In last month’s post, I provided some definitions and information around the concept of value chain management and discussed why it is becoming an increasingly important focus in order to compete in today’s business landscape. In this post, I am going to dive deeper into value chain competencies relevant to supply chain management and procurement.
In order for firm’s to provide the utmost value to customers, it is essential they adopt the end-to-end value chain model. This means not just ensuring they are integrated internally from a department-to-department point of view, but also seeking every opportunity to integrate with both their suppliers and customers. Evolving from a single company supply chain focus to an integrated value chain focus involves a couple of shifts in company philosophy:
a. Product focus to solution focus
b. Single company focus to multi-company focus
c. Technology project focus to full scale multi-company digitization
What this effectively does is provide a full circle loop of complete information flows. This means businesses can receive information about changes in customer needs and at the very least respond to them immediately, if not fulfill them.
Below are five value chain competencies that when embraced and applied by supply chain and procurement business units create a tremendous competitive edge. By incorporating these competencies into organizational procurement strategy, firms create value for customers by impacting cost, quality, customer responsiveness and speed to market.
1. Internal Integration
2. Customer Integration
3. Supplier Integration
4. Integrative and Digital Technologies
5. Risk Management
Next I am going to discuss how organizations can develop strategies and invest in technologies rooted in the above competencies to create value for their business. First and foremost I am going discuss internal integration which can be defined as a business unit’s capabilities focused on cross-functional structure and best practice procedures to help the company quickly adapt and respond to customer demand and external market changes. Advanced internal integration reduces the costs of doing business by streamlining communication and processes. It also improves customer responsiveness because all business units have access to the same information and are able to operate on the same platforms.
An obvious example is ERP software. While ERP is not a new technology and should be considered a must-have for any business looking to compete, the technology is still improving. More and more ERP softwares are coming complete with advanced agile dashboards. Organizations updating their ERP or integrating additional softwares and SaaS are gaining an edge due to increased visibility and advanced data analytics. These advanced analytics capabilities provide procurement with the ability to better anticipate demand and plan more effectively to reduce business costs which can be passed on to customers or reinvested for value-adds.
Customer integration is a business unit’s capabilities to assure customer demand is understood in order to quickly respond to ever-changing customer needs. It involves adopting technology used by customers in order increase visibility and reduce the complexity of fulfilling their demand. Additionally, customer integration can mean sharing actual resources and employees in order to ease the burden on customers, an example is vendor managed inventory. Similarly, supplier integration involves the sharing of resources and technology with suppliers in order to facilitate better service capabilities. Both customer and supplier integration can be aided by integrative and digital technologies. Integrative and digital technologies bolster a business unit’s capability to facilitate information sharing between value chain partners increasing both visibility and analytics opportunities. Procure-To-Pay software is a prime example of an integrative technology that streamlines the purchasing and payment of goods or services between customers and suppliers by digitizing the processes involved. The digitization reduces complexity and increases visibility for all parties.
Risk Management is a business unit’s capability to manage risk in order to improve and maintain integrated value chain performance. Proper risk management considers risks related to channel partners, competitors and technology when making value chain decisions. Companies should consider long term sustainability when making decisions about suppliers or other value chain partners such as technology providers. While procurement’s primary function might be considered reducing the cost of inputs in order to offer customers more competitively priced goods and services, risk management should be given nearly equal weight. Disruptions to supply chains can quickly eliminate direct material savings and cause drastic swings to gross profit margins. Controlling risk stabilizes these disruptions by making operational continuity a strategic priority. Effective risk management results in higher scores for all four customer value metrics. It reduces cost, improves quality, increases customer responsiveness and speeds time to market for new products.
In my last article I discussed Michael Porter’s value chain model which is widely accepted as the blueprint for strategically aligning an organization cross-functionally in order to deliver valuable products and services to the market. In his model procurement is considered a secondary function, a support activity rather than a primary activity for a business. Back in 1985 this was likely true, procurement had not yet become a strategic value-adding business unit. In today’s world, the rapid evolution of technology has created market conditions where consumer demands and needs are rapidly changing. Technology has also enabled procurement’s elevation to a more strategic practice. I think in today’s competitive landscape, most professionals and organizations would agree procurement should be considered a primary business activity in an organization’s value chain, even if it is included as a component of the overall supply chain. In closing, focusing on the competencies discussed in this article will allow smart organizations to increase the value of their products and services offered to customers, and thus improve their competitive position with in their market.