Reexamining business school fundamentals – supply chains and value chains as drivers of sustaining value
I have probably used the terms supply chain and value chain hundreds of times so far in this blog, and across a range of series I have posted to within it. I start this posting by pointing out two simple facts. One of them is an observation that many have made, and certainly in an international business context that problems always arise when people are using the same terms but with different meanings, connotations or underlying assumptions attached. The other is that I have at least occasionally cited a more standardized meaning for “supply chain” as I did above, with a link to the Wikipedia article on this term, but that there is no corresponding term for “value chain” provided there.
This posting seeks to address two issues:
• Clarifying more precisely what I mean when I use the term value chain and
• Linking this definition to that of supply chain and in terms that would make sense in the context of our increasingly interconnected marketplaces.
A value chain starts with a network of businesses and organizations that work together in connected and overlapping market spaces with connection through shared provision of good and services. A value chain defines and describes this network in terms of value created and distributed, between its connected nodes and across the network as a whole. From a value chain perspective, the network is in fact defined by this creating and distribution of value. In this, a value proposition gains that value in the hands and in the eyes of the customer receiving it as product or service, so a value chain is also a network of parameters that determines and specifies what value is in and across that grouping of organizations and the business ecosystem they collectively comprise. And the entire network is diminished and value across it as a whole becomes limited where there are weak links and the exchange of recognizable, meaningful value is broken.
Supply chain systems are frequently defined in terms of meeting seven specific principles [see Anderson, D.L., Britt, F.F. and D.J. Favre. (1997) The Seven Principles of Supply Chain Management. Supply Chain Management Review.]
1. Segment customers according to the product and service needs of distinct groups and adapt the supply chain to meet the needs of these groups profitably.
2. Customize the logistics network to the service requirements of these customer groups and so as to facilitate this profitability.
3. Track market signals and align demand planning accordingly across the supply chain so as to maintain efficiency in forecasting and to optimize asset allocations.
4. Differentiate the product closer to the customer and speed conversion across and throughout the supply chain.
5. Manage resources strategically to reduce overall costs.
6. Develop a supply chain-wide technology policy that supports multiple levels of decision making and that provides the transparency into product and service flow, and organizing information for optimizing this.
7. Develop and adopt channel-spanning performance metrics for determining collective and individualized success in identifying and meeting customer needs.
In a richly globally interconnected, business ecosystem context viewing supply chains as value chains adds an eighth principle to this list:
8. Monitor value developed across the network and optimize your value creation capabilities for nodes you directly connect to, in order to optimize value received in turn from your participation in the network.
And as I point out in Some Thoughts on the Co-Evolution of the Internet and Globalization as a recent posting, this can be crucial if your business is even going to be effectively included in the supply chain at all.
The next posting in this series is going to look into business ethics and communication in this widening business context.