Forging The Chain

Executives identify best practices and barriers in value-chain initiatives.

For all the talk of value-chain management and collaborating with partners throughout a chain, few firms operate at anything approaching a fully functioning, extended enterprise. Less than 2% of executives who responded to IndustryWeek's Value-Chain Survey say their business unit participates in an "excellent" value chain. But value-chain collaboration is not an all-or-nothing proposition. The results of small, incremental improvements with just a handful of partners on one product or function accumulate rapidly on the bottom line. And despite corporate and cultural barriers that impede collaboration, manufacturing executives and industry experts suggest there are starting points and best practices that enable companies to develop and successfully execute value-chain initiatives. The first and most obvious step toward collaboration is to recognize that value chains exist, and that all companies are links within these relationships. "I think the notion of managing a chain from supplier's supplier to customer's customer has been out there, but the reality is that we've been focused very much on the linkages one tier at a time over the last five or 10 years," says Kevin O'Laughlin, managing partner, supply-chain-products market, Ernst & Young LLP, Boston. "I'm intrigued by some of the new supply-chain structures, like the trade exchanges, which really get for the first time to an enabling, sharing infrastructure . . . ." Even with such enabling technologies, value-chain practitioners say IT must be accompanied by strategy, one that emanates from the uppermost corporate levels. IndustryWeek's Value-Chain Survey, with research conducted in association with Ernst & Young, indicates many CEOs have not embraced the value chain as a management concept. Thirty-five percent of all survey respondents identified "lack of value-chain leadership at the top of company" as a major barrier to achieving value-chain optimization. However, among companies that participate in excellent or very good value chains, just 21% identified leadership as a major barrier. More than three times as many respondents in poor chains (68%) identified lack of leadership as a major barrier. On the subject of strategy, 47% of those respondents not citing leadership as a barrier have a value-chain strategy in place vs 31% of those who indicate leadership is a major barrier. Another indication of the need for strategy can be found among respondents who participate in excellent or very good chains: 68% say they have a value-chain strategy, and 64% say the strategy is highly effective. Just 14% of respondents in poor chains have a strategy, and none reported it as highly effective. At small and midsized companies, the presence of value-chain collaboration and strategy is even less likely. Jay Taylor, executive director of professional services, Macola Inc., a Marion, Ohio-based developer of business-management software, believes most small manufacturers are oblivious to the value-chain concept. "The economy is so strong that they're fighting fires, they're trying to meet demand, and, in a lot cases, they're counting their money. They're not concerned about the guy down the street, the guy in Chicago, or the guy in Los Angeles." Only about one-fifth of companies with fewer than 500 employees have a value-chain strategy, and just 1% say they participate in an excellent chain. And, in a disturbing paradox, only 34% of small companies cite themselves -- rather than their suppliers or customers -- as the greatest barrier in achieving value-chain objectives; 44% of all companies and 50% of large companies cite themselves as a barrier. Recognizing Roles Once the vision of the value chain is embraced by management, it's necessary to look outside the company to specific roles of partners upstream and downstream. That process identifies partners that are willing to collaborate, partners that may be expendable if they don't collaborate, and partners that are crucial and cannot be replaced. For many manufacturers that supply major companies, such as mass retailers or distributors, this process also means acknowledging which company holds the most leverage. "Look at where you are in the chain -- where you are with your customers and where you are with your suppliers," advises Edward Wohlwender, senior vice president, supply-chain services, for Dayton-based Standard Register, a maker of customized business documents and electronic forms. "You may think you wield a lot of leverage with suppliers, but with customers you may not be a big cog." Even among suppliers relationships can run to extremes. V. William Hunt, CEO of Arvin Industries Inc., a Columbus, Ind.-based auto-parts manufacturer, notes the varied agendas of Arvin's suppliers: "We have a group of suppliers that are very close, totally dependent, and will do anything that we ask. Then we have a group of suppliers that are global, worldly, aggressively managing their companies, and AVCM [Arvin Value-Chain Management] is no problem for them. Then we have a big group in the middle that is broad-based; they have many customers, and we do not have a lot of leverage." At Iomega Corp., a Roy, Utah-based manufacturer of personal-computer storage devices such as Zip drives, the journey to value-chain collaboration began by first improving relationships with internal suppliers, then reaching out to external suppliers and customers. Dave Hubbard, vice president of global supply-chain management, says Iomega created a complex road map that involves four stages of improvement for each of its three partner groups. Each stage of improvement assesses the people, processes, and tools necessary to advance from where the company is currently to where it wants to be. "We start with an end statement, then work backward," he says. Hubbard cautions that the move from internal to external collaboration can be tedious and painful: "When you're establishing a value chain, what you're asking people to do is yield a bit of control to the chain. It's a very difficult thing to do when you're in a tightly competitive business or when you feel that by yielding to my control [you] have less control of [your] destiny. . . . The experience that we've had is that until we can show a pervasive win-win situation and a track record to meet commitments, we're getting a lot of skepticism. We're a 200-lb gorilla; we're not an 800-lb gorilla." Trust Through Reliability Hubbard says Iomega hasn't advanced as far with its value-chain strategy as it would like because some partners aren't ready to relinquish their trust. "[Partners] recognize what we're talking about from the intellectual standpoint. They understand the theory and what we're trying to do, and then they come back with the caveat: 'When you become more reliable, we'll talk with you.' We've had to focus on our internal processes to make sure that we are the reliable partner, and that they open up their doors and talk about replenishment schemes." That measure, "reliability," is key to collaboration, but it translates differently to customers and suppliers. On the customer side it involves attributes such as deliverability, quality, service, and agility. On the supplier side it may mean being able to provide a reliable forecast and sharing sound data with vendors. In order to share sound data, you've got to start with reliable data. Reaching a threshold of data integrity can be a formidable task for a small company and can take on leviathan proportions at multinational enterprises. "We've spent the last year reengineering the whole data process to get to the point where we have credible data to pass off, and now we can talk about Web-enabled outreach programs in terms of how to communicate this information faster and more simply," says Hubbard. "If the information is accurate, people don't have to put inventory piles in place; they can simply respond to the signal and everything starts flowing quicker. That's where we'll get the revolutions [in inventory turns]."

Value-Chain Benefits
Value-Chain Survey respondents indicated the following are a "major benefit" from sharing information with partners:
% Of Companies In Excellent Or Very Good Chains % Of Companies In Poor Chains % Of All Companies
Increased sales 41% 14% 26%
Cost savings 62% 22% 40%
Increased market share 32% 12% 20%
Inventory reductions 51% 18% 35%
Improved quality 60% 28% 39%
Accelerated delivery times 54% 27% 40%
Improved logistics management 43% 15% 27%
Improved customer service 66% 22% 44%
Sources: IndustryWeek, Ernst & Young 2000 William Paulk, general manager, ERP/supply-chain management of global industry solutions, IBM Corp., Atlanta, says a primary value-chain barrier is the absence of fundamental control data, even when IT systems are in place to extract and optimize data. He cites IBM figures that show midmarket ERP penetration at less than 40%, but questions the extent of ERP usage in those organizations. (Value-Chain Survey data show ERP implementation across all company sizes at 31%, with an additional 31% planning to implement this year). "Penetration [of ERP] in itself is not the inhibitor," says Paulk. "The real inhibitor, if you think about what the ERP system is there for, is getting the basic business controls. If I want to move to the next tier, into collaborative planning and things of that nature, do I have the right data at my disposal for planning models? . . . The ability to find very basic control and operational data is not there. If you don't have good data to feed into a lot of the planning models, even intraenterprise planning becomes somewhat irrelevant, much less multienterprise collaborative planning." Gene Long, the former director of Ernst & Young's global supply-chain practice who is now COO of SiteStuff.com Inc., echoes Paulk's statements. He says, "One of the things we see as very common is that the issue of data integrity doesn't surface until the technology is tackled: 'I want to do better collaborative planning. I want to do auction engagement for transportation [services].' And suddenly the [company] finds out the [data] they're making decisions with is really bad. The data integrity issue is one that we think successful companies will get after early and focus on on a continual basis." Data integrity is critical because more-developed value chains are sharing more information and more kinds of information. The Value-Chain Survey found that those companies participating in excellent or very good chains were far more likely to be sharing data than were companies in poor-performance chains. And they were particularly more likely to be sharing with suppliers: for example, inventory information, shared by 69% of companies in high-performance chains vs 45% in poor-performance chains share data with suppliers; sales forecasts, 68% vs 48%; strategic information, 46% vs 24%; and logistics information, 54% vs 20%. More important, companies in high-performance chains were two to three times more likely to indicate that sharing information produces tangible benefits, such as increased sales or improved quality. By 2001, predicts Karen Peterson, research director in enterprise and supply-chain management at GartnerGroup Inc., Stamford, Conn., enterprises that fail to "externalize" internal supply-chain data will be unable to achieve "preferred partner" status and will suffer a higher cost of doing business. "Information is replacing inventory, or at least people are trying to replace inventory with information," she says. Moving Beyond Price An aspect of value-chain relationships that more often involves coercion than collaboration is price. And unless capitalism is turned upside down, that's not likely to change. Standard Register's Wohlwender says, "I think there is still a lot of cautious skepticism [regarding value-chain management]. People fly at the level of integrated supply chain but operate at the level of 'What we really want are price concessions for goods and services that we're procuring.'" Pricing is the chief concern, even among companies in advanced value chains, according to the Value-Chain Survey. Forty-one percent of companies that have a highly effective value-chain strategy see "pricing pressures" as a major barrier to value-chain optimization; 44% of companies with no value-chain strategy see pricing as a barrier. Among respondents in excellent or very good chains, 40% report pricing pressures as a major barrier; 37% of companies in poor chains report pricing pressures as a major barrier.
Value-Chain Performance
Median performance measures:
Companies In Excellent Or Very Good Chains Companies In Poor Chains All Companies
Order-to-shipment leadtime 15 days 21 days 20 days
On-time delivery rate 95% 90% 93%
Cash-to-cash cycle 60 days 95 days 70 days
Annual inventory turn rate 10 turns 6 turns 8 turns
New-product development cycle 180 days 340 days 180 days
Sources: IndustryWeek, Ernst & Young 2000 With the proliferation of online marketplaces and exchanges, the importance of pricing in value-chain relationships has been elevated. In many cases portals and vortals are categorizing manufacturers as producers of "commodities," regardless of the goods they produce or if the label is warranted, and price becomes the deal maker. Value-chain experts believe, though, that as exchanges mature, online buying and selling will focus less on price and more on the collaborative benefits of time savings, market share, and reliability. Iomega's Hubbard says the true value in exchanges should be in time savings, but notes that few financial models assess time throughout the chain, and companies instead tend to make value-chain decisions based on the wrong criteria. "The key battleground in this whole value-chain thing is the concept of time. From the supplier's supplier to customer's customer, you want to make the cycle time as fast as possible because you have to improve quality, improve efficiency, improve productivity, improve cost, etc. . . . If I can take time out of the chain and take out my redundant steps I can keep my price competitive, still make a good profit, and be at the forefront of the competition rather than always fighting based on price considerations. I have extra weapons I can fight with. I've got delivery, customer satisfaction, reduced obsolescence. The value chain is giving me more things to compete with than just price." Eventually, believes Barbara Rosenbaum, associate director in the global supply chain practice of Ernst & Young LLP, Cleveland, chains will move more to such collaborative participation and the role of price will truly be secondary: "Involvement in a trade exchange provides a means to communicate and collaborate with suppliers and/or customers in a real-time environment using the Internet. An effective trade exchange will not just leverage large volumes to provide price pressures on suppliers, it will provide a mechanism to collaborate and share information up and down the value chain, thus creating a win-win situation for all parties involved in the exchange." Mindset For Change While the affordability, performance, and pervasiveness of IT continue to push the ways that companies can collaborate, the people using the technology -- and their capacity to embrace change -- may pose the biggest barrier to value-chain collaboration. "We've almost skirted around the people side of the equation," says Standard Register's Wohlwender, noting that in recent years employees have been bombarded by continuous change -- ERP implementations, e-commerce initiatives, and more. "How fast can you get people to absorb all that change in one period of time?" Peter Metz, executive director of the Center for [email protected] at the Massachusetts Institute of Technology, Cambridge, says the challenge for many companies is to help employees to embrace change more quickly. One way is through training and education, and Metz cites examples of companies that have committed 15% of employee time annually to training. (Value-Chain Survey respondents participating in excellent or very good chains were significantly less likely than those in poor-performance chains to cite knowledge/training or communication as major barriers to chain optimization: 31% vs 66% reported poor communication, and 28% vs 64% cited knowledge/training as a major barrier.) Other techniques Metz mentions are rewarding employees who accept change and hiring employees who relish change. He cites Motorola Inc. as a company that has put a lot of effort into "trying to create a change-receptive working environment," Metz notes. "They do it through training. They do it through education, and they do it through employee selection. . . . Several companies I know have put a lot more effort into employee evaluation, trying to put the prospective employees into an environment where they're being asked to deal with change." Even in a receptive environment, change needs to be adequately communicated. Long says there is typically buy-in to value-chain initiatives at high levels of an organization, but deeper down you'll find employees who haven't heard the message and "who are blind to the issue." "Communication of the objectives and the timing in supply-chain management initiatives as you evolve into value chains is [critical], and most [companies] do a really bad job of it," says Long. "How are you personalizing this to the man or woman on the line, the man or woman in the call center, or the person who's going to run ERP? What does it mean to them? If you can't answer that question today, your likelihood of success for change management is probably zero." Value-Chain Methodology IndustryWeek's Value-Chain Survey was conducted in association with Ernst & Young, the New York-based management consulting firm. The survey examines value-chain strategies, barriers, and performances. Approximately 2,100 executives responded to the Value-Chain Survey's four-page questionnaire in fourth-quarter 1999.
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