Sunday, December 9, 2007

Logistics – Supply Chain – Value Chain: Evolution of an Idea or Different Approaches?

At times I understand the difference between logistics, supply chain management, and value chain management. At other times I become more than a bit confused. I would like to think my confusion is caused by changes in the state-of-the-art – not an impaired mind. To make matters more interesting, there are variations in the themes: logistics, integrated logistics, strategic logistics, supply chain management, extended supply chains, etc.

I routinely ask the executives and managers I work with how they define supply chain management. After we determine that everyone has a different opinion, the conversation usually ends up with us talking about the difference between logistics and supply chain management. Some say the two are the same. Some logistics is part of supply chain management. Some that say supply chain management is part of logistics.

In 1986, the Council of Logistics Management, now CSCMP, defined logistics management as:

The process of planning, implementing, and controlling the efficient, cost effective flow and storage of raw materials, in-process inventory, finished goods and related information from point-of-origin to point-of-consumption for the purpose of conforming to customer requirements.

Now, the CSCMP defines supply chain management as:

Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third party service providers, and customers. In essence, supply chain management integrates supply and demand management within and across companies.

Supply Chain Management – Boundaries and Relationships

Supply chain management is an integrating function with primary responsibility for linking major business functions and business processes within and across companies into a cohesive and high-performing business model. It includes all of the logistics management activities noted above, as well as manufacturing operations, and it drives coordination of processes and activities with and across marketing, sales, product design, finance, and information technology.

So what changed? (By the way, if you visit the CSCMP website you will see they haven’t forgotten to include the definitions for logistics). First, the purchasing (buy) function has been included. Second, the production (manufacturing or “make”) has been included. While the new definition specifically mentions coordination and collaboration with partners, you could argue that it was implied in the 1986 definition. No one can argue that the new definition emphasizes an approach that extends outside the “four walls” of the organization.

In Fundamentals of Supply Chain Management (Mentzer, University of Tennessee – I particularly like the case studies) suggests that a supply chain consists of at least three companies which also extends the supply chain perspective outside the four walls.

In Competitive Advantage, 1985, (Porter, Harvard) introduced the concept of the value chain. I have never been sure whether the value chain concept was influenced by the supply chain notion or whether it developed independently from organizational / strategic theory. There can be little dispute that the ideas have influenced each other and have become, to some extent, co-mingled. Porter’s work was the first place I saw an attempt to describe a common process view of business. (Is this the origin of the “business process model?” Like the supply chain definition, the value chain definition includes: inbound logistics, operations, and outbound logistics. The value chain extends the definition to include marketing & sales and service. It incorporates HR. technical development (R&D), and procurement as infrastructure. Using this view, the cost of the raw materials (suppliers) plus direct and infrastructure activities when subtracted from the revenue provided by the customers equals the margin.

I see one obvious difference between the CSCMP’s supply chain management perspective and Porter’s value chain view – the addition of marketing and sales as an integral component of the “chain.” That is not to say that CSCMP overlooks marketing and sales – it is primarily a difference in emphasis. (Similar to the SCOR model which “implies” a relationship with marketing and sales but doesn’t really address it). The Value Reference Model (VRM), a process model that, like the SCOR model does for supply chains, provides process descriptions for describing all of the activities within the value chain. The VRM includes activities to describe product development (NPI or new product introduction), sales & marketing, and service. (HP developed two process models DCOR and CCOR, that when combined with the SCC developed SCOR model approximates the scope of the VRM).

A less obvious difference, but I believe one that is critical when you start implementing logistics / supply chain / or value chain solutions (whether it is an IT project, a lean or Six Sigma project, executive dashboards, benchmarking, process improvement or anything else) is the difference between an organizational perspective and a product / product line perspective. It is my belief that this is the root cause for much of the confusion or overlap between the three definitions. It is also, in my opinion, one of largest barriers in aligning the activities of the business units, the functional managers, the technology providers, and consultants.

Here’s what I mean. A manufacturer that produces different products is likely to have different suppliers, customers, desired business outcomes, production sites. For example, a manufacturer in the electronics industry might make servers and laptops. Clearly products require very different components. Even if both require power supplies, it is unlikely that the two will be interchangeable. It is also quite possible that the company that is the best source of supply for server power supplies is not the best for notebooks. Server production facilities may not be the same as notebooks. It is possible that based on the business model, the production strategies are different. (A postponement strategy could be used for one and not the other). Delivery and distribution could be very different. The notebooks could be sold to consumers and businesses while the servers would be sold primarily to businesses). How many supply chains or value chains are there?

From a functional or IT perspective, there may be only one supply/value chain – electronics products. For each of the products, the company must buy raw material, produce product, distribute, and deliver. Purchasing departments will be reviewed on the overall success of their buys. Production centers will be evaluated based on how well they meet their quotas and capacity utilization. Transportation departments will be rewarded based on their cost per ton and distribution centers will be incentivized to maximize their fill rates. IT departments seek solutions that allow them to install and support a common corporate solution – providing identical capabilities to both business units.

From the business perspective, there may be two very different supply chains. The server supply chain with must satisfy high volume, high revenue accounts with service level requirements that are significantly more demanding than the service level requirements for an individual notebook consumer. Business executives may demand different growth rates, different margins, and seek to support different geographic markets for each product.

The value chain concept is the arguably the logical next step in the reintegration of the enterprise. Integrating product development, marketing and sales, service and support (through the warranty and spare parts business) with “supply chain” activities continues what has become a new business imperative, the elimination of functional (and process silos). Certainly this is not a new idea. Sales and operation planning is a best practice that moves toward integrating two of these major fiefdoms.

I suspect after 30 years with the terms supply chain and value chain management, someone will develop a new term. A number of very smart people suggest that we should start talking about networks instead of chains.


James said...

The data which is provided by you about boundaries and relationships, comparative advantages of Supply Chain Management Services is very informative .thanks for providing such a good and informative data.

Conrad said...

I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.


Conrad said...

I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.