Value-Chain Management

BOSTON (05/23/2000) - Value-chain management is the Holy Grail for many of today's most progressive and innovative companies.

It moves businesses away from discrete streams of data about the product being made to one unified pool of information - one that even extends outside the company to suppliers and customers.

The goal: Full and seamless interaction among all members of the chain, resulting in lower inventories, higher customer satisfaction and shorter time to market.

But the obstacles are significant. For starters, many find that the software available is either fragmented, tackling only small portions of the entire value chain, or only recently released and relatively untested. And companies often face institutional barriers to communication between far-flung and operationally disparate divisions.

"Very, very few customers are even close to implementing [ideal value chains]," says Joshua Greenbaum, principal partner at Enterprise Applications Consulting in Berkeley, California. "In an ideal world, you would do value-chain management by starting fresh, building an organization from the ground up. And that's the dream of a lot of dot-coms."

But the reality, he says, is that value-chain management has to coexist with legacy management practices.

"You need to break down a lot of the traditional corporate barriers in a company that generally treat these different areas as separate entities that don't necessarily communicate with each other," he says. "Sales and marketing rarely talk to each other; neither ever talks to logistics or finance. Most companies don't have the business culture that understands an integrated view."

But even when starting from scratch, it can take a great deal of work to develop a value-chain management system.

An Expensive Undertaking

Venture capitalist Edward Greissle, managing partner of 1stVenture.com in New York, looks for such a system when evaluating a business plan - and checks to make sure start-ups follow through.

One recent example is ShipaToy.com, which sells gift baskets of toys.

"To be honest, value-chain management was not one of the things they thought about," Greissle says. "But once we went through a testing period, we had to restrategize. This was a difficult phase in the project."

According to Greissle, ShipaToy.com deals with products from more than 30 distributors, in what he called an "outsourcing nightmare."

Getting the right product tailored to the customer and delivered on time requires deep coordination among all stages of the production process, he says.

"Without value-chain management," Greissle says, "this business could not exist."

In fact, the issue is critical to a wide range of businesses in the new economy, he says.

"If a company does not have the ability to manage its data, its future is in question," Greissle says. "Only companies that are utilizing the new information age to its fullest will make it. They're the only ones streamlined enough to succeed."

For most businesses, value-chain management means reworking not just computer systems but also business processes and the structure of the organization itself.

And not only is there a great deal of time and effort involved, but value-chain management can also rack up high technology bills.

"The sky's the limit," Greenbaum says. "How much do you want to innovate? How much do you want to implement? How much do you want to be a pioneer? It can be hugely expensive because you not [only] need to have the IT resources, you need the facilities to do it, automated warehouses, tightly controlled logistics and supply chain, partners who can play the technology game with you and the command and control to force those partners to do it.

"That's where Dell and Cisco have an advantage," he added, "but there's not a lot of Dells and Ciscos in the world."

Improved Coordination

In the long run, integrated value chains can save money, thanks to lower transaction costs at each link of the chain. They can also increase a company's responsiveness, decrease inventories and help add to customer satisfaction.

"Part of the supply-chain management [system] is to help us understand customer demand much better," says Jim Gouin, chief financial officer at Ford Motor Co.'s Ford ConsumerConnect. "And the supply base can have access to our system, and we can see what kind of production capabilities they have and the inventories on the floor."

Ford is partnering with Oracle Corp. to create an electronic exchange for its business partners, which the companies hope will lower costs by increasing competition among their suppliers.

This exchange, which includes the Big Three automakers, will also cut transaction costs at each stage of the manufacturing and sales process and will allow suppliers to keep a closer eye on expected demand, says Gouin.

Another traditional manufacturer making strides on the customer side of the value-chain area is Caterpillar Inc. in Peoria, Illinois, according to Michael Lloyd, vice president of Chicago-based Aon Corp.'s consulting division.

"They manage the service value chain all the way from initial sales to the total duration of the product," he says. "Caterpillar positions itself really well, not just as provider of engines or equipment but as a full-spectrum provider of services, training for the maintenance people - the total package."

In addition, the customer side is linked back to the production side, Lloyd says: "A lot of the ideas for product development come directly from the users."

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