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Value Chain = Supply Chain + Demand Chain: New Approaches to Creating and Capturing Sustainable Value

Fanny Thublier(1), Terry Hanby (2) and Yongjiang Shi (2)

(1) Arts et Métiers ParisTech 75013 Paris, France (2) Institute for Manufacturing

University of Cambridge, Cambridge, CB3 0FS, UK  

 

Abstract The purpose of this research paper is to develop a Value Chain conceptual model based on a combined Supply and Demand approach. Drawing primarily from the literature on Supply Chain, Demand Chain and Value Chain, modern definitions for these concepts are developed. Based on these findings, a new equation in the “value” world is introduced: “Value Chain = Supply Chain + Demand Chain”. The resultant model recognizes the growing importance of the end-consumer in the design and management of these chains and considers both the effectiveness and efficiency relationship in the Value Chain. In addition, different value perspectives for the Value Chain are suggested with particular focus on sustainable value creation and capture issues. It is anticipated that this model will be developed further in the specific context of the luxury market using case studies to develop and refine the proposed Value Chain model. Keywords: Value Chain, Supply Chain, Demand Chain, Consumer, Customer. Introduction While external forces such as economic, ecological, technological and regulatory developments are increasingly altering the global landscape, new industry trends now affect the value chain. As well as information and product flow issues, one of the main challenges for today’s manufacturing is undoubtedly to be both efficient and effective. From now on, to succeed in tomorrow’s mass-customized market, companies must be more and more nimble and responsive in creating unique value propositions that increase that so called “value for the customer” (Band, 1980). Thus, the meaning of the term “value” is shifting from a purely financial industry-oriented perspective to a consumer/customer-driven one. Whereas, suppliers, producers and customers (distributors, retailers…) traditionally determined their own marketplace direction, nowadays, they are faced with the necessity to first start with the end-consumer requirements and then build proactive and knowledge-based relationships as well as infrastructures to deliver maximum value. In light of these facts, what is the role of the consumer in the Value Chain and what are the implications for the future design of the Value

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Chain? To answer these questions this paper starts by examining future industry/consumer trends as well as external forces and opportunity areas. Based on the analysis of these elements, the next step is to develop new models for Supply Chain and Demand Chain. Indeed, the value of a product/service is maximal when simultaneous supply chain performance and demand satisfaction are reached: in other words, Supply and Demand Chain “collaboration” is the key to Value Chain survival. This preliminary finding leads to the development of a new conceptual model for the Value Chain. More specifically, the focus is on an “end-consumer approach” in the sustainable creation and capture of value through a new value equation: “Value Chain = Supply Chain + Demand Chain”.

Literature review Supply Chain The literature on the Supply Chain provides a range of definitions for that term so that there is currently no single, common definition. Despite this it can be seen that there has been a growing complexity of the supply chain structure over time and that three main classes of model can be identified: -­‐ a classic linear model This model first appeared in a US Outlook article (Oliver and Webber, 1982) and attracted considerable attention (La Londe and Masters, 1994; Quinn, 1997; Handfields and Nichols, 1999; Chopra and Mendel, 2001). In today’s industrial context, the definition which seems to be most commonly used is that a Supply Chain refers to the integration of internal business functions and the flow of materials and information from the point of entry into the firm until they are delivered to the end-consumer. Typically, three building blocks can be identified: Inbound Operations, Production and Outbound Operations (see figure 1).

Figure 1: the “Classic” Supply Chain

Inbound operations refer to reception, warehousing and control of raw materials, Operations are manufacturing activities that transform the inputs into the final product and Outbound Operations are activities that deliver the finished product to the end-consumer (warehousing, order fulfillment). According to David F. Ross (2006), the main focus of this kind of Supply Chain is to: “Supply the right product at the right time with as little waste as possible”. In other words, the classic linear chain can also be qualified as “Lean Supply Chain”. This linear

Inbound Operations

Outbound Operations Production End-Consumer

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Supply Chain focuses on cost reduction, continuous improvement of processes, outsourced support functions and responsiveness and is “product/service-centered” -­‐ a linear model with integrated processes units : the “SCOR” Model Based on a linear approach of the Supply Chain, that model focuses more on management processes rather than Supply Chain structure and members. Specifically, the Supply Chain Council (2005) proposed a reference model for benchmarking supply chain processes and designing IT solutions for Supply Chain Management. This model distinguishes several processes: Plan, Source, Make, Deliver, and Return (see Figure 2). Through the interaction of these five processes in a firm, supplier, supplier’s supplier, customer, and customer’s customer, the Supply Chain members can communicate effectively.

Figure 2: The SCOR Model (Supply Chain Council, 2005)

Process Description

Plan Processes that balance aggregate demand and supply to develop a course of action which best meets sourcing, production and delivery requirements.

Source Processes that procure goods and services to meet planned or actual demand. Make Processes that transform product to a finished state.

Deliver Processes that provide finished goods and services, typically including order, transportation and distribution management.

Return Processes associated to return or receive returned products.

Table 1: Description of the SCOR Model processes

-­‐ a network approach (Lambert et al, 1998) As the concept of Supply Chain Management evolved, the term ‘Network’ came into use. It was developed in response to the fact that firms were generally part of a number of supply chains and had several customers and alternative suppliers. Attributes of network structure include the centrality of an actor’s position (Brass and Burkhardt, 1993; Ibarra, 1995), the extent of network closure (Coleman, 1990) and the degree

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of disconnectedness (as a “structural whole”) between contacts (Burt, 1992). These factors all contribute to network integration. Lambert et al. (1998) physically divided the supply network structure into an “upstream” supply network including tier 1 to initial suppliers and a “downstream” supply network including tier 1 to the end-consumers. This perspective views a focal firm’s whole supply network by comparing performance in its multiple supply chains in order to identify potential competitive problems and opportunities as well as to identify overall process improvements through supply chain thinking. This perspective views the focal company and members of the network in static positions and thus aligns well with Porter’s (1985) ‘Value Chain’ proposal that understanding a firm’s position in respect of its relationship with its supplier, channel, and buyer value chains is a crucial step in determining the appropriate direction of the many trade-off decisions it faces. Thus, the concept of Lean Supply Chain evolved towards the one of an Adaptive Supply Chain.

Figure 3: The Supply Network Model (Lambert et al., 1998)

Demand Chain The marketing concept can be considered as the necessary precursor to the Demand Chain concept. The marketing approach advocated that companies should plan their production in the context of consumer wants and needs and not just manufacturing capability. This new philosophy recommended focusing on the customer. In the 1980s, the emphasis in marketing strategy began to shift from activities that led to a single sale to ones that help to foster the development of a long-term relationship between customers and their suppliers. The concept of “demand chain” effectively emerged in 1997 when Fisher considered the limits of a purely cost/efficiency-focused Supply Chain. Christopher (1998) went further and suggested that:

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“It should be argued that it [Supply Chain Management] should be termed “Demand Chain Management” to reflect the fact that the chain should be driven by the market, not by suppliers…”

However, the problem of such an assertion is that simply changing the name does not change the behavior. Since then, the Demand Chain concept has attracted tremendous attention but, as with the Supply Chain, no universally agreed definition has emerged. For example, some authors define it as a part of the supply chain and emphasize the market mediation function (Eschenbacher and Knirsch et al. 2000, Treville and Hameri 2004), whereas other authors prefer to treat it as a separate chain that considers demand from market to suppliers (Huttunen et al. 2000, Korhonen et al. 1998, Williams et al. 2002). So, what is the ‘best’ relationship between Supply Chain and Demand Chain? Langabeer and Rose (2001) established a comparison between the Supply Chain and the Demand Chain (see Table 2) suggesting that an effective approach to demand chain management requires that organizations first of all understand their market and then identify core processes and capabilities that are required for success.

Supply Chain Demand Chain Efficiency focus Effectiveness focus

Processes are focused execution Processes are focused more on planning and delivering value

Cost is the key driver Cash flow and profitability are the key drivers

Short-term oriented, within the immediate and controllable future

Long term oriented, within the next planning cycles

Typically the domain of tactical manufacturing and logistics personnel

Typically the domain of marketing, sales and strategic operations managers

Focuses on immediate resource and capacity constraints

Focuses on long-term capabilities, not short-term constraints

Historical focus on operations planning and controls

Historical focus on demand management and supply chain alignment

Table 2: Supply Chain and Demand Chain (Adapted from Langabeer and Rose, 2001) Walters and Rainbird (2006) offer a model that integrates the two chains. To them, first understanding the Demand Chain (and more exactly the customer value drivers) may be used to identify the critical focus areas for an organization. These can then be used to adapt the supply chain…for the benefit of the whole Value Chain.

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Value Chain The term “value chain” was first introduced by Michael Porter (1985) to describe the range of inter-linked activities that a business uses to make and sell its products/services and so make profit. However, as for the Supply and Demand Chains, a plethora of models have emerged to describe the Value Chain as showed in Table 3.

Porter, 1985 Value Chain = Primary activities + Support Activities

Brown, 1997 Industry perspective: tool to disaggregate a business into related activities

Evans&Berman, 2001

B to B Value Chain model: Value Chain itself activity based and benefits created and offered to customers, and value deliver chain that all the parties providing value

Walters&Lancaster, 2001 A Value Chain is a business system which creates end-user satisfaction and realizes the objectives of other member stakeholders.

Walters&Rainbird, 2006 Value Chain = Supply Chain + Demand Chain

Physical

Lord Sainsbury of Turville, 2007

Value chain = activities from R&D to after-sales service through production

Rayport&Sviokla, 1995 Virtual Value Chain = value-adding information activities

Lee&Yang, 2000 Introduction of the concept of knowledge Value Chain

Definition

Virtual

Hansen&Birkinshaw, 2007

A value chain is a comprehensive framework to break down innovation into three phases and six critical activities.

Sullivan&Geringer, 1993 Two types of Value Chain: natural value chain and contrived value chain

Value Chain classification

Gereffiet al., 2005 Five types of Value Chains depending on the firm and the context: market, modular, relational, captive, hierarchy

Table 3: Value Chain Classification and definitions

In this paper, three important Value Chain models are described- Porter’s (1985), Lord Sainsbury of Turville’s (2007) and Walters and Rainbird’s (2006). Each one of these models is based on different but very influential ideas. For instance, Walters and Rainbird (2006) put the end-consumer in the center of their model, whereas Porter (1985) and Lord Sainsbury of Turville (2007) place greater emphasis on industry activities and, consequently, adopt a manufacturer’s point of view. Such different conceptions show how the market and the industry perspectives evolved over time and what the principal unresolved issues are in today’s value chain.

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-­‐ Porter’s (1985) complex linear model Porter (1985) was the first to argue that “every firm is a collection of activities that are performed to design, produce, market, deliver and support its products. A firm’s Value Chain and the way it performs individual activities are a reflection of its history, its strategy and the underlying economies of the activities themselves.” In other words, a Value Chain can be described as the value-added activities of an organization. In his model, Porter divides these activities into two categories, “primary activities” and “support activities”. The “primary activities” are dedicated to creating and delivering products as well as after-sales assistance. The “support activities” support the “primary activities” and can be described as all the activities that help to increase the effectiveness or efficiency of the primary activities.

Figure 4: Porter’s (1985) Value Chain Model

Firm Infrastructure Activities such as finance, legal, quality, management. Human Resources Management

R&D, process automation, and other technology development used to support the value-chain activities

Technology Development

Activities such as recruitment, development, and compensation of employees.

Procurement Function of purchasing the raw materials and other inputs used in the value-creating activities.

Inbound logistics

Receiving, warehousing and inventory control of input materials

Operations Value-creating activities that transform the inputs into the final product. Outbound logistics

Activities required to get the finished product to the customer, including warehousing, order fulfillment

Marketing and sales

Activities associated with getting buyers to purchase the product, including channel selection, advertising, pricing…

Service Activities that maintain and enhance the product’s value including customer support, repair services…

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Porter highlights the fact that “Value activities are the discrete building blocks of competitive advantage.”(cost or differentiation). For instance, a firm can achieve differentiation advantage by changing its Value Chain activities and redesigning its Value Chain. Porter (1986) went even further by linking up the value chains between firms to form what he called a “Value System”. In this way, a value system integrates a firm’s VC, a firm’s suppliers Value Chains and a firm’s customers’ Value Chains. However, in the current context the linkage between multiple firms’ value creating processes has more commonly become known as the “value chain.” As this name implies, the primary focus in value chains is on the benefits accruing to the participants especially companies: effective value chains generate profits. -­‐ Lord Sainsbury of Turville’s (2007) model: a Porter’s model simplification

Like Porter, Lord Sainsbury of Turville (2007) adopts a linear approach. The difference between the two lies in the fact that Sainsbury’s model is less complex and includes R&D and design.   According to him, the Value Chain includes all activities from R&D through production to service provision, and manufacturers are engaging in one or several links in the Value Chain. He suggests that a deep understanding of the Value Chain and the links between activities is required for firms in their practical operations to gain a competitive advantage. Indeed, companies’ decisions depend on many factors including the maturity and complexity of the product/process, maturity of the sector and the history and ownership of the company.

Figure 5: Lord Sainsbury of Turville’s (2007) Value Chain Model -­‐ A linear model which integrates the Supply Chain and the Demand Chain Walter and Rainbird (2006) took a totally different approach from these two models. They defined the Value Chain by the following fundamental equation: “Value Chain = Supply Chain + Demand Chain”.

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Walters and Rainbird (2006) argue: “[…] the value chain is an integrated management

activity that first explores and understands markets that appear attractive; second, through processes such as market opportunity analysis identifies the industry drivers and resource requirements; third, considers the potential organizational alternatives that are available and that are likely to prove to be successful in achieving realistic marketing and financial objectives.” In other words, they use the demand chain to focus on the supply chain (and more exactly on supply chain design, resource allocation, partner selection) as the way to gain competitive advantage. Their model is predicated on three key ideas: the existence of a customer value model (e.g. customer value expectations), customer value drivers (see table 4) and the concept of value proposition. Taken together, the customer value model and customer value drivers provide a good understanding of customer socio-economics and demographics. These can then lead to an effective market strategy developed through a value proposition.

Figure 6: Walter and Rainbird’s (2006) Value Chain Model  

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Value Driver Characteristics Asset Management Issues of capital intensity, utilization and productivity of

significance to industrial (B2B) customers. Time management Time-to-market: New Product Development

Production cycle time Order cycle time

Cost Management Purchase price Fixed (supply sourcing and evaluation, negotiation, transaction) and variable (operating costs, maintenance, product disposal) costs concerns

Performance Management

Customization Quality Unit Cost of output Flexibility Choice options Aesthetics Convenience Financial

Risk Management Financial risk (market/investor response) Marketing risk (consumer and stakeholder response) Relationship risk

Information Management

In the “new economy”, information need to be: -­‐ Accurate -­‐ Relevant -­‐ Shared -­‐ Timely

Table 4: Customer Value Drivers (Walters and Rainbird, 2006)

 

The value proposition is the most important step in the value chain analysis. Indeed, it enables the company to identify the kind of organization it can offer to the end-customer in response to their expectations. Secondly, it defines both for the external and internal stakeholders, what their tasks and roles need to be in order to meet the end- consumer expectations.

However, it is then necessary to turn this value proposition into appropriate production and coordination decisions so as to reflect customer product and purchasing behavior preferences.

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Shortcomings of the Current Models Supply Chain Shortcomings Table 5 compares the previous Supply Chain models in terms of their good and bad points.

Model Advantages Drawbacks Classic linear Model

• Efficiency • Cost saving

• Accepting Demand • Lack of alignment and

strategic visibility • Marketing and sales are not

taken into account SCOR Model

Excellent tool to: • Analyze, visualize and discuss

the structure of the Supply Chain • Reveal redundancies and

weaknesses • Formulate the structural and

strategic changes to improve the performance of the Supply Chain.

• Communicate between members

• Production planning needs to be supplemented

• Implementation level is not described

• Emphasis on the activity involved, not the person or organization that performs the activity

Supply Chain Network Model

• Responsive and low cost supply chain

• Source of competitive advantage in international markets

• No sophisticated systems are required to run it.

• Close relationship/ Partnership • Greater control and capture value • More visibility

• fragmentation of the supply chain due to globalised networks =>

the configuration of a supply network has become a complex business consideration • What about coordination,

integrated methods, information flows, risk mitigation in a more and more complex and globalised network?

• Sustainable network?

Table 5: Three famous models of Supply Chain: Advantages and Drawbacks As can be seen from the table current models have a number of shortcomings: -­‐ Lack of alignment and strategic visibility in an increasingly globalized world In an ever more complex globalised environment the Supply Chain can best be described as a huge network composed of a lot of suppliers and customers simultaneously interacting with each other. Because of the difficulties inherent in managing such a supply ecosystem, strategic and operational alignment (of, for example, supplier selection, collaboration and

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operations) is vital for success. Without this, the weak links in that network will be rapidly broken especially if extreme variability of demand puts excessive pressure on the system.

-­‐ Bad management of the “bullwhip effect” (Forrester, 1961): disruptions downstream and upstream can easily produce a ripple back effect leading to demand uncertainty.

-­‐ Failure to include risk management, optimization and cost impacts Market frailty, developing economies and globalization are major threats in today’s world and greater understanding the drivers of these risks, their probabilities and their effects is urgently needed. -­‐ Insufficient trust and relationship-building skills between suppliers, the focal firm,

customers and consumers and inadequate process orientation including appropriate metrics, information and integration.

A supply chain can be described as the interrelationship between a number of different processes. Thus, it is necessary to learn to rely on the skills and capabilities of the supply chain partners. For instance, by using trustworthy downstream partners, a firm can reduce its lead times and costs and improve product or service quality. Despite this, a process orientation needs to have the right metrics and the appropriate quantitative tools to measure performance. There have been some significant advances in this area particularly with reference to supply chain optimization. The focal company and its suppliers and customers need to agree how they will address the measurement and improvement of Supply Chain performance. In the coming years, a comprehensive control system will be required to assure effective and efficient performance measurement in the whole chain. However, developing such a system will require the various ‘players’ to agree and implement mutually advantageous exchange processes in order to ensure sustainable relationships.

-­‐ Lack of ongoing frameworks for supply chain architecture and structure: More and more problems related to supply chain structure and architecture are appearing as a result of inadequate relationship building. More specifically, with a growing and variable demand, supply chains need constant realignment, which often proves to be a difficult requirement because of problems in implementing effective integration and coordination between supply chain partners. Moreover, most of supply chains are not one-dimensional but necessitate consideration of a number of different chains including the product supply chain, the physical supply chain, the financial supply chain and the information supply chain.

-­‐ Insufficient management capability and leadership: supply chain competency models need to be developed to better identify, train and motivate individuals for taking on key supply chain roles.

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Value Chain Shortcomings Comparison between the different models Models Advantages Drawbacks Porter’s (1986) Model

• Competitive advantage: low cost and differentiation

• No customer focus • Globalization and

technology improvements? • “Static” Model

Lord Sainsbury of Turville’s (2007) Model

• A new approach: R&D and design are included in Value Chain

• A manufacturing perspective rather than a customer’s one

• No analysis of the market space and marketplace

• Information activities need to be considered

Walters &Rainbird’s (2006) Model:

“Value Chain

= Supply Chain

+ Demand Chain”

• Approach of both customer and corporate expectations

• “Marketing” approach • Integrated management

activity and inter-organizational relationship

• Enables planning, coordination and control

• Sustainable competitive advantage

• Proactive model

• A complex model difficult to reach, with lots of key steps hard to analyze

• No distinction between customer and consumer

Table 6: Three famous models of Value Chain: Advantages and Drawbacks As the above table makes clear these models have not paid sufficient attention to the requirements and demands of the end-consumer. Yet, in the coming years, consumers are likely to demand faster responses to their increasingly unique needs and thus will progressively take control of the whole Value Chain. The value of a product/service will more and more lie in the capacity of firms to meet these consumer demands. With this in mind, Clarkston Consulting (2007) has taken these dramatic changes in the consumer goods industry and named the business model of tomorrow the “Collapsing Value Chain”. Demand Chain Shortcomings The previous analysis makes clear the evolution of the efficient Value Chain towards a customer-centric model through the development of activities such as R&D (Lord Sainsbury of Turville, 2007), marketing and customer/consumer expectations analysis (Walters and Rainbird, 2006). However, the literature review has also shown that very often authors have confused two concepts: customer and consumer. In practice, these terms refer to two different groups of buyers who usually have different needs. The term ‘customers’ refers to distributors, retailers and cybermediaries (e.g. virtual exchange or buying intermediaries such

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as eBay).Their main preoccupations are consistency, speed, quality and cost. On the other hand, ‘consumers’ are at the very end of the Supply Chain and buy products for private and non-manufacturing use. Their purchase decisions are based not just on functional criteria such as cost and quality but more intangible emotional and social considerations as well (De Chernatony 1998, Baker 2003, Kapferer 1992).It is, therefore, often necessary to be aware of both of these rather different kinds of demand when creating and delivering a product and assessing any associated value. Thus, a comprehensive definition of the concepts of Demand Chain and Supply Chain needs to be based on an important assertion: “the customer is not the end-consumer”. And it is on that distinction that the whole of our study we will be based. Overall Shortcomings of Current Models and Consequent Opportunity Areas With the development of “e-technologies” and the growing obsession with reducing costs, companies are becoming more and more vulnerable to competition. The problem lies in the fact that companies are too inner-directed and, consequently, do not pay even attention to the wants and needs of their end-consumers. And yet, the latter, who are becoming more diverse in their demands, now ask for customized and innovative products with far greater emphasis on effectiveness rather than efficiency. In addition, new considerations related to both information flows and product/service flows are appearing. Consequently, suppliers, “focal” firms and customers need to develop collaborative relationships as well as aligned strategies to provide end-consumer satisfaction in an environment where consumers needs can change rapidly. Thus, defining today’s Supply Chain, Demand Chain and Value Chain requires an awareness of the industry/consumer key trends and external forces in order for an organization to be able to identify opportunity areas (see Table 7).

Opportunity Areas

Changing demographics Diversity of today’s consumers : market segmentation

Consumer behavior analysis

The “smart and savvy consumer” Innovation and product development

Consumer trends

Differentiation of the buying experience

New roles and new ways of partnering

Rich-media information Real-time visibility Information flows trends

Personalized focus Service orientation Demand capturing and understanding

Products/services trends

Personalized products and “mass customization” Virtualized products Consumer-Driven R&D Quality Brand ownership

Lean provisioning Multi-channel shifts Partner selection Sustainable and collaborative relationships with the consumer

Table 7: Key trends and opportunity areas

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These emergent trends require companies to take into account new external forces including ecological factors (sustainable development), regulatory developments (new rules), increasing globalization and competition and new technologies (Virtual reality, Information networks). New models for Supply Chain, Demand Chain and Value Chain A Supply Chain for Today’s World

The above arguments suggest that the future Supply Chain will have to:

-­‐ Lay greater emphasis on product innovation and environmental considerations

-­‐ Make greater use of new technologies: welding supply chains into seamless value networks requires integrative technologies that provide all levels of the Supply Chain with real-time windows that are sensitive to the real world pull of consumer demand.

-­‐ Recognize the presence of risk and understand the risk: risk can be divided into external risks arising from the marketplace (such as unpredictable changes in consumer demand and disruptions in the availability of materials) and internal risks (changes to processes, inaccurate data and incomplete planning for disaster and recovery). In practice, external and internal risks overlap. In addition, companies become extremely dependent on disruptions caused by social, political and natural events. Thus, according to John Cummings, i2 Technologies Chief Marketing Officer, “Risk isn’t a side issue of supply chain management; it’s the entire issue. You can really boil the whole equation down to risk.” Unfortunately, few quantitative models have been developed for accurate risk forecasting.

-­‐ Focus on effectiveness (doing the right things) rather than efficiency (doing things for less).

-­‐ Develop “In-Store” Logistics: including in-store visibility, shelf-ready products, shopper interaction

-­‐ Develop trust and mutually beneficial relationships: trust and collaboration have been

common in many long-established industries for many years. However, the twin pressures of cost minimization and price reduction have often had a detrimental effect on these co-operative activities. As a result, many of today’s Supply Chains are constrained by less than ideal relationships at both supplier-manufacturer and distributor-retailer levels. Further, instead of creating a solid and sustainable working relationship, many procurement and logistic organizations still continue to regard customers as adversaries. The main reason for this is that these latter activities often have no strategic role but just enable the “buying” or “shipping” of materials. The

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second reason is that many (most?) buyers and logistics managers choose their suppliers on the basis of a single decision criterion- price.

It is nowadays imperative for an organization to focus on the demand of both its customers and consumers. These two often have different needs with customers focusing more on profit and effectiveness, while end-consumers are now frequently concerned with acquiring a range of more intangible ‘emotional and social’ benefits (Kano, 1984). In this context, adaptability and integration within the Supply Chain are key requirements and should include shared data, supplier selection, synchronized production, “co-destiny” relationships, Collaborative Physical Logistics (shared transport, shared warehouse, and shared infrastructure) and customer training into the culture of the focal company. All in all, the focus will be on coordination across the entire Supply Chain. However, particular attention must be paid to the end-consumer by: -­‐ developing strategies that are consumer specific

-­‐ using information about demand to achieve alignment

-­‐ developing Demand Fluctuation Management: joint planning, execution and monitoring

-­‐ adapting to changes in both supply and demand

-­‐ laying emphasis on trust, reliability and loyalty of both the customer and the consumer: a strong attention should be paid to these notions as they are key factors in the creation of competitive advantage. They enable information sharing, material flow coordination in supply chains, demand shaping and create sustainable relationships.

-­‐ Considering the nature of consumer’s buying experience

All of this suggests that the traditional notion of a linear supply chain model is no longer applicable and that any adequate future model will need to be a highly dynamic demand- driven network. Taking all of these factors and considerations into account the following model has been developed:

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Information flows

Figure 7: Tomorrow’s Supply Chain (modified from AMR Research, 2007) This circular model differs from the classic linear model in that it does not simply accept demand but actually helps to shape it. It also proposes a close relationship between Supply activities, Product activities and Demand activities. Indeed, to meet any effectiveness objective, the delivered product has to be created in conformity with the end-consumer’s needs and demands. That is why, the “Demand » circle has to “collaborate” with the “Product” circle in order to deliver the most suitable set of product/service characteristics. Then, this specific product has to be physically created to reflect these characteristics. To achieve this, it is once again necessary for the “Product” circle and the “Supply Circle” to align their work and collaborate. During this production stage, Supply members need partners to act in synchrony with each other, both to reach the efficiency objective and to deliver the highest-quality product. If the end-consumer expectations are not satisfied, then, it will have far reaching consequences on the focal company and, in turn, on its Supply Chain. The only guaranteed solution is to redesign the supply chain by focusing on the Demand Chain and so gaining precise understanding of the end-consumer and the market.

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In contrast to classical Supply Chain models, this demand-driven circular construction offers a self-regulating model. A Demand Chain for Today As seen above, designing the new Supply Chain requires an understanding of the Demand Chain. But just what is a Demand Chain? With the growing complexity of markets, sales systems, the consumer environment, channels to market (Web, B2B marketplaces) and e-global competitors, it has become particularly difficult to manage effectively the relationships with the end-consumer in the demand chain. For instance, the Internet enables consumers to readily compare prices and choose their vendors. Further, B2B Marketplaces often aggregate products and threaten margins...and all this is taking place in an environment of growing diversity of consumer demand variability pressure. In light of these facts Demand Chains need to be “consumer-driven” and enable the development of Supply Chains that can rapidly deliver customized products, personalized support and increased consumer satisfaction: figure 8 illustrates these necessary changes.

Figure 8: The new Demand Chain: the consumer is the starting point (modified from Ross, 2008)

This model begins with the consumer, who is the “governor” of the Demand Chain, and then progressively moves towards the suppliers. Thus, four kinds of demand are identified:

- A consumer demand: which is, in effect, an “independent” demand since it is not subject to any form of higher demand and is the prime mover that initiates activities in the rest of Supply Chain.

- A customer derived demand: that is subject to the consumer demand. Its role is to let manufacturers know what the end-consumer expectations are. The customers are important intermediaries in the value creation process.

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- A direct demand: from the end-consumer to the focal firm, based on the consumer’s buying preferences.

- A dependent demand from the manufacturers/focal firm to the suppliers: the former have to manage both the finished goods (subject to both derived and dependent demand) and the production inventory. Once the finished goods demand has been determined, the contingent requirements have then to be communicated to materials and component parts suppliers for production and replenishment. In this way, suppliers are subject to dependent demand. As shown above, these two types of demand have very different characteristics and yet have to be coordinated for an organization to achieve optimal performance.

Finally, what is a Value Chain? The concepts Supply Chain and Value Chain have often been confused. However, they are two quite distinct entities. While Supply Chains are concerned with issues of logistics, material flows, information and cash, the Value Chain focuses on the sources of value in the chain and how these are co-ordinated in a coherent manner. The Supply Chain refers to issues such as efficiency, effectiveness and sustainability whereas the Value Chain deals with questions related to identifying and managing the sources of value in order to improve the competitive landscape and the competitive advantage for the focal firm. The Demand Chain can be considered as both the driver of these changes and the “data provider” on which companies base their new Value Chain system. The Value Chain approach presented in this paper offers a model that tries to satisfy both end-consumers and corporate expectations by integrating Supply Chain and Demand Chain processes (see figure 8). Indeed, demand defines the Supply Chain objectives whereas supply-side capabilities are used to shape, satisfy and sustain demand. There is, therefore, a dependency relationship between the Demand and Supply Chains. Moreover, managing both the Supply Chain and the Demand Chain systems makes it possible to deliver more consumer-sensitive value propositions and so create greater market value. In common with Walter and Rainbird (2006), the equation “Value Chain = Supply Chain + Demand Chain” is the essential foundation of this model. However, this in turn led to the recognition of two kinds of values chains contained within the Value Chain itself –the Industry Value Chain and the End-consumer Value “Chain”. Value from an industry perspective comes from the product/service itself, whereas for the end consumer value is defined by their perception of this same product or service; the two type of value may, in practice, differ very considerably as is true, for example, in the luxury goods market. Because markets are more and more consumer-driven, increasingly it is the consumer’s perceived value that is being placed at the top of the agenda. In fact, the traditional value definition, Value = Quality/Price is evolving due to a new equation of ‘perceived benefit’/price where ‘perceived benefit’ includes a whole host of complex and intangible psychological considerations on the part of the end consumer.

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Another important trend is the demand for ever-greater value derived from products and services that offer faster speed to market, greater flexibility in response to changing consumer needs and stronger ecological credentials. Managers nowadays frequently have to make decisions on shorter notices with less information and higher penalty costs. In some markets, only firms that have “mass-customization” capacities are successful. To stay profitable, organizations need to integrate quick response and flexibility into their culture, operations and relationships with the consumer. Facing with these fast-moving trends, the Value Chain needs to be redesigned so that it takes into includes the consumer perspective and recognizes the importance of closer relationships between companies and end-consumers. Capabilities in both communication skills and problem-solving activities between the members of the chain are critical for success.

Figure 9: A Consumer-driven and Collaborative Value Chain

This circular model shown in Figure 9 lays emphasis upon the dynamic and reciprocal relationships between all the members of the chain, supported by information/data sharing activities and an understanding of end-consumer needs. It also identifies two “sub-” Value Chains contained within the Value Chain itself - the industry Value Chain and the End-Consumer Value Chain. These create something of a ‘paradox’ within the system because they are built on two different value perspectives - an industry one that stresses efficiency and control of costs and a consumer one that assigns greatest priority to more intangible ‘emotional and social’ benefits. Resolving this ‘paradox’ requires organizations to create two sets of relationships, the one between suppliers, manufacturers, focal firm and retailers and

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the other between customers (retailers, distributors) and end-consumers. The nature of these links and their consequences are examined in greater detail in the following table:

Type of Links Actors Consequences

Alignment Collaboration Supplier Selection

Suppliers and Manufacturers

Improved product quality Shared assets Shared product innovation/development Joint planning Sustainable relationships Efficiency Supplier loyalty and trust Improved quality Time savings

Information sharing Leveled orders

Suppliers and retailers

Real-time visibility

Coordinated distribution Retailers and focal company

Personalized offerings Reduced production cycles

Data Sharing Joint Planning

Focal company and manufacturers

Near real-time production Improve real-time demand signal

“Co-destiny” strategies Focal company and stores

Effectiveness Consumer satisfaction

I ndu s t r i a l

Re l a t i o n s h i p s

Shopper dialogue Consumer selection Consumer understanding Customized services

Stores and end-consumers

Two-way dialogue More appropriate and reluctant product propositions Consumer trust Demand shaping and purchases anticipating Consumer-driven innovation Better product impact and greater value Sustainable relationships

Frequent/high-quality contacts

Retailers and end-consumers

Demand shaping Consumer-driven forecasts Trust and loyalty Better consumer feedback Brand ownership

Data sharing and collaboration

Retailers and stores

Demand shaping More relevant forecasts and greater consumer satisfaction

C o n s u m e r - d r i v e n

L i n k s

Table 8: New relationships between the members of the Value Chain and consequences

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All in all, the previous model introduces a shift in the locus of the created value within the chain. In the above model, value is not just created at the moment the goods are sold to the end consumer but, thanks to sustainable and consumer demand-focused relationships value is created throughout the whole of the Chain. This value is not purely financially but now includes a number of less tangible criteria such as trust, loyalty and organizational flexibility. Implications The “Paradigm Shift” (Kuhn, 1962) Classic Supply Chain models tend to be mechanistic: they are typically represented in the form of ‘boxes-and-arrows’ engineering diagrams. The boxes show the discrete process elements and the arrows their inter-relationship. The model presented in this paper is not linear but circular and the inter-relationships are shown by the overlap of the elements. Further, the difference between Porter’s Value Chain model and the one presented here lies in the fact that this models moves away from the typical purely manufacturing approach to a less ‘rational’ orientation that depends on end-consumers requirements. This “Paradigm Shift” (Kuhn, 1962) from a ‘mechanistic’ to a more ‘organic’ approach reflects a similar shift in orientation across the whole business world as can be seen, for example, in the marketing world with its shift from an Exchange Transactions (mechanistic) mindset to Relationship Building (organic) one. One result of this shift is that models including ours have become more complex. Consequences

Action 1: Understanding the end-consumer increases the Value Failure to understand and meet the expectations of the end-consumer will result in suppliers, focal companies and retailers losing ground to competitors who, on the contrary, do satisfy these needs with a stronger targeted-consumer proposition. To design an optimal value proposition, it is necessary to take into account the evolution of consumers’ knowledge and purchasing behavior. They are becoming more ‘savvy’ and they are willing to wait for new products if the value proposition supports it and they have better information to make the value decisions. Moreover, consumers apply this better knowledge to assess brand ‘sincerity’; any brand deemed insincere can be quickly affected by word of mouth (electronically based, for instance) exchanges between consumers. The focal company is the key driver in creating these long-term, sustainable relationships within the various chains. They have the opportunity to serve both the retailers and the end-customer by creating a dialogue with them and thus help them to make more informed decisions. The consumer/customer should not just take receipt of a product but should also be able to obtain more information about these products: Which company supplied the pizza? How many calories does the dessert contain? Answering such questions helps to develop and

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maintain consumer trust. This notion of trust is critical for the long-term survival of the Supply Chain and the Value Chain. In addition to the increase in consumer ‘savvy’, they are also becoming more and more experienced in accessing new information and marketing channels. For example, they are ready to give up personal information (on the global Internet) in exchange for perceived value and convenience. New models of the various chains must recognize and capitalize on these new channels of communication with consumers. Indeed, today’s multichannel environment enables people to have access to any given product from a number of sources at very similar prices. What makes a consumer/customer loyal is the resultant of all the experiences that a consumer has with a particular company. We are in the age of what one author has called “experiential marketing” (Kapferer, J.N., 2008). The total experience associated with buying, owning and using a brand/product is becoming the object of more focus. In luxury markets, if customers trust the shop, they will look less at the country of origin of the product as shown on the ‘made in’ label (Koromyslov, M., 2006). Action 2: Resolving the conflict between efficiency and effectiveness is urgently needed More than ever, consumers have the power to decide what they buy, how much they are going to pay, how it is going to be delivered and from whom they are going to buy. In other words, consumers nowadays measure value not just on the price in relation to ‘quality’ (efficiency) but also in terms of how well they meet their needs both functional and emotional (effectiveness). Therefore, end-consumers now expect effectiveness (need satisfaction) rather than just efficiency (doing things for less). Even by providing the most precise and efficient internal operations, if the provided product or service does not satisfy the consumer better than competitors do, then the business and so the value chain has no future. Giving priority to effectiveness will enable companies to identify more accurately market opportunities as well as the best ways of organizing themselves (and the rest of the Value Chain) to enable them to create and sell products that do match or exceed consumer’s expectations. Thus, by being both efficient and effective, a company will be able to offer and sell more products at a higher price while simultaneously keeping cost down – a ‘win-win’ formula for greater profitability. Moreover, a better understanding and management of time, skills, cash and resource allocation will lead to a sustainable value chain. Action 3: Changing Behavior Industry is an aggregation of businesses and changes must occur inside and between each company to make these new models for Value Chain and Supply Chain work. A number of cultural and behavioral shifts are necessary including: -­‐ Joint value creation: companies must create greater value by looking at best practice processes both inside and outside the retail and consumer products industry. Members of the chain must create value for each other by improving their ability to meet the needs of the end-consumer, all the more so since that it is the consumer who rewards the company by a purchase.

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-­‐ Shared training and corporate plans

-­‐ Killing preconceived ideas that keep firms from participating in new initiatives: for instance, improvements in the management of the Value Chain need to be shared throughout the industry.

-­‐ Developing cultural exchange programs: exchanging employees between retailers and manufacturers can improve the understanding of each other’s cultures and the differences between them. This can create a shared vision as well as facilitate the sharing of information with other value chain members.

Action 4: Understanding “Intangibles” Many of the e-companies like Google, Amazon, Microsoft and Facebook have very substantial declared values and yet own very few tangibles assets relative to this market value. Increasingly, intangible assets constitute the majority of the value that lies within an organization and represent a major source of competitive advantage for companies. By the beginning of the 21st century, “intangibles” were widely recognized as a key source of value for many companies. As Hoffman (2005) argues: ‘Nowadays the most important factors of production in developed economies are invisible. These intangible assets – staff skills, strategic and process quality, software, patents, brands, supplier and customer relationships, etc. – are delivering a fast-growing contribution to corporate competitiveness. And massive investment is being made in these assets…puts the total for the USA in 2004 at USD one trillion, equivalent to about 9% of US GDP… in short, the long- and oft-heralded knowledge society is reality.’ To understand how intangible assets can create such enormous value requires an appreciation of the fact that intangible asset value is a function of consumer beliefs and perceptions about a good or service and not the physical reality of that good or service. A particularly important intangible asset is the brand about which Kapferer (2008) says: “[…] a brand is a shared desirable and exclusive idea embodied in products, services, places and/or experiences.” At present there is neither a universally agreed system for classifying intangible assets nor methods for assessing their value. Nevertheless, their importance in the business world is now immense and likely to continue to grow in the future. Any comprehensive Value Chain model will need to take them into account, especially in consumer-facing (as opposed to B2B) markets.

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Conclusion In this paper, we have developed new models for the Supply Chain and Demand Chain based on a literature review and the analysis of key industry trends, consumer behavior and external forces (globalization, technology, ecology…). The goal of such an approach was to understand where the Value lies in the Supply and Demand Chain mechanisms and processes. In particular, we found that revising today’s Supply Chain models by focusing on the Demand Chain (and especially the end consumer as opposed to the customer) can add considerable value and support the following equation: “Value Chain = Supply Chain + Demand Chain”. The developed models, contrary to classic ones, lay strong emphasis on the necessity for building sustainable relationships between all the members of these chains in order to deliver the value expected by the end-consumer. They reflect a “Paradigm Shift” by moving from “mechanistic” concepts to more “organic” one, partly as a reflection of today’s emotional and social benefit-driven consumer purchase decision processes. However, successful relationships require a change in the behavior of suppliers, producer and customers. First of all, collaborative relationships are needed to facilitate the effective flow of information in order to facilitate rational decision-making and effective resource allocation for benefit of the chain as whole. Moreover, members of the Value Chain have to change their behavior and culture to be in tune with and responsive to the needs of their customers, the wants of their end-consumers and the complex interaction between what they do (developing new products/services), how they do it (improving business processes) and the ever more competitive environment within which they operate. Strategic alignment, partner and consumer selection, integration, joint value creation, shared training, shopper dialogue, risk forecasting and effectiveness are opportunity areas to develop. As a result, end-consumers will become more loyal and their trust towards the company increase. These relationships also make the consumers feel that they are in control of their buying experience, that they receive the value they expect and, consequently, end up buying the ‘best’ product for their specific needs. In other words a sustainable and high “value-to-the consumer’ is created. Further research is required in order to confirm this new Value Chain model, especially in companies that possess very few tangible assets and have a very high market value relative to their tangible assets.

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