How to drive value chain excellence

Editor's note:

Fowlers Inc. is a billion-dollar conglomerate with worldwide leadership in three business groups: optical technology products (Technology Products Group), food processing (Food Products Group) and business services (Durable Products Group). The Technology Products Group (TPG) is a major supplier of optical storage products and services such as CD-ROM replication; CD-R and CD-W media; title fulfillment and distribution services; and optical drives.

In the course of a supply chain transformation project, the TPG team identified and prioritized eight initiatives, driving $88 million in operating income improvement over three years. The TPG represents 45% of Fowlers' revenue and 36% of the parent company's operating income.

While TPG is in the process of realizing significant improvement in both its U.S. retail and U.S. OEM (key account) supply chains, there are still other factors affecting the overall health of its business. Table 1, is the original SWOT (strengths, weaknesses, opportunities, threats) analysis for the TPG; an asterisk indicates that the SWOT factor was impacted by the project.

TPG's "Big Business Question" was, "How do we drive revenue and profit growth through new valued-added capabilities while leveraging our cost-to-manufacture leadership?" TPG's president consulted with the company's vice president of operations, and they concluded four things:

  • First, answering the Big Business Question required more than just supply chain processes, as defined by SCOR. Product development, as defined by the Supply Chain Council's new Design Chain Operations Reference (DCOR) model, and sales, as defined by the new Customer Chain Operations Reference (CCOR) model, were also part of the equation.
  • Second, it would be necessary to reevaluate their competitive advantage by better understanding what their customers considered "value add." They would have to drive the group to be bestin-class in those activities.
  • Third, the TPG needed to identify the right value-added capabilities that would reduce the total costs for their customers while generating more profit for Fowlers.
  • Fourth, the company's supply chain excellence project approach could be adapted to support a broader value chain analysis (Figure 1).

Let's look at the key deliverables from this first phase:

Identify value chain improvement roles, evangelists, active executive sponsor(s), and a core steering team
An organization's Learning Quotient (LQ) attempts to measure its ability to acquire new knowledge and adapt behavior in response to changes in the business environment. A low organizational LQ (poor adaptability) is like a perpetual "Go to Jail" chance card in Monopoly. You never pass go and are stuck watching the game from behind bars until you can roll the right dice combination.

An evangelist, an active executive sponsor and a core steering team are three key roles driving the majority of impact to an organization's LQ in relationto value chain improvement. All three roles must be in place or you will not pass "Go."

Assemble and deliver appropriate educational content and gain consensus for a pilot project
There are generally three stages to organizational learning relative to value chain excellence. Like phases of the grieving process, each learning stage must occur in order to move on to the next one.

Initial exposure is the first stage; the objective is to investigate the value chain excellence framework and the fit of the process models of SCOR, DCOR and CCOR. The educational content of this phase is characterized by the phrase "short and sweet." This is the "tirekicking" stage where individuals (often considered as supply chain evangelists) are evaluating the fit of the method and the process frameworks with their business needs.

Learn how to sell is the second stage; the objective is for the evangelists to effectively sell active executive sponsor(s) and the core steering team on the benefits of value chain excellence and prepare them to effectively sponsor a pilot project. The educational content of this phase takes the overview content style of the first phase and incorporates real company data in as many places as possible to give the leadership team the best vision of a project in their own business language.

Implement a pilot project is the third stage; the object is for the project team — including the evangelists, active executive sponsor(s) and core steering team — to develop the knowledge, skill and motivation to successfully execute a project. The educational content in this phase is a mix of detailed "how to," templates and anecdotes that take theory to practice.

Overall, the amount of time spent in each phase is dependent on the organization's LQ. Companies with low LQ spend a lot of time in the first phase kicking tires until they're flat. High LQ companies can advance to the last phase in as little as three months; the typical duration is four to six months.

Not surprisingly, the TPG faced a number of challenges on the road to achieving value chain excellence. The first challenge was to identify the right evangelist (and ultimate project leader) for an initiative that would cross multiple process and trading partner boundaries. To make matters more complicated, the only formal engineering role in the organization reported to a corporate function. The TPG had survived in the past dividing product development between operations and sales and marketing.

The second challenge was to identify a core steering team who would ultimately be in charge of implementing the value chain changes. It would be necessary for the group to consider several organizational alternatives to provide long term sustainable benefits. The obvious core steering team members included the vice presidents for operations and sales & marketing.

Let's look now at the key deliverables from the second phase:

Calculate the number of value chains
Defining the number of company value chains uses the same technique as that of defining the number of supply chains. Figure 2 illustrates a value definition matrix for TPG.

The rows represent lines of business or product families; the lowest level of the row hierarchy is an item or SKU. The columns represent customers or customer segments; the lowest level of the column hierarchy is a customer "ship to" location. The check marks indicate a product or service that is delivered to a customer; the number of check marks provides a first draft of the number of company value chains. In TPG's case, there are 22 value chains affecting TPG's business results.

The next task is to gather some basic facts that are necessary to compare the relative impact each value chain has on overall results. Commonly used factors include unit volume and growth, revenue and revenue growth, cash-to-cash and cash-to-cash growth, and gross margin and gross margin growth.

Assemble a high level industry comparison
An industry comparison can provide a quick, relevant comparison of key operational performance metrics. This information can be collected from business information sources such as Hoovers (www.hoovers.com).

Figure 3 illustrates TPG's comparison against the CD, CD-ROM and DVD manufacturing and distribution industry.

The parity gap section identifies the company's relative position to the 50th percentile.

Decide on your project scope
In picking a scope for your project, the phrase, "Think big, act small and scale fast," is a good guideline to follow. The concept here is to pick a value chain ( using the value chain definition matrix shown in Figure 2) where many of the improvements can be applied broadly to other value chains and yet small enough to effectively manage change.

Figure 4 is an illustration of a generic decision matrix that can help prioritize project candidates. Once you've decided on a value chain, other factors involved in defining the scope of a project, include the processes (as depicted in Figure 1) and relevant metrics (which we'll look at in a future article).

The matrix is organized by value chain (the combination of product line and channel) and decision criteria (revenue $, gross margin $, complexity driven by the number of SKUs, and strategic importance). Each criterion has a weight (in this case they are all equally weighted at 25%). To produce an overall score, each value chain is ranked for each criterion (high score is better). By multiplying the weight times the rank, then times 100 an overall score is achieved.

The process of assembling the value chain definition matrix and industry comparison with the organization chart led the core steering team to make several observations.

First, the team picked the OEM content product value chains for the pilot project.

Second, the value-added services like packaging and distribution evolved within the product categories based on individual requests from customers.

Third, it was difficult to assess the profitability impact of value-added services.

Fourth, there was no one person or function thinking of the next generation of value-added services, nor was there a mechanism in place to effectively sell the ones they already provided.

The implication for TPG was to introduce a new row (and supporting organization) on the matrix focused on value chain services to include services that could add gross margin and revenue while saving the customer time and/or money. Competitors were already doing things like assembly and kitting, call center operations, graphic design, inventory management and warehousing, and returned-merchandise processing.

The next project steps (subject of a future article) will discuss the key steps of product to market and work and information flow analysis, which identify specific value chain improvement projects intended to drive growth and reduce cost, aligning process performance with competitive strategy.

Peter Bolstorff is president and CEO of SCE Limited (www.scelimited.com), which supports "do-it-yourself" supply chain performance through education, coaching and process expertise. He has been involved with the development of the SCOR model since its inception. He is the co-author (with Robert Rosenbaum) of Supply Chain Excellence: A Handbook for Dramatic Improvement Using the SCOR Model (Amacom, 2003). He can be reached at [email protected]

Learn more about supply chain metrics and the SCOR Model at: www.logisticstoday.com/supplychainmgt

Figure 1. Project phases using the value chain excellence approach

Figure 2. Example of a value chain definition matrix

Figure 3. Example of an industry comparison chart

Figure 4. Pilot project selection matrix


Table 1. Supply chain project's impact on Technical Products Group: SWOT analysis

Strengths

  • Product quality in Technical Products Group is superior.
  • Fowlers had achieved low-cost manufacturer status in the Technical Products Group prior to outsourcing several key items in the product line.

Weaknesses

  • Delivery performance is inconsistent.
  • Customer complaints are especially high.
  • Perception that TPG is "tough to do business with" (hard to place an order, incomplete and incorrect product shipments, inaccurate pricing, poor order status capability, etc).
  • Erosion of operating income in the Technical Product Groups due to price pressure.
  • Rate of cost increase for customer service is substantially outpacing sales.

Opportunities

  • Improve effectiveness and efficiency of order fulfillment to improve customer satisfaction and indirect spend.
  • Develop more advanced knowledge management capability to add financial value to customers beyond pure price decrease.
  • Leverage cost-to-manufacture leadership in the Technical Products Group to increase profits.

Threats

  • Technical Products Group market share is declining faster than the market overall; customer satisfaction scores put it in the lowest quartile of performance.
  • Price point in the Technical Products Group is getting too low to meet profit targets with the current cost structure.

Critical success factors

  • Achieve overall revenue growth for current year, targeted at 10% and after-tax profit of 7%.
  • Maintain image as technical leader in Technical Products Group product lines while improving overall return on assets.

Critical business issues

  • Customer Satisfaction from all channels in the Technical Products Group are negatively impacting sales.
  • Profits are disappearing from the Technology Group Products based on higher direct and indirect costs.
  • Revenue growth forecast is 5%. Inventory and receivables are expanding seemingly uncontrollably.


What is SCOR?

The Supply Chain Operations Reference model, developed by the Supply Chain Council (www.supply-chain.org), provides a standard methodology for managing supply chain projects centered on five areas: Plan, Source, Make, Deliver and Return.

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