CONTINUUM ADAPTIVE RESPONSE ADVANTAGE

Why the Leaders LoveVALUE CHAINValue chain management has

existed as a concept for years.

But only now it is heginning to

emerge as a practicality, driven

by new technology enablers and

by the toughest downturn in

decades. Here's a quick glimpse

of which companies are closest

to the value chain vision—and

why a value approach to supply

chain management makes

eminent business sense.

EXHIBIT 1

By Tam Harbert

fter years of paying lip serviceto terms such as "integratedsupply chain." "value-drivensupply chain" and 'cus-tomer value chain," supplychain practitioners appear

•to be starting to put theconcepts into practice. As the world comes faout of its worst recession in decades, a \handful of leading companies is shifting ""the supply chain paradigm in ways that couldsignificantly change the hasis of competition.In particular, they are heginning to emhrace whatwe will simply call value chain management.

The shift represents a new level of supply chainmaturity, says Charles Poirier, a partner in CSC

Consultings sup-

Value Chain Is Far Along Supply Chain Maturity Model

The "innovators" are pokingthrough or jumping over the wallto III and IV (tomorrow's market).

Most have achievedLevel 11 (today's market).

EnterpriseIntegration

IVValue Chain

Collaboration

Full NetworkConnectivity

FunctionalProcess

Intra-Enterprise

Inter-Enterprise

External Total BusinessSystem

Source: Charles C. Poirier, CSC

ply chain practice.Poirier has created asupply chain matu-rity model in whichhe has placed"Value ChainCollahoration" at thefourth level. {See Exhibit1.) Companies that havereached that advanced levelare the recognized supplychain leaders—Apple, Dell.Procter & Gamble, Wal-

Harbert is aand technology' journalistbased in Washington. D.C.She can be reached attharber^comcast. net

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MANAGEMENT

Mart, and Cisco among the more prominent names.In adopting a value cbain management approach, a

company begins to view its supply chain holistically-—asan integrated continuum that spans the breadth of thecompany, from design to procurement to manufactur-ing to sales to distribution. The company's managementteam recogni/es tbat tbe supply chain extends far beyondthe company's walls: hack to its suppliers and tbeir sup-pliers and lorward to its distributors, customers and evento the customers' customers. This is tbe essence of valuechain management.

At Cisco, a widely recognized supply chain leader,ihe \aliic chain upcration spans everything from the

supply side through to corporate quality and cus-lonier senice operations. It is designed to providecustomers with a lotal quality experience spanningcollaborative planning, product design, maniifac-iL[ring, product ijuality, order management, deliveryjnd customer service. Tbe entire value cbain orga-nization now accotints for about 10,{)()() of the cor-poration s employee base of approximately 60,000worldwide.

Of necessity, the value chain typically uses anew organizational model with new processes and

metrics, all of wbicb are designed to make improve-ments systematically and strategically rather than

individually and tactically. Rather than simply control-ling costs of goods and services, the goal is to deliverwhat the customer wanls in a profitable manner, therebyexpanding business and increasing revenue. At Cisco.for example, the value chain operation includes a formal"customer listening" function, using real-time, state-of-tbe-art tecbniques to gather botb technical and non-technical feedback.

Tbe move to a value cbain orientation is not a one-time shift, but ratber a gradual transformation. It is led.or at least endorsed, by tbe CIÏO and implemented bya bigh-ievei supply chain executive witb broad industryexperience and broad responsibilities aeross the corjïo-rate organization. (The accompanying sidebar profilesthis emerging leader.)

But wby the heightened emphasis on value cbainmanagement now—particularly wben tbe ideas bavebeen around for years? To be sure, tbe economic down-turn is a powerful driver of change, giving assertivesupply chain leaders the leeway to act more forcefully.Today's hard business climate has prompted at leastsome companies to re-evaluate their operations from lopto bottom, says Robert Hud/.ki, president of ClreybcardAdvisors LLC. Wbile some simply batten down tbe

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Value Chain

hatches and wait out the storm, a few firms see this asgolden opportunity to invest and put in place processesand organizational capabilities to be more competitivewhen business improves.

In other cases, growing business complexity is pre-cipitating the shift. At Cisco, for instance, the companyhas become markedly more global in its customer reach.Also, it is no longer a business-to-business provider ofcommunications gear for large enterprises. Today, Ciscohas a thriving consumer-products business and small-

In adopting a value chain managementapproach, a company begins to view itssupply chain holistically as an integrated continuumthat spans the breadth of the company.

to mid-sized customer segments, which means greatercomplexity in distribution channels and more directinteractions with many more customers.

In addition, technology has begun to enable someof these processes, observes Joel Sutherland, manag-ing director of the Center for Value Chain Researchat Lehigh University Rather than develop custom sys-tems, companies can now buy off-the-shelf technologythat supports an integrated supply chain. Whats more,a plethora of Web 2.0-based tools are allowing greatercommunication and collaboration across the supplychain. At the same time, technologies such as radio fre-quency identification (RFID) are enabling better track-ing of goods and shipments.

This article explores the contours of the emergingvalue-chain management organization, examining thestrategic and operational benefits it can produce, theorganization and processes it requires, and the corporatecLtltLirc in which it can thrive.

Benefits of a Value Chain ApproachWhen practiced effectively, value chain managementincreases revenue and profits, lowers eosts and Increas-es efficiency and productivity. Most importantly, itleads to higher levels of customer satisfaction—mean-ing that those customers are less likely to turn to thecompetition.

A customer value chain improves both the incomestatement and the balance sheet, sometimes dramati-cally, says Rudzki, whose firm advises its clients on howto transform their supply chains. Whereas a typicalmanufacturing company employing traditional supplier-side supply chain approaches might show 6 to 8 percent

returns on invested capital, the same company applyinga well-managed customer value chain could more thandouble those returns in just two to three years. "Peopleusually see that its a no-brainer," says Rudzki. The prob-lem is that most companies aren't looking, "They neversee the business case because they just don't look beyondthe tactical indicators."

But the biggest benefit transcends mere num-bers, adds Joseph Cavinato, Institute for SupplyManagement professor of supply chain management at

the Thunderbird School of GlobalManagement. It's a strategic com-petitive advantage. 'Cisco is look-ing at this as a whole new busi-ness model," he says. "They don'tconcern themselves with costs asmuch as they do with the biggerpicture of how to be successful

with customers so they can continue to win more busi-ness and make very good margins.'

Cisco's supply chain leaders confirm this. KevinHarrington, the Companys vice president of globalbusiness operations for customer value chain manage-ment, says Ciscos core operating metrics are at ail-timehighs-—and that those numbers all stem from satisfyingcustomers, "For us, customer value chain management isthe function that brings sales and service together for theoverall customer experience," he explains, "We are tr>'ingto anticipate what is required before the customer asks."That's where the customer listening function fits in.

Changing the Organization's DNAValue-chain management can require major surgery onthe company^ operating structure and business process-es. But before wielding any knives, a company needs todefine its goals, cautions Rudzki of Greybeard Advisors.Companies should first determine what they are try-ing to accomplish and make sure ever\'ont' understandsthose goals and the part they will play in achieving them.Otherwise, changes in structure and process will be inef-fective. "Don't think that just slapping a new title on thesame old stuff is going to make a difference, ' he says.

However, changos in processes and structure will heineffective if the cor]̂ )orate culture resists change. Theextended integration dictated by value chains withinthe coqioration and outside of it—among suppliers andcustomers—is anathema to most companies. Most busi-nesses still operate in silos, with senior managers heldresponsible only for the performance of their own divi-sion. According to the latest data from an annual surveyconducted by Supply Chain Management Review, CSC

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and Michigan State University, not enough supply chainsdeal effectively with other functional areas of the corpora-lion. Only about one third of the respondents to the 2009SC'AI/i survey, for example, indicated that they had a highlevel of integration with their finance and IT counterparts

in the organization. Ihe degree of integration with theproduct development folks was even lower at 27 percent.

Therefore, in order to realize the full benefits of valuechain management, C-level executives must be readyand willing to shake things up—to redefine time-honored

The Face of the New Supply Chain Executive11 takes a new breed of supply chain executive to effec-

tively implement and manage a value chain.The most fundamental qualification is a broad business

background, enabling the person to clearly see and under-stand how the supply chain supports business growth. AngelMéndez, senior vice president of customer value chainmanagement at Cisco, has broad experience In a variety ofindustries, including high tech, aerospace and finance. Heholds a master's degree in business administration as wellas a bachelor's degree in electrical engineering.

Kevin Harrington, who reports to Méndez and is respon-sible for all custoiner value chain management businessoperations, has 20 years of experience at different high-techcompanies, holding titles including president, chief operatingofficer and vice president of operations. Jake Barr, directorof supply network operations at P&G, began his career infinance and risk analysis and worked in a variety of P&Gbusiness units during his career. And James Mallard, vicepresident of global procurement at U PS, worked his wayup through the company's finance division before moving tosupply chain operations.

Mallard emphasizes the importance of understandingprofitability. He manages $20 billion of UPS's annualspend, buying everything from pens to aircraft. He focus-es on how the supply chain impacts the company's earn-ings, and he's training his 100-plus employees to thinkthat way too. "We've changed the mindset that we don'tjust buy —we optimize earnings," he says. At the sametime, cash flow gets his attention. "How quickly am Ipaying? How can I speed up the supply chain so there'sless cash involved? How do I lower inventory so there'sless cash exposed? Should I lease or buy equipment?These are the kinds of decisions that the leading-edgesupply chain executive thinks about in day-to-day activi-ties," says Mallard.

Today, supply chain staff need a mix of a skills —indi-viduals with backgrounds in finance, sales, engineering, forexample —so they can comfortably interact across func-tional disciplines. This broad range of experience translatesinto a different mindset, with a stronger grasp of the needto make trade-offs. For instance, while the overarching goalis to satisfy customers, true value chain leaders balance

that against making a profit. "Sometimes the company willeat some costs to keep a customer happy. Sometimes it willdisappoint a customer in order to make sure profitability isgood," says Kevin O'Marah of AMR Research. "That's busi-ness thinking. That's value-chain thinking."

In addition to broad business knowledge, the value chainchief needs superior management skills to be able to workeffectively with other top executives, including the CEO.Some longtime observers of the profession argue that thebest supply chain officers can ease CEOs' fears about shar-ing information with partners and customers. It is the supplychain officer who really understands why this is so impor-tant and how it will benefit the company. "They have to be[confident enoughl to walk into the CEO's office and talk tohim as an equal," says Joseph Cavinato of the ThunderbirdSchool of Global Management.

The value chain leader also has to have collaboration andnegotiation skills. When the role is on an equal footing withthat of other C-level executives, it can cause friction withother departments and lead to power struggles, particularlywith sales and marketing as the supply chain organizationbecomes more involved with the customer.

As the supply chain expands into other people's areasof responsibility, some "advanced socialization" is in order,says Cisco's Harrington. It helps when a CEO like Cisco'sJohn Chambers is clearly behind the change and has imbuedthe company with a collaborative operational model. "Itrequires a clear articulation of what you're trying to do andwhat's at stake for the company in terms of improvementand upside. And, candidly, it requires an adult conversationwith executives that moves far beyond protecting turf andhaving a fiefdom mentality."

The new supply chain role also overlaps with the tradi-tional chief operating officer role. In fact, the chief supplyofficer role may be morphing into the chief operating offi-cer role. Plenty of companies have vice presidents of opera-tions who head up the supply chain, notes Joel Sutherland,managing director of the Center for Value Chain Researchat Lehigh University. "Companies are recognizing that thatterm - operations - is not accurate anymore," he says.

It's only a short step from there to the CEO suite—as avery few elite supply chain leaders have proved.

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Value Chain

structures. "Supply chain by its very nature cuts acrossfunctional silos," says Kevin O"Marah, chief strategy offi-cer at AMR Research. "That does not fit well in the tra-ditional functional org structure, where sales owns this,manufacturing owns that and distribution owns that."

Of course, such monumental changes don't happenall at once. "It's a fairly large meal to consume in onesitting," says Rudzki. "Most companies can't make thejump from siiocd hebavior, even if they do each thingfairly well. They need a transformational road map."

When Cisco set out to transform its supply chainin 2005, the company started by modeling its customervalue chain organization on the Supply Chain CounciTsSCOR model, using the Plan. Source. Make. Deliver,Return phases. To accommodate its growing globalfootprint iind its reach to a wider mix of customersthrough more channels, Cisco set up structures suchas the customer listening activity and appointed a vicepresident responsible for each of the major SCORfunctions. (See Exhibit 2.) "It became very evidentthat there were many other ancillary functions thaiwere important to the customer," says Angel Méndez,senior vice president of customer value chain manage-ment. The company has since added several others asits value chain organization has matured, says Méndez'lieutenant, Kevin Harrington. But that maturation hasbeen "an iterative process," he notes. "We make com-mitments, deliver on those commitments, then we setour next-step goals." be says.

The most important organizational changes thatCisco made were to give the value chain operationresponsibility for front-end order management, custom-er service and overall customer satisfaction and qual-ity, says Harrington. In this respect, Cisco has movedbeyond what other companies have done organization-

Innovation

ProductOperations

EXHIBIT 2

Cisco's Customer Value Chain Management Organization

CVCM Teams Collaborate Across the Customer Value Chain

\ Plan y Source ^ Make > Quality ^ Delivery

TechnologyDemand Global Manufacturing & Quality

Management Supplier „ „ „ ̂ r.^^/ ^ Logisticsand Planning Management ^P'"^'"""^ Corporate

Quality

Global Business Operations

Source: Cisco Systems Inc.

\ Customery and Field

/ Support •Customer

Operations

1

ally, observes O"Marah. By putting quality, customer ful-fillment and service within the value chain organization,"they've really put structure behind the strategy."

Learning to ShareAlong with changes in organizational structure comechanges in business processes.

According to CSC"s Poirier, supply chain leaders likeP8fG. Wal-Mart and Cisco are taking supply chain vis-ibility to the next level. They're asking iheir customerslor more than just a forecast. Through programs suchas shopper loyalty cards and with access to more andmore detailed point-of-sale data, customers bave reamsof information on what their real-time needs are. Wal-Mart, for example, provides its huge database of point-ol-salc intormation to consumer goods suppliers such asP&G. So value-chain practitioners are working closelywith key suppliers and customers in sales and operat-ing planning (S&OP) activities so they can see actualdemand and assess what can be supplied, says Poirier."S8íOP has become a very- hot topic," be says. "All of asudden I think a light bulb went oif for some oí thesepeople, and they realized, *hey, there's money in this forboth of us. "

It's a tectonic shift of perspective, from making prod-uct and pushing it out to the market to looking at the mar-ket first and then supplying what's needed. By linking upwith retailers, companies can sense changes in demandas they happen. P&G calls it "joint value creation,"' saysRoddy Martin, senior vice president and research fellow atAMR Research. "Tlic new challenge for the supply chainis in fact getting and translating real demand data." This isone of five key capabilities that supply chain leaders typi-cally have in place, says Martin. (Sec Exhibit 3.}

Supply chain leaders are also co-analyzing dataamong their ouín depart-ments and with key sup-pliers and customers."They have much moreuseful information onconsumption in theirdatabases than theyVebeen using." Poirier says.Ihey are letting out-siders in to help themanalyze it. to help themuse the data to iden-tify customer needs anddetermine where theycan add value. However,this ean be another area

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Five Capabilities of Value Network

1 Accurate demand forecasts through joint value creation/demandvisibility into markets, segments, customers

2 A reliable, compliant and predictable product supply networksupporting the end-to-end demand-driven supply chain.

2 Operationalized innovation from embedded innovation capabil-ities: qtiality by design (QbD), design for manufacture, supply,and market

A Profitable and balanced trade-offs across the value network-leveraging sales and operations planning (S&OP) as a core processand tielwork design and operations as a core capability

5 The agility to profitably shape demand across the supply network

Source: AMR Research: Value Chain Transformation, June 29, 2009

where corporate culture is a barrier. One of the biggestinhihilors of moving lo an integrated value chain is thercsislJiifc—oflen from the C'KO's oHice—to sharinginiornialion.

Al tlif same time, best-practices supply cbain lead-ers are redesigning iheir metrics lo IOCLIS on salisfyingthe customer in ways that arc profitable lor the htisiness.Your organization and process changes will accomplisblittle if you're still measuring things according to iradi-lional slrucUire and lunclion, notes O'Marah. Instead,ibe AMR Researcb analyst advises, companies need toinslilutf metrics that measure factors ibal cul acrossjunctions, such as profitability per shipment, and then111 si't up the IT systems to traek tbose metrics. Thenyou can reward the value-chain leam for improving thosemetrics, "if you dont have ibe data to do tbat, you cantreward teams for doing it," O'Marab says.

Knowing Your CustomerAnother important aspect of value chain slraleg) is theneed lo segment customers according to what those cus-kjmcrs value—and then to tailor the value chain to meet[he needs of those various segments. "A loi of companiesw ere giving away a lot of service lor which they were paidnothing, and tbe customer didn t really care, " says CSC sPoirier. "iNow. companies are looking at their customersand asking, 'What do you really want that you are willingto pay for? Then I will match ibat service witb where Iplace you in my segmentation.'Tbat s wbat I see tbe lead-ers doing." That may mean "liring" the customers tbataren't willing lo pay for what your company is providing.

Cisco has created virtual customer value teams to sup-port specific customers, says Harrington. These are par-

ticular customers "tbat we're trying to transform witb,"be says. "They are pushing us and we're pushing tbem.Tbey are part of our whole innovation engine." Thecustomer value team is part of tbe account team andis responsible lor anticipating customer needs and deal-ing with any operational gaps that stand in the way Bycommunicating with tbe customer and bringing all theinformation needed for that communication, the teamscan "make the right operational dance happen." saysHarrington, because "so much of that o])eralional gluelives inside oí the supply chain. ' For example, a cus-tomer value team can "take the spin out of a sales call.Instead ol having a sales leader standing in front of acustomer and thinking on his feet because tbe customerjusl threw him a cur\c ball." the cttsinmer \'aluc team isihere to provide accurate information. It may be infor-mation that will answer tbe customer's question. It maybe inf()niiation thai will correct a customers misunder-standing or niisperceplion.

Because tbat customer value team is made up of peo-ple from (.]tia!ily, fulfillment and ser\1ce ftinctions. it canproperly weigh irade-olTs that will be good for the custom-er and good for Cisco, notes industry observer O'Marah.Ratber than having those ftinctions operating separatelyand trying to fulfill iheir own cost-containmcnl missions,tbey are ail reporting to tbe same organization, meaningtbat those trade-offs arc made al a higher level.

Value Chain and LeadershipCompanies tbat are embracing the value chain arealready pulling ahead of the pack, according to SupplyChain Management Review's annual survey of sup-ply chain progress. That gap is only going to widen.Organizations without a well-managed value chain "willbe frozen out of the sales to tbe best customers, becausecompanies like Cisco and PÖcG are locking them up,"says Poirier. Other observers say sucb companies will berelegated to second- or third-tier status, and ultimatelymay be in peril if they do not or cannot focus on meetingconsumer demand profiiably.

Tbe recession is hastening tbe demise of tbe old sup-ply-chain paradigm. Whether establisbed companies willbe quick enougb to replace it with a more competitivemodel is an open question. In tbe past, severe econom-ic downturns bave killed off the companies that baveadhered to outdated business models. The fear factorright now. according lo Thunderbird professor Cavinato:The possible emergence of industry game-changers—agile, asserti\'e new entrants that apply tbe new valuechain concepts with rigor and discipline. It has hap-pened before. It can easily bappen again.

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