Supply Chain: Creating Value

This is a series on Supply Chain Basics looking at the discipline from the Society of Operations Management perspective. Supply chain is also essential to project management as PMs are typically trained in world class contracting. The Defense Acquisition Workforce Improvement Act, DAWIA, certification highlights the combination of project management and supply chain. In this post, we will explore Supply Chain value adding some additional support as well.

Supply Chain: Creating Value

Supply chain management aims to create value that is the worth of an item, good, or service. A related concept is 'value added' to goods and services. This is the responsibility of all entities in the supply chain. The relevant definition of 'value added' is the actual increase in utility from the viewpoint of the customer. The idea is to remove all non-value added activities. However, customers may view value wider than simply utility when considering price, availability, and attractiveness.

APICS views the business as a capitalist notion of profit margin or the difference between revenue and the cost of goods sold. The greater the margin the greater the financial success. Net profit is the result of deducting all expenses not only the costs of goods sold from revenues. APICS ponders the questions is financial success, money, a sufficient measure; are other traits involved; and are there limitations to ways of creating money? APICS emphatically asserts, "YES".

Not all profits are justified. Revenue can be generated that may be unethical or socially forbidden.  Governments tend to have influence in these areas and in Global operations what is permissible in one region may not be permissible elsewhere.

Value is measured by one stakeholder group at a time. Global supply chains have many stakeholders and what is beneficial to one stakeholder may be harmful to another. Therefore, identifying all the stakeholders and determining the impact the activity will have on each other is important.  Downstream impacts are just as important. Ultimately, the end customer is a significant stakeholder. There is a balance between value and profits. Each partner in the supply chain must optimize value in the supply chain as a whole. many questions need to be answered;

• Should profits be passed through to customers as discounts?
• Should profits be distributed as investor dividends?
• Should profits be reinvested in equipment and plant upgrades?

External stakeholders are also a challenge and consideration. These include governments, communities, lenders, etc...

Balancing the stakeholders value in the supply chain is a challenge as increasing the value for one decreases the value for another. Everyone has to be satisfied in order to participate.

Sustainable Supply Chains

This is when environmental paradigms are infused into the supply chain utilizing the cradle-to-the-grave notion of product management.  Sustainability and green are often used interchangeably despite sustainability being a broader topic including social and economic concerns. Both terms tend to refer to the limitations of economic activity imposed by natural resources. Companies should seek renewable resources rather than those that are depleting with slow or no replenishment.  Protection of the environment is also a major consideration.  ISO14000 provides an international standard for supply chain operation. However, in many countries ISO14000 reporting requirements can create legal issues for companies given local or national laws regarding these standards. Therefore, many companies are reluctant to adopt these standards.  Sustainability overall is significant in supply chain management;

• Government and regulatory pressures
• Good environmental management and sustainability
• Public opinion and the power of consumer choice
• Potential for competitive advantage

Sustainability makes good sense because it drives growth, reduces costs, and increases profits. Green supply chain management is here to stay and adds stakeholder value.

Financial Value

Reducing costs in one way to creating financial value and must be performed carefully in one of three ways:

1. Tradeoffs may be self-defeating. Rebalancing the spending increasing money in one area while reducing spending in another area can have negative impacts or a net loss. For example, shifting inventory from one member in the chain to another who has less capability or leverage could cost the relationship and supply chain performance.
2. It takes money to make money. Reducing costs through layoffs may free capital for supply chain projects but inevitably results in lower performance and ultimately failure. Most supply chain improvements require capital up front to realize greater revenues, profits, or both in time. There has to be a net gain.  Typical measures have been ROI and ROA. 
3. Gains must be equitably distributed. An error often made is not redistributing gains based on the needs of the stakeholders. Teamwork across the chain must be justly rewarded.  

Customer Value

In a capital economy, making money means responding to the customer meaning market driven.  The goal of market driven supply chain is to deliver products and services to that customer who will make the purchase.  Supply chain may be managed with an eye to delivering one or more of the following:

• Product or Service Quality: The supply chain must coordinate the right design, right materials,  and right production in order to achieve the right level of quality.
• Affordability:  This is a misleading notion in most cases. Affordability is not discounts, bargains, and just items of modest value but instead the appropriate price level for a market. A supply chain invests in the appropriate level of processes, people, technology etc... in order to achieve the right price. Keeping goods and service at the right price means supply chain efficiencies. 
• Availability: Some products and services require timeliness.  This affects not only inventories but the mode of delivery. 
• Services:  There is an indistinct division between products and services.  Often services are value added to a product sale. A reverse supply chain has grown in importance in recent years often called the Service Chain to handle returns, repairs, and warranty issues. 
• Sustainability:  Consumers are often the driving force behind environmental and social supply chain innovation.  Customer opinion for or against a companies policies and practices can impact sales. 

The amount of emphasis on one value or another will depend upon the nucleus firm's market strategy. No one will deliver low quality on an unpredictable schedule at high prices. In the end, the creation of customer value is the primary factor in supply chain strategy.

Social Value

A supply chain's contribution to society comes from three factors.

• Creating a positive good through delivering socially desired and useful products or services
• Avoiding or reducing negative environmental side effects of activities such as extraction, processing, and construction
• Integrating sustainability into the supply chain using the SCOR model.
• Plan, source, make, deliver, and return

There is no one size fits all approach to building and sustaining a supply chain.  Different practices and the sequencing in which they are adopted will vary and be driven by organizational and supply chain objectives.

References:

(2011). APICS Certified Supply Chain Professional Learning System. (2011 ed.). Version 2.2.