Supply Chains and Value Chains

Over time, researchers and practitioners have developed dozens of definitions to describe supply chains and supply chain management. One group of researchers has indicated that defining supply chain management both as a philosophy and as a set of operational activities creates confusion.8 These researchers break down the concept into three areas and separate supply chain orientation from supply chains and from supply chain management.

A supply chain orientation is a higher-level recognition of the strategic value of managing operational activities and flows within and across a supply chain. A supply chain is a set of three or more organizations linked directly by one or more of the upstream or downstream flows of products, services, finances, and information from a source to a customer. Supply chain management, then, endorses a supply chain orientation and involves proactively managing the two-way movement and coordination of goods, services, information, and funds (i.e., the various flows) from raw material through end user. According to this definition, supply chain management requires the coordination of activities and flows that extend across boundaries. Organizations that endorse a supply chain orientation are likely to emphasize supply chain management.

Regardless of the definition or supply chain perspective used, we should recognize that supply chains are composed of interrelated activities that are internal and external to a firm. These activities are diverse in their scope; the participants who support them are often located across geographic boundaries and often come from diverse cultures.

Although many activities are part of supply chain management (which a later section discusses), an improved perspective visualizes supply chains as composed of processes rather than discrete, often poorly aligned activities and tasks. A process consists of a set of interrelated tasks or activities designed to achieve a specific objective or outcome. New-product development (NPD), customer-order fulfillment, supplier evaluation and selection, and demand and supply planning are examples of critical organizational processes that are part of supply chain management. Recent product recalls of consumer products such as automobiles, toys, peanut butter, and dog food have placed increasing emphasis on a new supply chain concept: the reverse supply chain; its goal is to rapidly identify and return these tainted products back through the supply chain. Toyota’s recent problems with acceleration and braking problems lead to massive recalls and forced Toyota to temporarily suspend the sales of certain models.

Conceiving of supply chains as a series of systematic processes makes sense for a number of reasons. Almost by definition, processes usually move across functional boundaries, which aligns well with a supply management and supply chain orientation. Well-communicated processes also accelerate learning as participants become familiar with a defined process. Furthermore, formal supply chain processes can “build in” best practices and knowledge that enhance the likelihood of success. Perhaps most importantly, organizations can document, measure, and improve their supply chain processes.

A question that often arises, and one that has no definite answer, involves the difference between a value chain and a supply chain. Michael Porter, who first articulated the value chain concept in the 1980s, argues that a firm’s value chain is composed of primary and support activities that can lead to competitive advantage when configured properly. Exhibit 1.2 presents a modified version of Porter’s value chain model. This exhibit also defines some important supply chain–related terms and places them in their proper context.

One way to think about the difference between a value chain and a supply chain is to conceptualize the supply chain as a subset of the value chain. All personnel within an organization are part of a value chain. The same is not true about supply chains. The primary activities, or the horizontal flow across Exhibit 1.2, represent the operational part of the value chain, or what some refer to as the supply chain. At an organizational level, the value chain is broader than the supply chain, because it includes all activities in the form of primary and support activities. Furthermore, the original value chain concept focused primarily on internal participants, whereas a supply chain, by definition, is both internally and externally focused.

To reflect current thinking, we must expand the original value chain model, which focused primarily on internal participants, to include suppliers and customers who reside well upstream and downstream from the focal organization. Multiple levels of suppliers and customers form the foundation for the extended value chain or the extended enterprise concept, which states that success is a function of effectively managing a linked group of firms past first-level suppliers or customers. In fact, progressive firms understand that managing cost, quality, and delivery requires attention to suppliers that reside several tiers from the producer. The extended enterprise concept recognizes explicitly that competition is no longer between firms but rather between coordinated supply chains or networks of firms.

Notice that Exhibit 1.2 identifies purchasing as a support activity. This means that purchasing provides a service to internal customers. Although purchasing is the central link with suppliers that provide direct materials, which is the upstream or left-hand side of Exhibit 1.2, purchasing can support the materials and service requirements of any internal group. (Direct materials are those items provided by suppliers and used directly during production or service delivery.) Purchasing is becoming increasingly responsible for sourcing indirect goods and services required by internal groups. Examples of indirect items include personal computers, office and janitorial supplies, health care contracts, transportation services, advertising and media, and travel. Although indirect items are not required for production, they are still vital to the effective running of an organization. The right-hand side of the model illustrates the customer, or downstream, portion of the supply chain. Because meeting or exceeding customer expectations is the lifeblood of any organization, it should become the focal point of supply chain activities. Exhibit 1.2 presents a relatively straightforward and linear view of the value and supply chain, which is often not the case. First, the flows of materials, information, funds, and knowledge across a supply chain are often fragmented and uncoordinated. The “handoff” points from one group to the next or from one organization to the next usually provide opportunity for improvements. Second, the value chain model shows suppliers linking with inbound logistics and then operations. Although this is usually the case with direct materials, indirect items and finished goods sourced externally can result in suppliers delivering to any part of the supply chain.