Value Chain Management

There has been a lot written lately about the impact of e-commerce. The so-called dot-com’s are hot these days. I think most analysts agree, however, that the long-term impact of these companies, with their business-to-consumer orientation of buying and selling goods over the Web, will be relatively minor compared with the impact of companies focused on delivering business-to-business solutions. One area of business-to-business applications that has become particularly important during the past year is value chain management (VCM).

A corporation’s value chain is the set of materials, information, processes, and procedures used to manage a product's lifecycle. This includes the design, development, implementation, distribution, and delivery of goods and services to the consumer. VCM is becoming crucial to the successful evolution of many organizations in the business-to-business arena. This is particularly true in the manufacturing, pharmaceutical, consumer-packaged goods, and transportation sectors.

The difference between a supply chain and a value chain is that a supply chain is unidirectional and focused on improving the efficiency of the flow of goods from manufacturing to the consumer. Value chain management is bidirectional and has a broader scope; it covers the entire product lifecycle and includes services and goods.

The members of a value chain include upstream and downstream members. An upstream member provides the raw materials or finished goods that are put into a business process. For example, a computer manufacturer's chip and disk drive suppliers are upstream members of the value chain. These companies also have upstream vendors that supply them with raw materials or sub-assemblies for the manufacturing processes. A downstream member consumes the output of a corporation’s business processes. For a computer manufacturer, this would be a distributor, retailer, or an end-user consumer.

A value chain system improves design, engineering, sales, and customer service through a closed-loop feedback mechanism. If the manufacturer decides to modify a product’s attributes, for example, change management processes and documents -- such as design specifications, engineering diagrams, cost allocation, or schedules -- must be generated and shared between the manufacturer and supplier. A VCM system improves the efficiency of this process, reducing time-to-market, product errors, and rework. It can also provide feedback to the supplier if users report failures or marketing develops additional product requirements.

VCM is becoming crucial. The companies that will be the winners in the Web-based economy of the next millennium are those that understand how to manage the value chain to add more value relative to the overall cost of the value chain.

An example of efficient VCM from the retail sector is Wal-Mart. Wal-Mart leverages its information technology infrastructure -- based on a combination of point-of-sales systems and a data warehouse -- to help its suppliers manage their products on Wal-Mart’s retail shelves. By providing suppliers with up-to-date information about which products are selling at certain locations, Wal-Mart helps them directly monitor and adjust inventory levels to reflect sales at a fine level of granularity. This, combined with Wal-Mart’s huge size, enables it to demand massive discounts and rapid replenishment, which is the core of Wal-Mart’s competitive advantage in its markets.

How does a company improve the velocity and efficiency of its value chain? The key is to eliminate nonelectronic processes -- such as paper reports, faxes, and telephone calls -- and implement online, Web-based access to value chain data for all authorized users in the process. This reduces time-to-decision barriers that are created by non-electronic media. It also externalizes a company’s internal processes to value chain members. This empowers them to make decisions based on timely information and to wring out costs and inefficiency.

What should you look for if your company is thinking about using its information technology to improve the efficiency and velocity of its value chain? In my column next issue, I will describe some requirements for a VCM product and tell you about some of the vendors that are emerging in this market. --Robert Craig is vice president of marketing at Viador Inc. (Burlington, Mass.), and a former director at the Hurwitz Group Inc. Contact him at