Value-Chain Management FAQ

Q. Supply chain, value chain -- what's the difference?
A. There's a temptation to use "value chain" and "supply chain" interchangeably, but there's really a difference in the concepts that's worth remembering.
The supply chain model -- which came first -- focuses on activities that get raw materials and subassemblies into a manufacturing operation smoothly and economically.
The value-chain notion has a different focus, and a larger scope. Value-chain analysis looks at every step from raw materials to the eventual end-user -- right down to disposing of the packaging after use. The goal is to deliver maximum value to the end user for the least possible total cost. That makes supply-chain management a subset of the value-chain analysis.

Q. Can't I maximize value by just optimizing each step in the process?
A. Value-chain management looks at the entire value-adding process. Just optimizing each individual step may not be the entire answer. If you go to a less expensive package, but it costs the end user more to dispose of it, you may be detracting from the total value of the product. Consolidating inventories may reduce warehouse costs, but if the consolidation also increases delivery time, it may force the user to hold more items on site, which reduces value. You have to consider the total impact of each optimization.

Q. How can I measure value-chain effectiveness?
A. According to the Hurwitz Group, one good example of a metric for measuring the value of e-business is a measure called the IPC ratio. IPC stands for Information, Product, Cash. The IPC ratio looks at the comparative cycle times for the IPC elements. In a successful value-chain implementation, information and cash take less time to flow through the chain than the actual product creation and distribution.

Q. What's the biggest benefit of electronic value-chain operations?
A. The biggest single value-added element of electronic value-chain capabilities is time. If you can fulfill an order faster, complete a sale, or electronically transfer products from one channel to another, you can cut process time. Shorter process time lets you respond to more customer requests, lets your customers carry smaller inventories, and speeds the flow of both information and payments.

Q. Do I get anything from value-chain tools besides shorter cycle time?
A. Electronic value chain operations can also give you invaluable data about trends and changing needs in your markets. The electronic sales function includes product and information requests, surveys, complaints, and resolutions. All these data are valuable for shaping business strategies and focusing marketing tactics.

Q. If value chains are so critical, why is this new way of looking at them just emerging now?
A. The current surge in interest in value chains is based on the evolution of technology. Your value chains are complicated networks of interactions, and the information technology and Internet capabilities to deliver really effective value-chain management tools have only recently become available. Cheaper computing power, better interplatform communications, more effective data translation and the growth of Internet-based e-business all contribute to a critical mass of technology that makes value-chain management a profit-building exercise.

Q. How can electronic commerce help me respond to changes in my value chains?
A. Electronic distribution channels -- e-channels -- allow looser coupling within value chains. Because e-channels cut costs and provide more flexibility in availability inquiries, order processing, billing, and other distribution activities, they give you more flexibility in distributing a changing product mix to changing markets.

Q. After all this value-chain management, I still end up with overstock sitting in a warehouse. Where does that fit in the value-chain model?
A. Value-chain management doesn't make everything operate perfectly. But it can help you respond better to the imbalances that inevitably develop in the course of business. For example, there are e-commerce systems that let you quickly move excess stocks into an electronic marketplace with wide industry exposure. That tightens your overall value chain by cutting overhead costs.