Moving Value Through the Supply Chain

July 30, 2008
Some tips on how to influence and recognize value movement throughout the supply chain.

Do the terms -- value added, superior customer value, or value chain -- make you want to throw something since you have heard the terms so much? Let's face it, you have been trying to improve revenue and profitability by creating superior value for your customers, improving effectiveness and efficiency and improving supplier relationships for years. You have spent countless hours getting managers trained in lean and six sigma processes, implementing enterprise and customer relationship management systems, and executing initiatives to improve innovation, capture voice of the customer data and integrate information systems. You have spent millions of dollars in cash, time and effort. Yet, the pressure from global competitors seems to be increasing rather than declining and you often find yourself still being beat up on price. What in the world is going on here? The problem is movement.

You probably thought that "moving value" was about how you can move value through the supply chain, managing its creation and delivery. But, it also means that value perceptions are moving throughout the supply chain; the target is constantly in flux. We will deal with both aspects of value movement in this article and leave you with five tips on how you might adapt your approach to managing them.

Value management begins with understanding that value is in the eye of the "customer" and not inherent in any product, service, or system. The "customer" is the next person in a work cell, the next process in the factory, the next business unit to whom you deliver, the immediate paying customer be it another business unit or an external firm and the subsequent downstream organizations and consumers through to the final end-user. In a true relationship mindset, world-class companies often think of their suppliers also as customers; how can I better service my suppliers and suppliers' suppliers? As such, every link in the "value stream" within your "four walls" and outside constitutes a supplier-customer relationship. Each decision maker is willing to make certain sacrifices in terms of monetary and non-monetary costs to obtain desired benefits. The more positive is that tradeoff between benefits and sacrifices, the more value both parties receive, driving customer satisfaction, commitment and recommendations to others.

A significant amount of research states that all customers value functional benefits, relational benefits, service benefits, and brand reputation (quality, consistency) -- and they evaluate each distinctly. Customers also evaluate both the monetary and non-monetary sacrifices (e.g., difficulty of doing business with a vendor, retailer, supplier) that they must make to obtain those benefits. As a result, we should exert effort on those activities that either improve the opportunity for an immediate or downstream customer to experience an improved, very specific, desired benefit and/or experience less of a sacrifice to obtain those benefits. Moving value means constantly improving the value perceptions immediate and downstream customers perceive they are getting. In exchange, customers "pay" suppliers more in terms of price, volume, share of business, and share of mind, improving the value that suppliers receive from customers all the way back through the supply chain.

Moving value recognizes the fact that most of what and how customers make value judgments is out of the control of marketers/suppliers/brand managers. Customers constantly are bombarded with buying-related information. As customers, regardless of definition, go about living their lives, they are constantly refining their interpretations about the value of specific products, services, and relationships. Since brand managers/suppliers have little influence on this valuing process, they are forced to be constantly vigilant to the changes in what specific customers value and why. It is nothing short of an entirely different way of looking at customers and supply chain relationships.

So your task is two-fold, to continuously improve the value equation at every stage of the value stream by improving benefits and reducing sacrifices while also recognizing that the target you are shooting at is constantly changing.

I have five tips to help you think about influencing and recognizing value movement throughout the supply chain.

  1. Operate under the assumption that your competition knows at least 90% of what you know -- if not 10% more than you know. Dig deeper. Pat Summit, head coach of the six-time national champion Lady Vols women's basketball team at the University of Tennessee, simply outworks her competition. The team puts in more hours refining processes and skills and studying the competition and customers than do their competitors.
  2. Assume that the most critical aspects of desired value propositions are changing 10% faster than your current nightmare. In the consumer electronics world of LG and Sony, constant change means rapidly increasing technological capabilities and customer expectations within a world of stomach-wrenching, pricing cascades. Vigilance for opportunities to influence changes in value perceptions anywhere along the supply chain and for changes to which they must respond is essential merely for survival. Make one wrong strategic move based on an inaccurate or incomplete evaluation of value movement, and a firm could be playing catch-up for years as witnessed by Dell's operations in China.
  3. Focus on quality metrics but ignore emotional bonding through superior brand management at your own peril. Samsung has significantly improved its ability to increase value creation throughout its supply chain, both for business customers and consumers. However, it has yet to create the powerful emotion bonds that solidify customer relationships and facilitate higher margins that its tougher competitors have. Quality alone is never enough.
  4. Develop relationships that enable significant and frequent information sharing through joint processes that involve multiple supply chain partners. Ikea has long been known for its ability to move value both up and down its supply chain by integrating demand and supply processes and designing supply chains that make it easier, more affordable, and in many cases, more enjoyable for customers to acquire the benefits they want. They not only execute superior supply chain management, they also win advertising awards for the creativity and effectiveness of their marketing communications. They have a laser-focus on specific target markets, know how to own their position within those markets, and stay at the forefront of changing value expectations -- some of which they drive themselves.
  5. Learn by thinking out of the box. Don't benchmark and hire only from within your industry. Hire top talent from outside. Invest in processes that stimulate new ways of recognizing and approaching problems and opportunities. Eastman Chemical Co., for example, has hired a number of branding, product development, and advertising managers from consumer goods industries in order to stimulate out-of-the-box thinking about value-change possibilities.

Value must be experienced at each and every step of the supply chain within and outside of your organization. Your targets are moving too quickly in today's global business environment. You must constantly move the value bar higher at every link you can influence and keep up with changes that you cannot influence but to which you must respond -- all ahead of the competition.

Daniel J. Flint, Ph.D., is the Proffitt's, Inc. Professor of Marketing and director of the marketing Ph.D. program at the University of Tennessee, Knoxville. He has an engineering degree from Annapolis, an MSA from Central Michigan University, and a Ph.D. in marketing and logistics from the University of Tennessee. Flint's expertise is in customer value management, specifically helping firms gain deeper insights to their customers' changing value perceptions, and logistics innovation.

For over 50 years, University of Tennessee (UT) faculty have played a major role in the supply chain/logistics arena -- conducting innovative research, publishing leading-edge findings, writing industry-standard textbooks, and creating benchmarks for successful corporate supply chain management. Programming is top-ranked in Supply Chain Management Review, U.S. News & World Report, and Journal of Business Logistics. Certification is available.

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