This week will explore the four levels of Value Focussed Supply (VFS) as put forward in a CAPS recent research report on Linking Supply to Competitive Business Strategies and the holistic approach put forward by CAPS to get more value out of your Supply Management Association.

According to CAPS, you start with the elimination of value leakage. While this is a good place to start in theory, in practice, at least until now, most organizations increased value in supply management purely by accident. They were given a mandate to reduce cost and when they were no longer able to negotiate better prices or optimize incurred costs (logistics, storage, VAT, etc.), they looked for new ways. Not knowing any, they got creative, and sometimes they got lucky and found strategies that not only lowered costs but increased the overall value of supply management to the organization. At this point, the organizations began an effort to find more value, and began their progression up the supply management value curve, which, in the view of CAPS, and the author, starts with the elimination of value leakage (although the author believes one or two critical steps were overlooked in the report).

According to CAPS, value is obtained at each level of the value curve by focussing on four components of the balance sheet — revenue, cost, assets, and intangibles — and finding ways to improve them such that the overall corporate position is improved. At this level of VFS, this means that a company would:

• Protect Revenue
  by improving quality and stability of supply
• Reduce Cost
  by reducing unit cost and managing demand
• Reduce Working Capital Requirements
  by improving working capital management
• Protect Corporate Reputation
  by taking steps to prevent the media fiascos that would result if
  tainted food or dangerous products were released into the marketplace

Furthermore, such a company might go about these actions by:

• Working with Key Suppliers
  to implement Lean, Six Sigma, or TQM (Total Quality Management) processes to reduce defects, streamline production, and increase schedule accuracy like Powercon worked with a key supplier to correct dismal delivery performance and increase customer loyalty in the process
• Looking at Alternate Fee Arrangements
  like Pharmacare did with ancillary legal services which could be contracted on performance-based fee arrangements and other ABM (alternate billing methods) to reduce costs by 20% to 40%
• Adopting Better Inventory Management Strategies or Early Payment Discounts
  as reduced inventory translates into a reduction of cash locked up in inventory (as well as reduced storage costs) and early payment discounts not only reduces invoice payments, but reduces a supplier’s need for financing (which is often at higher rates), which reduces future costs
• By Improving Testing and Quality Inspection Practices
  even though this might increase costs slightly up front since having a better brand increases revenue in the long term and the up front cost quickly translates into long-term savings

These are all great strategies, and, for the most part, great starting points for any supply management organization that wants to increase the total value it provides (and do true Total Value Management), but a few of them seem to skip the starting points, at least in SI’s viewpoint. This will be the focus of Part II.