures are increasing, this type of analysis is extremely important.

Consider one global consumer products company that wanted to migrate from a one-supply-chain-fits-all strategy to a value network design based on an understanding of how technology, demand, and product variability translate into operational excellence. To accomplish this task, the company evaluated its product profile of 120,000 items using a new framework (see Figure 8).


For each circle, the company developed an operating strategy. Each of the 16 different value networks was redesigned using value-network principles:

For high-volume products with predictable demand, the focus of the value network •was efficiency.

For products with highly variable demand and short product lifecycles, the focus was •responsiveness.

For low-volume products with highly variable demand and short product lifecycles, •the focus was portfolio rationalization.

Technology

Lifecycle

Commoditized

SpecializedShort Long

6

15

4 3

12

8 7

5

9

1112

10

16

14 13

Technology

Lifecycle

Commoditized


Technology

Lifecycle

Commoditized


Technology

Lifecycle

Commoditized


Volu

me

High

Low

Demand PredictabilityLow High

Figure 8: Large CP company—volume, demand variability, technology, and lifecycle clusters



7 Levers of Demand Shaping 7 Levers of Agility

• Marketing programs• New product introductions• Promotions• Trade deals• Sales incentives• Price management• Supply shaping/run-out strategies

• Postponement• Improve transparency through VMI/SMI• Design for supply; reuse• Logistics policies• Adaptive networks• Flexible manufacturing strategies• Tie agility strategies to demand shaping

Figure 9: Balancing demand shaping with agility strategies


Supporting the elements of the operational strategy for value networks: five case studies

To better understand the development of an operating strategy as outlined in Figure 3, we share five case studies from DDVN leaders. Each case study is an example of an ele-ment of the operating strategy.

The company drove improvements over the last year through flexible manufacturing work centers, postponement strategies, and pooled inventories for products. These net-works were continuously tweaked in S&OP processes by aligning demand-shaping and agility levers.

While it is too early to ascertain the success of this program, early results are promis-ing, with improvements in new product launch success, the profitable perfect order, and total supply chain costs.


Seagate: building effective demand networks

Align DemandRelationships

Demand networks,joint value creation

strategies

DDVN OperatingStrategy Component

Figure 10: Seagate stock value

Source: Yahoo! Inc., 2007

Disk-drive maker Seagate, the Forbes Company of the Year for 2005, saw revenue climb 21% to $7.5B that year—the same year the disk drive industry saw its price per byte of capacity fall by 40%.

This is a far cry from when Seagate was so undervalued that it was taken private in late 2000 in a $2.1B buyout. The company responded by becoming more global and accelerating product launch success. In 2000, the com-pany launched three products a year, while today it successfully launches 10 to 12. Seagate used to be in 50% of the available markets. By 2005, it jumped to 75% of available markets. The secret? Demand networks.

Seagate understands the value of downstream data in sensing demand and the critical nature of demand signals in driving pull-based replenishment. Today, 42 distributors and 212 suppliers in Seagate’s network operate on a pull-based signal. This change from a traditional forecasting approach in 2001 to a demand signal based on pull, not push, is the basis of a multiyear, demand-driven vision.

Seagate valued downstream data enough to invest. While many companies talk about the need for channel data and wish that it was more available, Seagate did not wait for the distributors to share data or invest in systems to share data. It went ahead and invested in a relatively simple system of printer emulators and E2open connectiv-ity to connect 31 distributors in three weeks. Within a year, it had 42 customers with direct connections using RosettaNet.

True collaboration is based on a win-win value proposition. While many suppliers box, position, and play games with their distributors, Seagate recognized that it needed to partner and prove the value proposition of the new system to get distributor buy in. In the words of Seagate, “We don’t tell our OEMs anything. We discuss it with them. We knew that we needed to convince them that a better in-stock position was money in their pocket.”


Procter & Gamble: powering innovation through design networks

When A.G. Lafley became CEO of P&G in 2000, his focus was on winning in big countries with big brands and big customers. To do this, one of Mr. Lafley’s key strategies was to drive 50% of innovation processes from the outside through open innovation using design networks. Today, 42% of products have a major component from open innovation (up from 10% in 2001), and more than $2B in other companies’ sales are powered by P&G assets. With an entrenched, inward focus on strong processes, long-time employees, and more than 3,600 company-specific acronyms, the company had a long history of building things itself. As Mr. Lafley took the helm, he said that “P&G would acquire 50% of innovations from outside P&G.”

Take Swiffer, for example. Launched in 1998, the cleaning device was found by an innovation scout in Japan and rolled out nationally in 2001. Compare this to the eight years of internal development into Pampers before the national launch.

The company’s goal is to ensure that the open innovation efforts are aimed at what the business needs, and it’s not just molecular chemistry. It also involves services innovation, business platform innovation, and joint ventures. Consider P&G’s investments in Tremor (for word-of-mouth marketing) and Vocalpoint (for open innovation) as new techniques to gather insights. Other creative strategies include a marketing partnership with Dunkin’ Donuts coffee and the current joint venture with Clorox to use technology to sell a better trash bag under the Clorox label.

While a company can talk open innovation, DDVN leaders like P&G start with a cultural transformation focused on serving the line of business and rewarded by joint and shared incentives that bring together innova-tion and operations excellence.


Right ProductPlatforms

Design networks,innovation

methodologies

Figure 11: Procter & Gamble stock value



Johnson Controls: operational excellence through supply

When it comes to supply excellence in combination with innovation excellence and alignment, Johnson Controls clearly leads the pack. This rare balance has yielded year-over-year growth in margins from 2002 to 2007 of 15% CAGR, along with a 13% CAGR growth rate in revenue. This is its sixty-third consecutive year of sales increases and its thirteenth consecutive year of margin improvement. As a result, market capitalization has grown from $7B in 2002 to $23B in 2007.

With a philosophy of local leadership, the company operates in 75 countries around the world. It succeeds in an uncertain market by assuring excellence in all aspects of the business, while diversifying portfolios to mitigate risk, like a downturn in any one business or region. Its 2008 revenue projections are 45% from automotive, 39% from building efficiency, and 16% from power products (batteries). 40% of growth is from emerging markets.

The company exemplifies operations and innovation excellence. A pioneer in lean manufacturing, Johnson Controls focuses on improving agility and eliminating waste in a very volatile demand environment. It has adapted Six Sigma practices to low-cost country sourcing, with 33% of manufacturing in low-cost countries today and 38% projected by 2010. In the emerging markets of China, the company operates 19 joint ventures.

Additionally, the ingenuity-welcome culture encourages and motivates creativity and resourcefulness in employ-ees. It is adept at taking advantage of the intersections in its businesses, such as scale, technology, and talent. Strong leadership drives continuous improvement in cost, quality, safety, standardized products and processes, and working capital for sustainable growth.


Design theSupply

Response

Supply chainnetworkdesign

Figure 12: Johnson Controls stock value



IBM: building organizational excellence

The last 18 months have shown a steady increase in shareholder value for IBM. One of the key enablers is IBM’s focus on building supply chain talent.

Its workforce management initiative has four thrusts: talent and mobility, vendor management, resource man-agement, and learning. The need for a common standard to define the workforce and forecast resource demand in relation to market needs drives the program. IBM made ownership of the workforce management solution mandatory by all divisions to better plan and train talent.


BuildOrganizational

Systems andManage Talent

Continuousimprovement,

capabilities required

Figure 13: IBM stock value



Resource Balancing and Optimization

Current situation:Inability to view workforce dynamics across labor pools

Workforce management solution:Demand and supply aggreated and balanced at country levelOptimal staffing mix managed to sourcing strategy

Resource Strategy and SourcingCurrent situation:Lack of a sourcing strategyManagement systems discourage cross-business unit collaboration

Workforce management solution:Policies and tooling in place to support use of the optimal resourceAlternate work models exist and increase variable labor mix

Suppy Chain Program Design

Current situation:No design for end-to-end supply chainNo central accountability for workforce management

Workforce management solution:Common supply chain design based on best practicesCentral oversight of measurements and investments

Supply PlanningCurrent situation:No standard for de�ning workforceLabor pools managed in isolation by business units

Workforce management solution:Workforce catalogued consistently across business units and poolsSupply pool optimized at the country level

Current situation:Limited forecasting of anticipated resource demandDi�culty in linking training investment with market needs

Workforce management solution:Resource forecasts provided using one common expertise taxonomyForecasted shortages will drive training investments

Forecasting and Demand Management

Figure 14: IBM workforce management initiative

Source: IBM, 2007


Having a cross-functional career path is key to the building of talent. IBM no longer encourages employees to understand one silo. Instead, it stimulates cross-functional and global understanding through multifunctional career paths.

Demand andsupply planning

Ful�llmentGloballogistics

ManufacturingProcurement

SCMconsulting

level

ISC entrylevel

ISC sta�level

SCMadvisory

level

SCM seniorlevel

N/A

N/A

Supply chainmanagement

Experienceoutside of ISC

Figure 15: IBM—Supply chain management career path

Source: IBM, 2007

Traditional career paths

Sample SCM career paths


Boeing: supplier networks power success

The Boeing 787 is a family of three airplanes designed to create a more efficient passenger experience. The 787-8 can carry 223 passengers in three classes of seating, with a range of up to 8,500 nautical miles. Designing and building the 787 required Boeing to think in a new way about supplier relationships. The first step was to treat the 132 global build sites as partners, not suppliers.

This involved three major changes.

1. Make suppliers responsible for delivering world-class design

Despite the fact that the 787 is experiencing a six-month delay because of a titanium fastener shortage and sup-plier ramp-up, the completeness of design of the supplier network is the best example of value network design that we have seen.

The network design is based on the principle that a supplier could create a better wing design than Boeing. Boeing had to let go of its belief that it gained competitive advantage through internal techniques for the design and fabrication of wings. Time-to-market constraints were better served by letting Japanese manufacturers take responsibility for the wings.

Now Nagoya is making the wings and Alenia Aeronautica in Italy is handling the stabilizers. The newly formed Spirit AeroSystems (recently spun off from Boeing) in Wichita, Kansas, along with Vought in South Carolina and Kawasaki in Japan, manufacture the fuselage. The first composite section rolled out in January 2005, with the final external design frozen later that year.

Boeingas of 23-May-2006 Splits:�

Millions

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80

70

60

50

40

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80.060.040.020.0

2001 2002 2003 2004 2005 2006


Align SupplyRelationships

Effective supplynetworks, execution

of buy-sidestrategies

Figure 16: Boeing stock value

Source: Bloomberg L.P., 2006


2. Have suppliers deliver subassemblies, and let Boeing deal with final assembly

For final assembly, Boeing attaches completed subassemblies instead of building the complete aircraft from bills of materials on site. Major 787 assemblies are shipped to Everett, Washington from around the world.

To accomplish this, three 747s are being modified in Taipei to carry the subassemblies to Boeing. The modifica-tions build on concepts refined in the 737 program, in which the complete fuselage barrel sections are built and shipped by rail from Spirit AeroSystems.

International in�uence heavy in 7E7Major portions of Boeing planes are constructed outside the United States. For the �rst time, Boeing will look to a group of Japanese manufacturers to build most of the wings of the Dreamliner. A breakdown of companies involved:

Boeing35% share

Vought AircraftIndustries andAlenia Aeronautica26% share

Japanese suppliers35% share

Note: Percentages do not equal 100% because 4% of work has not been allocated.

BoeingPieces of the plane supplied by Boeing will be constructedat production sites in Tulsa; Wichita, Kan., Frederickson, Wash.; Winnipeg, Canada; andat Hawker De Haviland in Australia.Assembly will be in Everett, Wash.

Vought, AleniaDallas-based Vought will workwith the Italian-based �rm tobuild the horizontal stabilizerand the center and back portionsof the fuselage.

Japanese SuppliersThey will construct the �xedportions of the wings. Firmsinvolved are Fuji HeavyIndustries, Kawasaki HeavyIndustries, and MitsubishiHeavy Industries.

Figure 17: Supplier collaboration

Source: Boeing and Chicago Tribune, 2007


3. Offer standardized options and features for the platform

To accelerate the design and minimize the number of major components in the 787, the teams designed stan-dard platform features. The design of the aircraft was for these features to affect final assembly, not the design of major components. As a result, the final assembly can be completed in three days using standardized down-stream components.

Boeing now has more than 100 design partners around the world that require design support 24/7. To manage these partners, Boeing funded a network built on the product lifecycle management (PLM) software suite from Dassault Systemes.

Using these design networks, Boeing and its partners design, build, and test every aspect of the 787 airplane and its manufacturing processes digitally, prior to late-stage assembly. The use of digital mock-up eliminates costly and time-consuming physical prototypes by letting users make quick design iterations to respond to demand.

With Boeing operating as final assembler, coordinating the 132 structural and systems partners spread out around the globe, it has two key tasks:

Securing the critical component for composites and making it available for its supply partners.•

Assuring that demand and supply are synchronized across multiple tiers so key components arrive at Boeing’s •Washington state facility when needed.

Boeing implemented Exostar (through a partnership with E2open) for these supply management duties. The system is used to manage the complete order lifecycle and returns process across multiple tiers and to track con-sumption and replenishment for Boeing’s Partner Managed Inventory program. It is designed to let Boeing and its partners issue purchase orders, track purchase order changes, exchange advance ship notification information, manage returns, and track shipments across multiple tiers of its supply network. The system monitors events and process exceptions against the master schedule using synchronized, time-sequenced demand signals for all partners.


Getting started on your DDVN transformation

The transformation from reacting to supply situations, to demand-driven supply and building DDVN networks requires aligning value network strategies with operational strategies. Here are seven considerations to get started:

Business strategy• —Gain clarity on the business strategy with a focus on outside-in requirements. Clearly define what benefits and capabilities drive value and how these are best packaged for channel delivery.

Market focus• —Segment by market to align demand, product, and supply cycles to ensure the delivery of value for each network. In defining the operational strategy, build processes to ensure cross-functional alignment within each value network to deliver the business strategy.

Focus on relationships• —Build key relationships for demand, design, and supply networks based on joint value creation. Base network design on power structures and the gap between capabilities and aspirations to build the right mix of collaborative and joint value creation practices.

Talent development• —Focus on organizational talent development across value net-work processes. With the continuous reinvention of supply chain management, learn from IBM in how to plan and develop cross-functional talent.

Demand latency• —Reduce demand latency throughout the network by building demand networks to sense and translate demand. Focus on the use of downstream data, the enabling information systems architecture, and business-to-business (B2B) strategies.

Outward facing• —Build strong cross-functional, outward-facing processes based on outside-in priorities. In these processes, strike the right balance of demand shaping and agility levers for each value network.

Tie metrics to continuous improvement• —Build reinforcing metrics and continu-ous improvement programs to sustain value. Continually evaluate value network design based on network and business priority changes.


Rules of the road

You cannot save your way to value. • A strategy to reduce costs without alignment with a business strategy or growth does not drive value.

Organizations must align cross-functionally.• While many companies believe that they can focus the back office on cost savings and the front office on product launch and customer service, this reasoning is flawed. Without cross-functional alignment, the groups will never achieve a balanced set of objectives.

Focus.• Most companies are seeking a world-class supply chain in isolation from design and a solid understanding of value. Successful companies align the operational strategy with the design of their value networks. The mistake is searching for world-class processes in the absence of a holistic, outside-in operations strategy.

Avoid buzzword bingo.• The use of terms like agility and flexibility abounds in most organizations without a common definition, causing confusion and organizational dysfunction. To make this actionable, companies need to define these capabilities and make them part of the DDVN operations strategy.

Build with your metaphor in the right context.• Most companies liken the building of a world-class supply chain strategy to building a house. True, the architecture of a world-class supply chain is house building, but the best homes are built with a full understanding of the house as part of holistic city planning.

Question what you inherit and phase out the processes that don’t add value.• Inherited supply chain versus optimized design poses a time-to-value challenge. Companies need a guiding coalition to actively design the supply chain and demand response across all value network functions, including sales and marketing and IT.

Understand the difference between integrated and synchronized supply chain •planning. Most companies focus on singular flows. Maximizing value in DDVN strategies requires a comprehensive focus on demand flows, information flows, and cash flows in concert with product flows across demand, product, and supply networks.

Demand-driven value network operational strategies are necessary to power effective demand-driven networks. The focus must be outside-in and rooted in cross-functional and network processes, with a clear understanding of value based on cycle analysis. While the goal of supply chain projects has historically been end-to-end supply chain integration, the new goal is synchronized demand—demand sensing, demand shap-ing, demand translation—to power value networks. This changes everything—process, organization and technology—with unprecedented SCM rewards.


Appendix A: Related research

For more on the design of value networks, reference these additional pieces of research:

Organizations

“Three Factors To Improve Success in Supply Chain Organizations” •

“Designing a Demand-Driven Supply Management Organization”•

“Do You Need a Supply Chain Center of Excellence?” •

“Building A Global Organization: Nine Truths”•

Metrics

“The Hierarchy of Supply Chain Metrics: Diagnosing Your Supply Chain Health” •

Product Launch Dashboards, Part 1: The Hierarchy of Product Metrics •

“What Does Good Look Like? Answers Lie in Performance Measurement”•

Design of value networks

“Supply Chain Design: What If You Could Start From Scratch?”•

“In Search of a Supply Chain Strategy, Part 1”•

“In Search of Supply Chain Strategy, Part 2”•

“Outsourced Manufacturing in Consumer Products: Redesign for Improved Value”•

“Defining the Consumer Products Value Network”•

“Designing the Consumer Products Value Network”•

“Contract Manufacturing at a Crossroads: Brand Owner Need for Visibility”•

“Strategic Manufacturing Outsourcing: How To Achieve a Return on Relationship •Investment”


Notes


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Documents

How Do I Drive Value Through a Value Network?api.ning.com/.../CasestudyDemandDrivenValueNetworkDDVN.pdf · • Design networks—Focused on external collaboration with design partners