“We live in a world where supply chains, not companies, compete for market dominance. But companies often have diverging incentives and interests from their supply chain partners, so when they independently strive to optimize their individual objectives, the expected result can be compromised. ”
Hau L Lee, Triple-A Supply Chains, Harvard Business Review, October 2004
“The idea of the value chain is based on the process view of organizations, the idea of seeing a manufacturing (or service) organisation as a system, made up of subsystems each with inputs, transformation processes and outputs. Inputs, transformation processes, and outputs involve the acquisition and consumption of resources – money, labour, materials, equipment, buildings, land, administration and management. How value chain activities are carried out determines costs and affects profits.”
Institute for Manufacturing, 2013
Tipping points are fascinating to watch. They are even more fun to create.
I want to be part of the evolution that helps leaders to redefine strategies based on the changing physics, electronics and capabilities in value networks.
Tonight, I am stranded in a hotel in Chicago. Facing a string of canceled flights yesterday at O’Hare airport, instead of fighting the mayhem, I opted to pull my bags to the hotel across the street. It is 3:00 AM. The Chicago airport is closed for the night. It is quiet and a good time to think. So, on this Friday night, I find myself typing away on my keyboard on what is another sleepless night. So, bear with me as I throw down the gauntlet for the high-tech value chains to seize new levels of effectiveness.
What Is Value?
When I wrote the book Bricks Matter, I cavalierly penned a chapter on the evolution of supply chain thinking from cost to value. It sounds simple, but it is not. I found this out the hard way when Keith Harrison, contributor to the Forward of the book, asked me to define what I meant by “value.” Keith is the former Global Product Supply Officer for P&G, and a person that I greatly respect. So, I swallowed hard and began the discussion.
It is one thing to write it, but it is a horse of another color to defend it. I think about this discussion with Keith often as I work on the Supply Chain Index and edit the chapters of Metrics That Matter.
I believe that value is what you create. You know when you have created value when it drives improved brand perception, increased sales or improved market capitalization. Easier said than done. You might say…. Yes, I agree.
How do you know when you have created it? And more importantly for supply chain leaders today, how can we create new levels of value from new business models that are happening based on the tipping points within the extended supply chain?
Let’s Take a Hard Look at Value Chains
To understand value creation, we have to understand how companies have made trade-offs. In Figure 1, I share a composite orbit chart of progress of Cisco Systems, Intel, Samsung and Flextronics on the Effective Frontier at the intersection of inventory turns and operating margin for 2006-2012. What can we learn? I think three things:
1) A Hard-Fought and Tough Journey. This is a group of leaders. I have great respect for each of them. However, no company in this chart is on a linear path towards improving both margin and inventory turns. Instead, it is a gnarly road with each company struggling to make trade-offs.
2) Efficient Supply Chains, Not Effective Networks. Each company operates within its own plane, improving its own potential. We are still very early in the true adoption of value chain concepts. Our current processes and dependencies on Excel spreadsheets cannot get us to our goal.
3) Risky Business? Contract manufacturers operate at low margins and lack resiliency. The value chain depends on the contract manufacturers to drive value, but the lack of stability of the business model is a risk for the system.
Figure 1. High-Tech and Electronic Supply Networks
The investment in technologies has made companies more efficient, but not more effective. This is an important distinction. Why? All of the companies in the chart have improved revenue/employee.
Across the industries, this is the case. Our historic supply chain practices have made companies more efficient, but we have not made them more effective. Sadly, we also need to admit that we have not progressed very far on the creation of value networks. We have talked the concepts, but not enabled the processes. So, my question this morning as the sun comes up is, “Could we?
But, Could We?
My thought is yes. I think that this industry is poised for a tipping point. As we think about this value network, and the potential redefinition through new business models, I think that we are ready to change the equation. Three things are happening, that I think are significant:
Flextronics has invested in the development of Elementum. This is a new start-up in the B2B network technology space.
E2open last week announced the purchase of Serus. This purchase increases E2open’s capabilities for visibility into the processes of the outsourced semiconductor network of foundries.
Kinaxis successfully orchestrated an IPO. New money into Kinaxis, a wider portfolio for E2open and the evolution of a new player with Elementum could change the equation.
As we move forward, I think that it is important to take a hard look at Figure 1 and ask ourselves the question, “How can we drive greater value into this value network through more effective data sharing, market sensing and translation and the enablement of the digital supply chain?” I am stepping forward to throw down the gauntlet.
The pace of change in this value network is increasing rapidly. As a result, we need to enable the moments of truth in this value chain. This includes the decision to build, the digital definition of the product, the decision of when and where to ship, and the decisions of which materials to put into which products. It is about more than visibility. It is not about the automation of yesterday’s processes into the cloud. Let’s work backwards on the announcements:
Kinaxis needs to briefly congratulate themselves—it was a tough fight—and then move on. It is time to move to a many-to-many data model. The Kinaxis model is an enterprise solution. It lacks the community infrastructure and the canonical integration layer of E2open. The current work on data sharing and control tower for Kinaxis is inside-out, not outside-in. It is an enterprise solution, not a network solution. As a result, it works well for a singular company connecting with its trading network; but, not with the interaction needs of the greater community.
E2open needs to better define the value proposition, and the go-to-market messaging, and continue to add value at the application level. They have fought a hard fight to evolve through a turbulent decade. It is now time to build-out the model.
Elementum is the new kid on the block. It is important for Elementum to build a community. It needs to be more than Flextronics.
So, as we think about the drivers for the tipping points—and the coalescence of new forms of analytics with big data systems, 3D printing, and the Internet of Things—there is a need in this value network to quickly to automate the supply chain moments of truth. This is the clear articulation of when and how to make, source, and deliver for the community. It needs to be multi-tier and many-to-many.
Without this, the players are stuck. Their current performance is stalled, and their interdependencies are too great to not improve through automation. It is about the network, not the enterprise. It is about the new definition of the digital supply chain. It is about new models. This is the challenge.
So, here, I throw down the gauntlet. The race is on. Let’s see who delivers. I look forward to your thoughts.
How to Learn More:
At Supply Chain Insights we are having fun exploring and understanding these trends.
We are currently doing research on the evolution of new forms of analytics in the hype cycle that many people refer to as Big Data, and we are completing our survey on digital manufacturing. We would love to hear from you. As with all our research, when you share with us, we share with you. If you respond to one of our surveys, we keep all of the responses confidential and only report the findings in aggregate.
In the Big Data research study, we are analyzing the adoption rate of Big Data Analytics of concurrent optimization, streaming data, cloud adoption, and cognitive learning. For more on this tipping point, please see my last blog post Dreaming of Clouds, Lakes and Streams. When it comes to digital manufacturing, it is a new world combining the Internet of Things with 3D Printing. We will be showcasing case studies of both new forms of analytics and the use of 3D printing at our upcoming Supply Chain Insights Global Summit on September 10-11, in Scottsdale, AZ. We hope to see you there!