Getting Ready

Your Company -- How to prepare your organization to adopt a value-chain model.

It's not unusual for corporate executives to get new business cards every few months. After all, redrawing the lines and boxes on the organization chart and doling out new titles has become commonplace in American business. So when Hugh Hoffman of American Standard Cos. Inc. Piscataway, N.J., tells you that he is the "process owner of chinaware order fulfillment," you might nod and silently marvel at such an ungainly title. But that would miss the point, because Hoffman truly does own a process, and therein lies a key reason for American Standard's recent success. This old-line maker of plumbing supplies, air conditioners (under the Trane and American Standard brand names), and automotive products has been on a roll. Operating earnings and margins in most of its businesses showed significant improvement in the second quarter, and the company says it expects this momentum to continue, with earnings per share expected to be up 15% to 17% from last year's $2.98. The company's stock was trading at close to its 12-month high of 49 7/16, well above its one-year low of 21 5/8. Many of the efficiencies driving such success can be traced to the adoption of a new business model that, while not dubbed a "value chain" internally, has sprung directly out of early efforts to improve the supply chain and achieve a new level of sophistication and integration. The key to that integration is a move away from traditional functional job roles such as sales, marketing, and accounts payable and toward a process model that links all the functions involved in selling certain products to certain customers. That's where Hoffman comes in. As process owner for chinaware order fulfillment, he has soup-to-nuts responsibility for the delivery of all the company's chinaware (in this context, toilets, lavatories, bidets, and related products) throughout the U.S. That means that he oversees every aspect of the business, from demand forecasting right through to revenue collection. The new model means big changes in the way American Standard is organized. "We were a very traditional, conservative company," he says. "The business was changing. There was incredible pressure on prices, but also a need to innovate and to serve customers better. So we knew we had to change, and change fast." The company adopted a paradigm known as demand-flow technology (DFT), which might be described as a sort of meta-value chain that can be achieved through a formalized process involving business rules and metrics. As with a value-chain model, the goal is to get a better handle on customer needs and then work backward through every link in the chain, from shipping to manufacturing and all the way to raw-materials acquisition at the supplier level. By collaborating with all the business partners in the chain, American Standard not only can drive down costs, but expand its markets. "The traditional supply chain is very internally focused," says Vijay Govindarajan, professor of international business at Dartmouth College's Tuck School of Business. "In this value-chain approach the emphasis is on an external view: is value being created at every step of the process?" The goal, he says, is not to simply drive down costs, but to be able to respond to changing conditions more quickly and pursue new opportunities more aggressively. But before a company can take that external view, it often must make internal changes to pave the way. That was the case at American Standard, where several major steps were needed to embrace a value-chain or DFT approach to business. One of the first was the creation of "supplier councils" throughout the organization. Brian Evans, currently vice president and group controller for plumbing products, headed up this effort on both the air-conditioning and plumbing sides of the business. "Companies will spend huge amounts of money looking for ways to drive down labor costs," he says, "but often they don't look at purchasing at all." However, 70% of American Standard's costs entail purchasing goods and services from suppliers. The intent behind the supplier councils was to completely change the way the company shops, be it for raw materials, components, even office supplies and energy. American Standard identified 14 major commodities --including clay (for plumbing fixtures), plastics, natural gas, and shipping cartons -- and formed teams charged with centralized buying. No longer would each factory cut its own deals. But that meant that the councils -- composed not only of purchasing agents but also engineers, logistics specialists, and other team members -- would have to understand how essential it was to do things differently. "We had to have several meetings just to make sure people understood why we were doing it this way," Evans says. "The potential savings were huge, but we were asking people to come to work and view things far differently than they had the day before." The councils didn't simply negotiate for best price; they forged new relationships with suppliers, providing a big-picture view of American Standard's corporate vision, its new requirements for its suppliers, and what it could mean to everyone's bottom line. The councils represented an important step in fostering cross-functional teamwork at American Standard. But quarterly meetings of a small percentage of a company's total employees will only take it so far. This new emphasis on processes and teamwork manifested itself in a more obvious way: The company tore down walls, literally. It redesigned its office space so that all members of a team work in an open area, where cubicle walls are less than four-ft high. "None of us would have voted for it in the beginning," Hoffman says, "but now we wouldn't go back to the old way. It really enhances teamwork." In the last few years more than 85% of factory-floor equipment has been relocated, again with the aim of focusing on flow. "We no longer assemble in one place and paint in another," says David Gleditsch, DFT formalization leader. "We want the same fluidity with our internal processes that we're pushing for across the value chain. They go hand-in-hand." Other important elements include communication and training. The company has sent 30,000 people to be trained in the concept of DFT. Today employees are assigned to work teams that tackle a given process and are often asked to do different things on different days, depending on need. "Our hiring process now assesses how well a potential employee can learn, adapt, and be flexible," Gleditsch says, "because those traits are at the core of our way of doing business." American Standard maintains training labs in each factory and also educates its employees on the company's overall mission. "Our people understand things like 'inventory turns' and 'working capital management.' I think that breadth of vision is key to making a value chain come alive." Although American Standard has implemented specific approaches that suit its own needs, experts say that any company moving toward a value-chain model can follow some basic guidelines. "There's a huge amount of work involved in moving to a value chain, so a 'trigger point' is usually needed," says James E. Morehouse, a consultant with A.T. Kearney Inc. in Chicago. A trigger point could be anything from the external pressure of quarterly losses to a change such as a new CEO coming aboard, but whatever it may be, it "creates a sense of urgency. You make choices differently, more aggressively, because you don't have the luxury of engaging in the usual analysis or simply forming a committee." Jim Uchneat, research director at Benchmarking Partners Inc., Boston, says that once a company has been motivated to move toward a value-chain model, it should begin by understanding customer demand in better detail than ever before. This requires not only tighter ties with customers, but, from an internal perspective, a rethinking of forecasts. "There has to be greater consistency," Uchneat says. "Too often sales and marketing has one forecast, manufacturing another. One department forecasts in units, another in dollars." The most successful companies, he says, compare different forecasts monthly and make sure they're on target with customer demand. Another important facet of internal preparation is self-assessment. Robin Palmer, partner in charge of supply-chain management in KPMG Consulting's Mountain View, Calif., office says that most manufacturers fall at about the midpoint of a five-phase scale:

  • In phases one and two, companies are either functionally based or just beginning to integrate around the concept of processes.
  • Phase three finds them fully integrated internally, often thanks to enterprise-resource-planning (ERP) software, and with some level of connectivity to suppliers and customers.
  • Phase four is an "enterprise-to-enterprise" world in which the company's focus has moved away from internal boundaries to embrace trends such as vendor-managed inventory.
  • In phase five, the company is part of a "value network," connected to other enterprises not in a hub-and-spoke model, as in phase four, but in a many-to-many relationship in which, as Palmer says, "you have visibility throughout the network, with all the data you need to make optimum decisions." Palmer says that few businesses have reached phase five, particularly in manufacturing. But the omnipresence of ERP software means that most larger manufacturers can at least lay claim to phase three. Even better news is that further gains don't have to be incremental. Companies can leapfrog, with the right commitment and technology. Although KPMG believes that certain forms of information technology are essential to this effort, Palmer adds that technology is only one of five critical areas to address. The others are strategy, people, process, and nontechnology infrastructure. "The great challenge," he says, "is that you can be a phase one company in one area, and a phase four in another." Therefore, companies must assess all five, get them in synch, and then ascend to a higher phase. As if that weren't enough, Palmer advocates an incremental approach, in which tangible gains are seen in 90 to 120 days. "It's a far cry from rolling out ERP over two or three years," he says. "Companies expect rapid benefits." They not only expect them -- they need them. A recent KPMG study of more than 120 companies found a widening gap between the haves and the have-nots. Companies that have embarked on various supply-chain initiatives are clearly superior in three common measures of performance: cycle time, inventory turnover, and perfect-order rates. "As these supply-chain leaders advance toward value chains," says Laurie Widder, KPMG senior manager in supply-chain solutions, "this gap will grow. It's not too late for the have-nots to plunge in, but if they don't act now they'll be toast." Widder says that one problem faced by many companies is the lack of experienced executives. Basic supply-chain management, she explains, hasn't been in existence long enough for there to be enough sophisticated supply-chain managers available. "Most companies talk a good game about wanting to adopt a value-chain model for growth," she says. "But when you look at what they're doing, it's a functional supply-chain approach focused only on cutting costs." That's why many experts say that senior leadership is key. J. Michael Hagan, chairman and CEO of Furon Co., a manufacturer of specialty polymer products in Laguna Niguel, Calif., agrees. However, he adds, "Value is a mindset that [not only] has to be driven from the top down, but also from the bottom up. Everyone has to be asking whether a given task adds value, and if it doesn't, why do it?" As with other executives, he says that having a workforce trained not only in specific tasks but in an overall understanding of the business mission creates an atmosphere in which a value-chain model can take hold. One way in which Furon addresses this is by continuing to accelerate a program it began several years ago, in which it places its own employees in customer sites and also brings in the employees of suppliers and customers to work on its premises. Hagan says that this collaboration is essential if "you want to go from being a mere component supplier to being a solutions provider." He cites a case in which Furon worked with Navistar International Inc. to develop new air-brake assemblies. "At first we just sold them air-brake tubing -- reels and reels of it," he says. "They'd buy that from us, manifolds from someone else, and other components from other people." But that forced Navistar to combine those components into a workable system. Quality issues ensued: fittings would separate from manifolds, resulting in brake systems that would lock up. So Furon proposed that it build preshaped tubing complete with fittings and manifolds, ready for installation. "They saved millions, and we're making much more money than we did just selling tubing," Hagan says, crediting the collaboration between the engineering departments of both companies for the new approach. Hagan says that one essential ingredient for success in a value-chain environment is technology. "The combination of intranets and the Internet is a terrific enabler. Our engineering teams were connected right down to the CAD level on the desktop. I think when you get your networks in place and then learn how to collaborate with your partners by really understanding their needs and capabilities, you will create new solutions. And that is what value is all about."
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