Where demand meets supply

When every part of the supply chain can touch every other part, the potential for value-creating networks can become reality.

By Peter Bradley -- Logistics Management, 3/1/2000

For simplicity's sake, supply chains are often illustrated in a linear fashion. A supplier links to manufacturing, which links to distribution, which links to the retail operation, which links to the consumer.

The reality, as every logistics manager knows, is far more complex--an intricate web of suppliers, multiple manufacturing and distribution facilities, and a broad range of customers with a wide variety of requirements, and all of that often across an extensive geographical base.

That complexity makes the task of moving inventory and information efficiently among all of the participants extraordinarily difficult to execute. But 21st-century business demands make it essential. Customers are in control and they are demanding speed, reliability, customization, and ease of doing business. Business models have to respond to that.

Last month, executives from several leading companies took part in a two-day conference in Chicago addressing the issue of integrating supply and demand chains. The meeting, co-sponsored by The Conference Board and Mercer Management Consulting, gave participants a look at how both shippers and providers view the challenges and the opportunities presented by the demands for speed, reliability, and customization.

The challenge, says David Bovet, a Mercer vice president, is to create what Mercer calls "value nets." The consulting firm defines those as networks that connect customer needs to component sources, product assembly, rapid delivery mechanisms, and support services. The concept is based in large part on the ability to make information flow quickly to all participants in the network who need it. The focus of all the participants, Bovet says, is on the customer.

Bovet insists that the idea of value nets is not a replacement for supply chain management but rather the strategic application of supply chain capabilities. Companies with successful value networks, he reports, are similar in several ways: Processes are set off by a customer order; standard components are assembled to custom configuration, often by third-party manufacturers; and efficient distribution follows, often by direct delivery.

Process Changes Needed

Both Bovet and Mercer Vice President Joseph Martha, who have written a book describing these networks, take pains to distinguish value nets from supply chains. Supply chains, they say, are functional in nature, while value nets describe a business design with the customer at the center. They are not linear but involve simultaneous activities responding to customer-specified preferences.

"The focus is on processes, organization, people, and systems," Martha says. "[The value net's success] relies on how intelligently you are able to use information."

The goal, says Bovet, is not to achieve incremental improvements in cost, but to make process changes that produce major increases in corporate value. The techniques for implementing value chains are not much different from those used in supply chain management. A business design built around the concept of a value net, the consultants say, elevates supply chain capabilities to strategic levels.

In that respect, the value net proposition is an extension of advanced supply chain strategy. The idea of supply chains has always encompassed cross-functional and even cross-enterprise collaboration and integration. The conception of the value net, as described by Martha and Bovet, appears to be an effort to extend that idea to one that accelerates communication and compresses time by eliminating the mindset that business progresses in a linear fashion. Instead, it substitutes the idea that all parts of the net are interconnected, allowing for near instant communication across all of its constituents, enabling the rapid and reliable fulfillment of demands.

Value Net Success Stories

Although the best-known examples of companies with successful value nets come from the high-tech industry, Bovet and Martha say that the lessons are applicable to almost any industry. Bovet cited the following examples during his presentation to The Conference Board:

- Miller SQA, an office furniture supplier for small businesses and home offices, uses a system that automatically schedules production based on actual customer orders. Materials suppliers can see inventories and customer demand and respond to those, while a third party provides just-in-time (JIT) delivery of materials. The system also links up with those of dealers, allowing them to coordinate installation schedules with deliveries. As a result, the order cycle has been reduced to between two and fourteen days and 99.6 percent of shipments are made on time.

- Zara, a chain of chic fashion stores located in Spain, links all of its stores to corporate headquarters, allowing sales personnel to share input from customers. At headquarters, that information can be shared with fabric suppliers and the small workshops in Portugal that produce many of the products. Zara can get a product from sketch to the store shelf in 10 to 15 days, making it a leader in "hot" fashion. Bovet says that ability has created what has been called "Zara-mania" in Spain.

- Cisco Systems, a major provider of telecommunications network components, outsources production of many of its units and receives more than 80 percent of its orders on its Web site. Contract manufacturers monitor the orders and build equipment configured to customer demands, while Cisco Systems adds software and tests the equipment at the supplier's site. More than half the orders are delivered directly to the customer. By linking contract manufacturers and suppliers and outsourcing the bulk of its production, Cisco has rapidly increased output without adding capacity and slashed its time to market for new products. Its systems also assure that customer-configured orders are compatible with other systems operated by the customer, reducing order errors to under 1 percent.

- Cemex is a cement producer in Monterrey, Mexico. It faced the problem of frequent changes to orders and difficulty delivering on time. Through a $200 million investment in technology over the last 10 years, it can now synchronize production, vehicle movements, and orders. Customers can still change orders late in the cycle, while cement trucks can deliver orders within a 20-minute window. The result is that the company now has a 60-percent market share and a pre-tax and depreciation margin of 35 percent.

Bovet says that the implementation of a value net strategy has allowed each of those companies to achieve significant gains in traditional supply chain metrics such as inventory turns, days of supply, order-cycle times, cash conversion, and on-time delivery. They have also achieved growth in revenue and profit margins and improved return on assets and asset intensity measures as well as improved market value.

That success takes great collaboration both within a company and among its partners in the supply chain. The secret, Bovet notes, lies in networked players and processes. "We've never found a company able to do it alone," he says.

Editor's note: Bovet and Martha's book, Value Nets: Breaking the Supply Chain to Unlock Hidden Profits, will be published by John Wiley & Sons in May.