Today’s post completes our exploration of 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 Organization.

According to CAPS, the final level of VFS, after tomorrow’s value has been created, is to stretch for added value. While SI agrees with the premise and many of the strategies that CAPS outlines for additional value creation, it’s not sure that “stretch for added value” constitutes a level, as an organization should always be looking for added value. After an organization creates tomorrow’s value, what it really needs to be do is work on its future supply chains and design new value into those supply chains from day one.

The reality with supply chains is that all sources of value, like all sources of cost savings, are fleeting. Once you stop the leakage, the savings to be had from that strategy are gone. Once you reduce TCO while improving quality by using an alternate material, current value has been increased and a new strategy will have to be identified to find additional value (as a single alternate material can only be substituted in once). Once you design an alternate component that requires less of a costly raw material and that utilizes more of the cheaper, more resilient raw material, the opportunity to increase value disappears as soon as the component enters production. Thus, once you create tomorrow’s value, you have to start looking beyond tomorrow because it won’t be long until tomorrow becomes today and a new opportunity is needed. This means that the supply chain has to be redesigned and improved on a regular basis — and that’s why the fourth level of VFS should focus on design for value in the next generation supply chain.

But before we digress too far, let’s review what CAPS suggests for an organization that wants to stretch for added value.

• Gain or Unlock New Sources of Revenue
  by reshaping the supply marketplace, like Bentham did when it bypassed the traditional supply market to develop a new captive source that used alternate sources for steel and fabrication to deliver needed components 50% faster
• Share Risk and Increase Integration Along The Value Chain
  like Carco did when it integrated with key material suppliers, toolmakers, and first tier suppliers, switched to aluminum alloy tooling for select parts, changed tool designs to accomodate model variations, and improved supply base capabilities across the board
• Eliminate Unneeded Assets
  like Globalgoods did when it chose to rationalize the supply base to take advantage of relationships with smaller suppliers that it could use to negotiate additional value through equity value rebates (based on the suppliers’ market cap and level of business) as those suppliers profited considerably from business with Globalgoods
• Create Competitive Barriers
  like Meditrend did when it increased integration of the entire healthcare delivery system to deliver better patient outcomes at lower costs

These are all good suggestions to add value, but many of the strategies either belong at other levels of VFS or need to be integrated in a broader supply chain redesign for an organization to truly maximize it’s return on investment. For example, an adept organization would partially reshape the supply base (through rationalization among existing and alternate suppliers) and plan to eliminate unneeded assets as soon as possible when creating tomorrow’s value and a progressive organization would begin integration early in the VFS as integration of related processes is often a quick way to increase current value. The real stretch is the creation of competitive barriers and the unlocking of new sources of revenue, but this often requires a new supply chain to support the new revenue stream or the competitive barrier the organization wishes to acquire. Most organizations can’t begin producing a new product or service without an appropriate supply chain in place. That’s why SI thinks the next level should be design for value, using the strategies defined by CAPS in conjunction with strategies identified by some of the early proponents of next-generation supply chain design, such as AMR with their DDSN² (Demand Driven Supply Network) methodologies. A holistic strategy focussed on value-driven supply chain redesign is what a leading organization needs to take their TVM (Total Value Management [eSourcing Forum] [Sourcing Innovation]) philosophy to the next level.

With a few tweaks, the VFS strategies, and the migration up the value curve they represent, put forward by CAPS is one of the best, and most inclusive collection of progressive value strategies that the doctor has seen yet, and a great overview for any organization that would like to create value by design (instead of by accident), but as a step-by-step guidebook, it leaves something to be desired. CAPS recognizes this and also offers up a framework, that will be discussed in a future series, but in order for the framework to be useful, one has to have the right data to support the strategy, which could have extensive data requirements. But how and when does one get this data? This seems to be a weak point of the methodology and a hole that needs to be filled if one is going to employ the methodology to maximum effectiveness. So how do you plug the hole? That’s the subject of next week’s miniseries. Stay tuned!

Today’s post continues our exploration of 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 Organization.

The next level of VFS, after current value has been maximized, is to create tomorrow’s value to insure that the Supply Management organization continues to deliver value year after year. Again, SI is in full agreement. The Supply Management organization must deliver value year after year, and the best way to do that is to start creating tomorrow’s value today.

So how do you increase current value? According to CAPS, the organization must continue its focus on the four critical components of the balance sheet — revenue, cost, assets, and intangibles — and find ways to take the improvements to the next level. At this level of VFS, this means that a company would:

• Focus on Obtaining a Strategic Flexibility Advantage
  by leveraging supply base capability for competitive advantage like Comco did to eliminate the need for an entire sub-component
• Optimize Costs Along the Value Chain and Rationalize Value
  by leveraging supplier knowledge like HiTech did to co-develop a brand new component and bring a product to market a year ahead of the competition, and by improving the value-to-cost ratio via value engineering and analysis
• Tailor Assets to Markets and Rationalize Assets Along the Value Chain
  by identifying customer needs and creating unique value like Apollo did when it created packaging to unify the adoption of a consistent look-and-feel for a new entertainment product, by eliminating duplicate assets, and by outsourcing or insourcing assets to achieve scale or competitive advantage
• Support Sustainability and Leverage Intellectual Capital
  to increase the value of the brand for years to come like Healthifood did when it utilized the intellectual capital of the supply base to design equipment for local markets and cut NPI by 25% (while considering full life-cycle costs in new equipment from a sustainability perspective that included water and energy utilization)

SI fully agrees with these recommendations and believes that CAPS is on the right track with these recommendations. The only things it would add are:

• Strategic Flexibility
  adopt an ongoing focus on component and SKU rationalization — the fewer distinct products there are to manufacture, the easier it is to be flexible with scheduling
• Optimize Costs
  make utilization of strategic sourcing decision optimization and supply chain optimization solutions part of daily operational life
• Rationalize Assets
  and rationalize the supply base at the same time — if there are too many suppliers with similar assets that are under-utilized, it might be time to trim a few suppliers or get a few new ones
• Support Sustainability
  consistently look for new sources of supply that are less harmful to the environment or (more) renewable (than current raw materials)

Now that tomorrow’s value has been created, an organization can focus on moving on to the final level of VFS, which is the subject of the final post of this week.