Lessons From the Innovators
By David M. Bovet and Joseph A. Martha -- Supply Chain Management Review, 5/1/2000
In the course of fitting together the five puzzle pieces of business design, we have introduced many value-net innovators. Value proposition, scope, profit capture, strategic control, and execution have each been illustrated through companies that have either invented or reinvented themselves using value-net concepts. Each of these companies differs, for example, by combining a unique value proposition with an individual scope decision. There are hundreds if not thousands of different value-net designs.
Despite their differences, the early-adopter companies we studied offer a common set of practical lessons that any executive can use to score better with customers, transform his or her own organization, and unlock hidden profits. We've organized those lessons under five major headings: new designs, customer focus, operating effectiveness, digitizing the value net, and management techniques.
1. New DesignsValue nets represent a vibrant new type of business design. They differ fundamentally from an efficient supply chain or modern information technology because they define a company's overall business strategy. Value-net designs are holistic in their interlinkage of customer needs and fulfillment capabilities. The first set of lessons learned from the innovators addresses this integrated, networked nature that constitutes the broadest distinguishing characteristic of a value net. Four lessons are featured: supply chain as business design, assembling the puzzle, from sequential to networked, and hybrid clicks and mortar.
Supply Chain as Business Design
The basic premise and promise of value-net design is demonstrated by the innovators [profiled in earlier chapters of the book]. Each has mastered some (though rarely all) of the key value-net features: they are customer-aligned, collaborative and systemic, agile, fast-flow, and digital. They deliver convenience, reliability, speed, and customization—in varying degrees and combinations—to the delight of their customers. And they are doing so with powerful integrated, networked operations that provide value to customers and shareholders alike.
The examples we cite confirm the emergence of value nets as a new form of business design. Airliance Materials, for instance, relies on agile, digital supply chain management to supply competing airlines with convenient, cost-effective access to spare parts. Li & Fung's entire raison d'être lies in managing an extensive worldwide set of garment and toy-making workshops that can respond to leading retailers' demands fast and accurately. And Cemex's reliable delivery of cement has propelled it to leadership in its industry.
In these and other cases, the operations-intensive nature of the differentiated product/service offering is key to market success. Whether it is Apple Computer's dramatic resurrection or Weyerhaeuser's door-building turnaround, these successes depend on customer-focused, agile, and digital value nets. And these models will become increasingly popular in numerous industries.
Assembling the Puzzle
The five puzzle pieces of business design—value proposition, scope, profit capture, strategic control, and execution—provide valuable guidance for the creative process. Yet the pieces must be put together properly; the whole design must fit together seamlessly to release the greatest amount of economic energy.
For each piece of the puzzle, a set of design options exists. (Exhibit 1 gives an overview of those options, which are described in greater detail in the book.) Different options may align best with different customer segments. But matching up the options across the five major elements of design is critical to building an effective value net.
From Sequential to Networked
It takes a new type of supply chain to form the core of this new form of business design. The key conceptual shift is from a sequential, linear model to a networked, systemic approach. Value nets represent the biggest shift in the order-make-deliver process since the age of mass production. Sequential processing of complex products takes so long and involves so many noncontrolled handoffs that speculative production to stock is the necessary result. Under the old system, customers are virtually guaranteed not to get the exact products and services they would prefer.
The new model enables fast, reliable, convenient delivery through a networked solution. Cisco Systems, for example, ships 60 percent of its products directly from suppliers to customers. This eliminates the physical process and time typically required to move products from a supplier to an original equipment manufacturer (OEM). Gateway and Miller SQA have slashed cycle time by establishing rapid information transmission and streamlined physical flows across entire networks of customers, companies, and providers. Progressive Insurance has taken a similar approach in a pure service industry. It has broken the hold of entrenched, sequential auto claims processing to bring settlement convenience directly to an accident scene. Cost estimates and repair arrangements can be delivered on the spot, saving valuable time for customers and the company alike.
A networked solution is the only way to deliver on customers' escalating demands for speed, reliability, and convenience. Ram ChandraSekaran at Cisco Systems refers to the "supplier ecosystem" created by eliminating the information barriers as being the key to Cisco's direct-fulfillment model. This network, in turn, has allowed Cisco to provide fast and reliable delivery of customized products. OrderTrust's digital order-processing network, with automated links to more than 600 suppliers and fulfillment houses, provides a similar solution to emerging Internet merchants.
Hybrid Clicks and Mortar
Value-net innovators generally favor neither a pure Internet nor a pure bricks-and-mortar approach. They seek to combine the best of both worlds for their customers with a hybrid approach.
Several variations exist. Gateway, for example, offers its "call, click, or come in" options to customers. It has rapidly expanded its network of Gateway Country stores to provide the personal touch sought by many consumers and small businesses during the sales and service-support cycle. Yet these showrooms carry no inventory, maintaining the cost advantage of a consumer-direct approach.
Others achieve a hybrid solution by cooperating closely with established dealer networks—but in new, more effective ways. Vauxhall shows how an automaker can work with its dealers to maximize Internet convenience and the personal service afforded by a vast retail network. Vehicle test drives and residential delivery of a new car are radical departures from the traditional buyer-dealer relationship. They also represent powerful enhancements to an Internet-only, impersonal solution. Office furniture maker Miller SQA uses its dealers for standard selling and installation activities but through digital technology and accurate delivery schedules, equips them far more effectively than before.
2. Customer FocusEach of the innovative companies we encountered puts its customers squarely at the center of its value-net activities. They differentiate their offerings to meet the precise needs of targeted customers and deploy advanced supply chain capabilities to enhance the service mix sought by each customer segment. These capabilities form the core of their business designs.
Customer focus contains four value-net lessons: clarify the offer, use a choiceboard as your customer interface, compress the order-to-delivery cycle, and provide convenient delivery. (The choiceboard is an interactive tool for customers to design their own products by choosing from a set of components and service options.)
Clarify the Offer
Successful value nets do not attempt to be all things to all people. Instead, winning companies identify and define target market segments and offer value propositions with powerful appeal to those segments. Value nets then profitably fulfill the promises made to those segments.
Streamline, Miller SQA, and Cemex exemplify this point. Streamline relentlessly campaigns to deliver on its promise to busy suburban families. Its value net, from Internet ordering and automatic replenishment to "The Box" and unattended weekly delivery, is entirely geared to meeting the needs of a very specific segment of society. Miller SQA shows a similar degree of focus. When SQA was formed as an operating unit of Herman Miller, a distinct market segment (small- to medium-sized business customers) was targeted with a clear offer—simple, quick, and affordable. A fast and efficient value net was created to make good on the company's motto. Cemex likewise has a straightforward offer: We deliver cement to your site within a stated 20-minute window.
Use a Choiceboard as Your Customer Interface
A choiceboard's ability to accurately gather customer preferences and feed them digitally to supply partners lays the groundwork essential for customer knowledge and rapid turnaround.
Gateway illustrates effective choiceboard application. It gives computer buyers three points of entry to its value net: click, call, or come in. Whether the buyer walks into a Gateway Country store, calls the toll-free order number, or goes directly online, he or she will encounter a choiceboard that offers controlled choices and feeds information into Gateway's fulfillment infrastructure.
Miller SQA created a choiceboard with a twist. Its Z-Axis software not only offers furniture choices and accepts orders but also displays an entire office layout in three dimensions. "Customers love it because it saves them lots of time," a dealer told us. "Lots of time" is an understatement; this customer interface is credited with shortening the typical order cycle from several months to a few days. Z-Axis orders are automatically rendered into bills of material and transmitted electronically to SQA's plants, which in turn provide order-level visibility four times daily to key suppliers. The Z-Axis choiceboard provides a critical front end that supports SQA's quest for speed, reliability, and reasonable cost.
Many companies, and entire industries, still lack choiceboards. The personal computer industry is already there as any home computer user familiar with the Dell and Gateway Web sites can attest. e-Commerce companies of all stripes are using them. Automakers are working on it. For managers in pulp and paper, steel, logistics services, building materials, or railcars: Would a choiceboard excite your customers and feed order information efficiently into your supply operations?
Compress the Order-to-Delivery Cycle
Once an order is placed, value-net innovators move heaven and earth to fill it quickly. Speed and instant gratification pervade modern society, so demands for faster service reach all sectors of commerce.
For sellers of commodity products, speed can be a differentiator, imbuing quite ordinary stuff—pipes, building materials, and office furniture—with greater utility. Weyerhaeuser enjoys price premiums because of its fast, differentiated delivery cycle. The company has cut ordering times from four weeks to 15 minutes and has also dramatically reduced leadtimes.
Miller SQA understood the value of speed and made "quick" its middle name. It has slashed order-to-delivery cycle time from the eight weeks common in that industry to less than one week. And it does so with 99.6-percent reliability by harnessing digitally networked suppliers, its controlled-complexity product line, and constant attention to numerical measures of speed and reliability.
How fast is fast enough for your business? You might respond that being faster than your industry competitors is fast enough. But remember that your customers may gauge your performance by what they are experiencing from suppliers in totally different industries.
Remember, too, that the bar of expectations is moving higher. If you are setting out on a two-year improvement program that aims to match Gateway's current three-to-five-day delivery performance, you will find yourself trailing Gateway's performance two years hence. The reason: Gateway continues to improve.
Provide Convenient Delivery
Product delivery enjoys no boardroom cachet. Few CEOs or their plant managers give much thought to what happens once finished goods leave the loading dock. Yet the delivery experience can have a major impact on customer satisfaction, loyalty, word-of-mouth, the brand, and profitability. You can engineer that experience to delight customers and tap new sources of profitable revenue.
Even mundane items such as cement and groceries can thrill customers if they are packaged with superb delivery. Cemex's formula is reliable delivery within a 20-minute time frame. Streamline's is reliable delivery in farm-fresh condition. Xerox's is equipment setup, operator training, and used machine removal. Miller SQA's combines factory-direct shipment with dealer installation support.
Convenient service delivery is also proliferating. Progressive Insurance, the fast-growing auto insurer, has evolved its value proposition from simply fast claims settlement to focusing on the overall convenience of returning a repaired vehicle rapidly to its customer. Vauxhall's approach to selling cars over the Internet provides convenience at all stages of the process, from ordering (via a choiceboard on Vauxhall's Web site) to delivery (by a dealer to the buyer's home).
If superb delivery can win customers for cement, groceries, and automobiles, the range of potential applications is extremely broad. For commodity products, delivery offers the possibility of service differentiation with a tangible value. For perishable goods, quality-preserving delivery techniques are essential. And for high-value or complex products, delivery with a capital "D"—meaning everything from the physical drop-off to installation, trouble-shooting, and after-sales support—is a way to boost revenues, dampen cyclical fluctuations in revenue, and provide customer value.
3. Operating EffectivenessCustomer focus must be complemented with effective systems for production and distribution. Operational "innards" must be digitized to make good on the promise made to customers. For traditional incumbent firms, operational effectiveness usually means major role and process changes. For dot-com companies, fulfillment capability will ultimately separate winners from losers. The payoff of operating effectiveness is substantial, as the innovators have shown.
Build to Order
Every value net should be designed around three powerful concepts: actual demand, speed, and customization. The "make" process should be triggered by an actual sale to the end-customer. No more passing "guesswork" orders from one layer to another of the old supply chain but, rather, actual sales and specifications.
Design the net to be fast. Speed requires systemic, not sequential, processing. Design your operation so that incoming orders are split into major modules and assigned immediately to specialized suppliers. Modules should then be grouped or assembled on the fly, during the delivery process (as UPS does for Gateway computers) if necessary. Design where possible to eliminate echelons of distribution and warehouses filled with aging product. If customer service and logistics objectives require mixing products and consolidating truckloads, do so at cross-dock facilities that are emptied by the end of each day. These steps will increase the speed of delivery and minimize inventory.
At the same time, build the capability to give customers individualized products. Successful customization usually begins with a concerted drive to minimize complexity, involving the use of standard components and a set of constrained but relevant choices.
These design features—responding to actual demand, speed, and customization—may seem like a tall order, but they are the emerging standard for doing business, and we've offered examples of companies that have accommodated each. Gateway, for example, builds customized machines to actual orders, fast, and has eliminated traditional distribution echelons and warehouses of finished goods. Some order components are merged in transit to end-customers.
Converting existing build-to-order businesses or traditional mass production companies into fast value nets is a major opportunity in many industries. Miller SQA has perfected this new model. It builds to order and assures speed by clustering its suppliers around its assembly plant. These design features and expert coordination through information systems provide fast, reliable delivery and give SQA 200 inventory turns each year. Weyerhaeuser has achieved similar results with customized door production.
Executives we interviewed in businesses as diverse as heavy equipment and fashion suggest they are working hard on this issue. A senior executive at DaimlerChrysler put it simply: "If you don't think people are trying to move toward the Dell model in all industries, you're crazy." Build-to-order models will soon drive the manufacture of everything from light bulbs to cat food. If you can design the network and the necessary tools—such as complexity reduction and component standardization—you can make it happen for your company.
Select Strategic Supply Partners
Filling roles across the value-net design is another key to operating effectiveness. None of the innovators we observed attempt to do everything themselves. Even the Spanish fashion house, Zara, one of the most vertically integrated companies we studied, outsources its labor-intensive sewing and assembly work to a group of small nearby cooperatives. Outsourced relationships provide efficiency, as each player specializes in its own métier. Equally important, they offer flexibility and scalability.
Biogen, the Cambridge, Massachusetts-based biotechnology company, faced a critical choice of roles and partners when it decided to launch its new drug, Avonex. It wanted to become a full-fledged operating company, rather than license its discovery to "Big Pharma." However, the company lacked the infrastructure to ramp up rapidly once regulatory approval was received. Biogen's solution was to form a value net with a small number of partners. With this handful of manufacturing and distribution allies, Biogen was able to make product available to customers within 35 hours of final regulatory approval—a record in its industry.
SOHO, the virtual furniture company, is an even more extreme example of outsourcing. SOHO's founder believed that the secret to rapid expansion and profit growth lay in leveraging the scale and experience of trusted partners. Acting on that belief, he designed a value net that relied on external providers for just about everything. Is there a limit to the virtual model? Mahmoud Ladjevardi answered the question emphatically: "No. It can grow with you. Flexibility is built in. We can add sources easily. They can be marshaled or redirected as needed."
These examples make three important points:
- Innovators typically restrict their strategic value-net relationships to a few providers. This reflects the time and investment needed to develop and maintain smooth-running collaboration with outside firms.
- Scalability, the ability to quickly expand and contract production, is one of the main reasons for using network partners. Biogen, SOHO, and others have leveraged the assets of supply partners to avoid fixed-asset investments.
- Strategic relationships with partners work over the long term only when they lead to mutually beneficial situations. This means that the outsourcer must not simply push inventory onto the supplier's books. A powerful company might get away with this in the short run but doing so does not lead to a strong supplier relationship or mutual support.
Every one of our innovators is digital to some degree, and all are moving toward even greater reliance on information technology. We see three important lessons in this area.
Design the Information Flow First
The first step in digitizing the value net is to reach key design decisions regarding information flow. What are the key recurring operational decisions and which information elements are needed? Which flows can be simultaneous, versus which must still respect some sequential steps? How much access should suppliers and other partners, some of which will surely work for your competitors, have to your operational data and processes? These decisions must be carefully thought through prior to wiring up the value net.
At Cisco Systems, these design decisions led to instant customer linkages and transmission to suppliers. Supplier users of Cisco's information system are treated identically to Cisco employees. And Cisco's suppliers run their operations, including quality control, on Cisco's applications. Miller SQA transmits production module requirements to its suppliers four times a day. Volkswagen provides very specific, limited sets of parts information to its logistics providers. In each case, flow patterns are designed with value-net decisions, roles, and responsibilities in mind.
Digitize Communications Across the Value Net
The most obvious purpose of information technology in a value net is to achieve fast and efficient transmission of information from customers to providers. Gateway's reseller and supply partners, for example, are all digitally connected. An order received from a customer is automatically transmitted to the contract manufacturers and to the assembly floor and then to UPS for pickup and delivery.
Streamline's first digital information link is with its customers. Some 75 percent of orders are received over the Internet, and that number continues to climb as more subscribers make the Internet a part of their lives. This link adds to customer convenience and reduces Streamline's order-processing costs.
Digital powerhouses such as OrderTrust demonstrate how complete networks of merchants, suppliers, fulfillers, and drop-shippers can be automatically linked. OrderTrust's computers handle 400,000 transactions each day without human intervention. Even the process of linking in new partners has been automated to speed ramp-up time.
Harness Bits to Power Decision Making
Companies and their partners can achieve greater control of net activities when they adopt planning software and other decision-making tools. Many of the companies we have seen use sophisticated rule-based decision systems in conjunction with enterprise resource planning software to accept and process orders, optimize production capacity, and issue time-definite delivery dates. These make it possible to schedule most orders without manual intervention. New software, increasingly Web-hosted, is bringing advanced optimization algorithms within reach of almost any manufacturer and retailer. The challenges of intercontinental sourcing and logistics, among the most thorny in any supply chain, are now being addressed through new software offerings. Ventures such as Celarix and RockPort Trade Systems have developed powerful Web-based applications that provide importers [with] the ability to manage and optimize their off-shore activities in real time.
Digital technology is the backbone of every effective value net. But technology must remain a means to a strategic end. "Apple uses SAP, i2, and home-grown technologies," says the firm's Tim Cook. "Systems help automate processes. But it's the process and the people! The systems are just enablers."
5. Management TechniquesAs with any other business design, realizing the full potential of a value net requires strong management. Leadership at the top, buy-in throughout the organization, and the right performance incentives are essential. That said, our research has identified three principles that every CEO should observe in designing and managing a value-net enterprise: define a breakthrough vision, adopt simple and clear goals, and use an entrepreneurial team to make the transition.
Define a Breakthrough Vision
One of the chief distinguishing characteristics of the value-net designs we have profiled is the boldness of the new vision in making a clear break with the past. This vision is customer-inspired. Miller SQA was born, for example, from a clear vision of the frustrations that office furniture buyers faced and the conviction that meeting those unmet needs in dramatically new ways would form the cornerstone of an entirely new business. The sharp departure from a months-long process to a week-long fulfillment cycle was the embodiment of this quantum leap in service.
Value nets don't get created by incremental efforts. Courage and conviction are required to promote the vision. As Apple's Tim Cook told us, "A lot of people thought we were crazy" when Apple set out to beat Dell at the operations game. In two years, Apple had surpassed Dell on key metrics such as inventory turns. It wasn't easy, but the clarity of the vision and its call for breakthrough results were essential in communicating the mindset change and process revolution that would be necessary.
Adopt Simple and Clear Goals
The evidence from innovators is overwhelming: They have set simple, clear goals to drive successful performance. When we began our research, we were familiar with the goals typically used in supply chain management. We felt that many were inappropriate—for example, focusing totally on operating costs without considering the role of differing service levels in driving customer satisfaction. We had in mind a balanced mix of more innovative goals, such as responsiveness to changing demand or ability to manage the network.
What we [have] learned is that successful implementers of advanced supply chain designs are single-minded in their quest. They set simple goals that are clear to employees at all levels. Miller SQA's target of 100 percent on-time shipments is but one example. The image of its operations vice president's handing out $100 bills to employees who know how many consecutive days the company has hit that target is a powerful one. It indicates commitment and broad-based identification with a common goal. ...
Our advice is to choose a demanding goal that can only be reached through successful implementation of the new value-net design. Represent that goal in a metric that everyone can understand and follow it day by day.
Use an Entrepreneurial Team to Make the Transition
We don't think you need a new super department of supply chain management to make the transition to a value net. Such a department is a logical ideal for those who want to integrate the functional silos of procurement, logistics, and manufacturing. But creating one maxi-silo may worsen some interactions while it eases others. No single, specific organization structure can ensure the necessary coordination to launch and operate the new design.
The experiences of the innovators suggest that a dynamic team is the best assurance of value-net implementation. At Biogen, three operations executives and a handful of other employees representing marketing, quality, and regulatory services built the network that brought Avonex to market quickly and successfully. They did so within an environment that largely left them free to make decisions on their own.
At CIBA Vision, the Swiss contact lens manufacturer, a small multinational team designed and implemented the company's new EuroLogistics Center from the ground up. The team leader had no previous logistics experience. The team's power came from its combination of expertise in several functions, its knowledge of each of the European countries involved, and its dedication to making the transition happen fast.
Innovators believe strongly that a formal organization structure is not the answer to value-net implementation. We concur. Instead of bureaucracy, create a small, strong, entrepreneurial team that sees the vision, identifies the goal, and works across functions to build the value net.
Keep a Step AheadThe previous chapters described the power of value-net business design and what it takes to create one. We have provided examples of value-net companies in several industries. And we have drawn from them lessons that others can follow.
More companies in more industries will adopt value-net business designs in the years ahead. As they do, end-customers will experience faster, better service at lower costs. Close collaboration between supply partners will become the norm. Executives will learn new ways to design and manage their businesses. Successful implementers will enjoy higher profits, while competitors of value-net implementers will feel the heat.
Having said this, business designs must be constantly renewed. The picture of value-net design we have presented is bound to change in the years ahead. Customer needs and expectations will change. New and more powerful digital technologies will appear. Some of the companies showcased in these pages as exemplary practitioners may stumble or find themselves outmaneuvered by competitors with newer, more effective designs.
Sun Microsystems' Hugh Aitken captures the essence of this challenge: "You have to keep ahead of the curve. Every two or three years, supply chain design gets reinvented. And that's okay. That's what growth is all about. Mark time for an instant—and you're toast."
It is a fast-changing world. Readers who have been inspired by the value-net concept should think a step or two ahead of the best-practice examples shown here. The five elements of business design and the lessons we have drawn provide a guiding framework, but the inspiration and the vision are yours. It's an exciting time to be an innovator. Customers are waiting to be delighted. The door to hidden profits and new value is unlocked. Please step through.
| Author Information |
| David M. Bovet and Joseph A. Martha are vice presidents with Mercer Management Consulting Inc. This article is excerpted from their new book, Value Nets: Breaking the Supply Chain to Unlock Hidden Profits, copyrighted 2000 by Mercer Management Consulting Inc. and reprinted with permission of the publisher, John Wiley & Sons Inc. This book is available in hardcover and paperback at all bookstores, from online booksellers, and from the John Wiley Web site at www.wiley.com. Or call (800) 225-5945. |
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