Companies Need Focus on Integration

Two years ago, I lived on a horse farm in the rural Carolinas.  The area around the Tryon International Equestrian Center is beautiful and pastoral, nestled up against the Appalachian foothills.  While the countryside was idyllic and the Equestrian Center world-class, the antebellum farmhouse I lived in was not.  I decided to purchase new appliances for a recently remodeled kitchen.

I went to the local branch of a national “big box” retailer – a well-known chain in North America carrying home appliances – and purchased four items: a gas range/oven, a refrigerator and a washer and dryer.  The retailer offered these products at a special discount as part of its “Welcome Summer” promotional campaign.  After twenty interactions with five companies, the appliances were finally installed in my kitchen – six months after their purchase.  Just in time for a “Holiday Harvest Festival” I hosted on the farm!

I didn’t know at the time of the sale that the retailer had outsourced nearly all its supply chain functions to third-party vendors.  The post-sales fulfillment of my purchase(s) required interacting with five separate companies: the retailer (a local branch of a North American chain), the manufacturer (based in Asia), the transporter (a local hauler affiliated with a US logistics company), the installer (a local tradesman), and the utility company (a regional supplier).  First, the refrigerator arrived damaged and I refused delivery starting a ripple of transactions across the supply chain — from transporter, to retailer and finally to manufacturer.  Second, the wrong gas connectors were delivered for the range/oven; the retailer hadn’t ordered the right parts.  A second wave of interactions was initiated across the supply chain – from installer, to retailer and finally to utility company.  Third, the washing machine model I ordered was no longer available requiring a third round of interactions between the transporter (to return the “matching” dryer), the retailer (to credit the purchase and select a new model), the manufacturer (to ensure the newly chosen model was available), the transporter (to reschedule the delivery), and the installer (to connect the appliances).

At my “Autumn Harvest Festival” on the farm, my friends admired the renovated kitchen.  They asked about the renovation and where I purchased the appliances.  I entertained them with stories describing my interactions with the retailer over the preceding months.  Everyone laughed a great deal.  I doubt any of them will purchase from that retailer.

Value Chains Require Value to Flow

I use the term ‘value chain’ instead of ‘supply chain’ for two reasons.  First, the term ‘value chain’ gives equal weight to the downstream and upstream portions of the chain.  Second, the term ‘value chain’ focuses on the essence of business, i.e. value rather than supply.  The chain metaphor describes the interlinked players who deliver a good from the manufacturer to the customer.  Supply chain players, however, interact on three levels – physical (the goods moved), financial (the funds transferred), and informational.  To prevent focusing on just physical flows and avoid viewing the supply chain as a mechanical process, lean thinking uses the term ‘value stream’ highlighting the ‘flows’ from upstream to downstream participants.  It is not a new concept.

As early as 1919, Logan Grant McPherson referenced value flows in his book The Flow of Value.  In 1991, The Machine that Changed the World elaborated the tenets of value streams.  The concept of value flows greatly influenced my PhD research.  Dan Jones, one of the co-authors of the 1991 book, examined my final thesis (dissertation) at the University of Bath.

I described value flows at length in a previous article.  [Note: Academic research of flows represents an emerging science – constructal theory].  The ultimate customer’s definition of value provides the lodestar for value chain management.  The ultimate customer determines what is valuable – and what is not.  In the opening example, I should have provided the reference point for all five participating players in the supply chain.  I obviously was not the focus.

Was my experience a one-off example of a bad supply chain?  A single ‘blip’ in otherwise frictionless global commerce?  Sadly I think not.  I have subsequently navigated other value chains where I, as ultimate customer, had to serve as the ‘value chain integrator’ to ensure that I received the value I desired.  (I communicated between parties, monitored progress, and tried to expedite resolution/delivery).  Global trade and technology have enabled greater outsourcing of different parts of the value chain.  Physical flows (the first “pipe”) are handled by third-party logistics providers (3PLs).  Informational flows (the second “pipe”) are transacted via “the cloud” using applications hosted by Software-as-a-Service (SaaS) providers.  Credit card companies and web-based payors (e.g. PayPal) process the resulting financial flows (the third “pipe”).  All three pipes convey value.  But are they integrated?  Does value flow?  In most instances, the answer from customers is clearly no.

Eliminate Value Gaps Through Value Integration

Companies have lost sight of the need for integration.  Business integration is also not a new idea.  In 1990, Michael Hammer described the concept of Business Process Reengineering (BPR) in the Harvard Business Review (HBR) article “Reengineering Work: Don’t Automate, Obliterate.”   In 1992, Robert Kaplan and David Norton published the HBR article The Balanced Scorecard—Measures That Drive Performance,” asserting that business management required a more balanced set (BSc) of performance metrics.  In 1994, I served as a Research Manager with Andersen Consulting (now Accenture); the consultancy promoted ‘business integration” – seamlessly combining strategy, process, technology and people– to its clients.  In 2004, the HBR article “Staple Yourself to an Order” described the need for Order Management Cycle (OMC) integration using a systems view.

 

More recently, though, HBR published “The Death of Supply Chain Management.”

“Within 5-10 years, the supply chain function may be obsolete, replaced by a smoothly running, self-regulating utility that optimally manages end-to-end work flows and requires very little human intervention. … The trend is clear: Technology is replacing people in supply chain management — and doing a better job. It’s not hard to imagine a future in which automated processes, data governance, advanced analytics, sensors, robotics, artificial intelligence, and a continual learning loop will minimize the need for humans.”

Really?  Pity the poor customer!  Outsourcing and technology have sometimes created – rather than eliminated — blockages in value flows.  Internal reengineering efforts cannot prevent inefficient handoffs between third-party supply chain “partners.”   Expanding the metrics used for performance reporting won’t solve goal-conflict between value chain players.  Order management cycle optimization requires systems-wide thinking across the entire value chain.  I pray technical advances do not “kill off” supply chain management.  It is likely new technologies will only further highlight the brokenness of many value chains!  They will reveal multiple value gaps.

The web enables customers to see into company value chains to a degree never before possible.  Self-service channels have automated customer service thereby enabling customers to monitor directly value chain performance via internet-based order and fulfillment interfaces.   Whenever problems occur – as my experience demonstrates in this article’s opening – company inefficiencies are exposed and rendered even more glaring to customers.  Business integration fails.  Value doesn’t flow to the customer.  Who then is responsible for overall value delivery if Supply Chain Management (SCM) is eliminated by the firm?

Use the Integrated Value Process!

Business Process Reengineering (BPR), Balanced Scorecards (BSc), Blockchains, Artificial Intelligence (AI), Big Data, Robotics, etc. may prove helpful, but they alone are insufficient if companies don’t understand value!   Value is key to strategy. Value is the foundation of the value chain, the interconnected value activities the firm and its partner companies perform. The firm thereby creates and delivers products and services valuable to its customers, i.e. the firm’s value proposition.

In An Empirical Framework for Evaluating, Implementing and Managing a Value-based Supply Chain Strategy (PhD thesis accepted by the University of Bath School of Management —ProQuest publication number 3121355), I published the Integrated Value Process (IVP) framework.  IVP consists of (1) a ‘meta’ definition of value, (2) a conceptual framework illustrating the value management process based on that ‘meta’ definition, (3) five value gaps (mapping to the framework), and (4) a set of ‘first principles’ driving effective value management.  Executives can use the IVP framework to identify internal and external interruptions / blockages in value flows across their companies’ respective value chains.  They can then eliminate those value gaps to optimize value performance.

In terms of value creation, delivery and management, where does your organization hurt?  What are your organization’s “value symptoms” and how do they reflect deficient value management?  (See previous article).  Don’t know the answer?  Ask your customers – they will gladly tell you.  Your organization’s value symptoms are warning signs.  Don’t wait until it’s too late!  Use the Integrated Value Process (IVP) framework to optimize value flows across your enterprise and your value chain.

About the Author

Andrew Swan, PhD is a multidisciplinary and cross-functional integrator of strategy, processes, and information technology. His focus and expertise center on helping executives increase value creation and optimize value flows in business. Dr. Swan holds four degrees in Management, Accounting & Finance, Information & Knowledge Strategy, and Computer Science from the University of Chicago Booth School of Business,  the University of Bath School of Management, and Columbia University.

He frequently publishes articles on value chains, value streams / flows, and Integrative Value Management on his website www.andrewjswan.com. Dr. Swan created the Integrated Value Process (IVP) Framework to help companies optimize the flow of goods & services, funds, and information across their respective value chains for multiple stakeholders. He can be reached at andrew.swan@columbia.edu or at +1.773.633.7186.  He lives in Chicago.

2 thoughts on “Value Chains – Whither “Value Integration?”

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