In the ideal state, a manufacturing company is like a seamless, value-creating pipeline endlessly meeting customers' expectations by transforming ideas, raw materials, parts and subassemblies into finished products and services. That's the vision.
Of course reality is all about limited resources, wasteful and disconnected processes, unfulfilled promises, impossible customers and recalcitrant suppliers. Still, the vision of the perfect customer-fulfillment process provides a useful framework for understanding where a company actually adds value. To understand how manufacturers are adding value today and how they might better align functional activity, we joined forces with IBM Corp., working closely with IBM Business Consulting Services, late last year to conduct the IndustryWeek Value-Chain Survey.
The spirit of our inquiry followed the original value-chain concept introduced by Michael Porter back in the mid-1980s (Competitive Advantage, 1985, The Free Press). Looking internally, Porter said the goal of a company's various activities -- which include marketing and after-sale service in addition to operational functions -- is to add sufficient value to a product or service to, at minimum, cover the cost of providing those products and services.
It was therefore reassuring to find, when asked to rank their top three objectives, manufacturers listed profitability first -- by a long shot -- in each of the five areas that we surveyed. Not surprisingly, the No. 2 priority varied depending upon which factor of the profit equation survey respondents could influence most directly. People in new product development, supply-chain planning and customer-order management singled out increased revenue as their second-highest objective, while those in logistics and procurement were zeroing in on cost reductions.
Porter hypothesized that, by analyzing functional activity, company strategists could determine where competitive advantages lie. Based on this, they could then direct resources more effectively and better evaluate what a company should do in-house and what should be outsourced. Manufacturers have spent the intervening years -- a period in which information technology has exploded and trade barriers have fallen, speeding communication and freeing goods and services to move across international borders -- wrestling with this very issue. As competitive advantages have evaporated and reappeared, they've become adept at rationalizing their resources.
In this environment the value-chain concept itself has expanded to include the activities of customers and suppliers. Able to collect and monitor much more information than they could in the past, operational leaders have realized that the opportunities to cut costs and enhance customer satisfaction across the value-creating system dwarf the opportunities that exist within any single organization. Under the updated vision of the value chain, wasteful procedures, transactions and buffer stocks -- the historical legacy of mistrust and hedges against market uncertainty -- are eliminated and replaced by cross-organizational collaboration and data. What remains is a "profit chain."
The value-chain survey data is broken out in five functional areas:
Methodology: IndustryWeek editors and subject-matter experts within IBM Corp., our research partner, developed the survey instruments for each of five functional areas. Each survey consisted of 18 to 24 questions. For the mailings we pulled random samples from lists of individuals with the appropriate functional job titles obtained from the audited subscription files of IW and other Penton Media Inc. lists. IBM mailed the five survey forms to about 25,000 people. The IBM Survey Research Center collected, cleaned and tabulated the results from mid-September to mid-October 2003. There were 1,461 completed questionnaires for an overall response rate of 5.9%. The total number of respondents broke down as follows: supply-chain planning (260), new product development (360), procurement (396), customer order management (270) and logistics (175).