If there is one thing I know that is true about supply chain, it is that we love our acronyms and buzzwords. When I first began to study and immerse myself in the supply chain world, one of my first challenges was understanding, in plain language, what the heck my professors and textbooks were talking about. That led me to create the Supply Chain Wiki when I first landed on the Supply Chain Insights team. Check it out if you’d like help understanding different terms or acronyms. I find that clear definitions, like those found in our Wiki, enable even seasoned professionals to ensure they are on the same page in high-stakes supply chain conversations. And that leads me to the topic of this post.
One question I have heard recently, and the inspiration for an upcoming report is clarification regarding the difference between a value chain and a supply chain. Today, I’d like to briefly discuss what a value chain means to me and present a couple of graphics that I’ve built with Index data that help to solidify the value chain concept.
A supply chain is a chain of upstream and downstream business engaged in arms-length transactions in an effort to bring a product through the stages of plan, make, source, and deliver.
Source: Chain Sequence, Inc. (http://www.chainsequence.com/supply_chain_legal_notices.html)
A value chain, on the other hand, is a step further in evolution, moving beyond arms-length transactions and separate cogs into a cooperative and mutually beneficial environment. A value chain environment is at odds with the outdated idea of passing costs onto upstream and downstream partners for the benefit of the focal firm (the main firm that is the focus of the analysis).
The majority of the work I have recently been focused on involves charting the financial performance of different peer-group companies operating within a single industry. For example, our September 26th webinar (you can listen here) focused on CPG, Chemical and Pharmaceutical companies. But I’ve taken a different approach recently, charting different members of the same value chain as you can see in the image below illustrating a packaging company, a CPG company and two retailers. What is so striking here is that the pattern of evolution as shown by the companies in this graphic do not mimic each other, as they have in previous slides. Most of the Chemical companies, for example, followed a similar pattern only differing on their starting location in 2000. Each company here displays a very distinct and unique pattern.
The companies occupy different parts of the graph, yet both retail companies are in very close proximity to each other and display decreasing C2C values. Do members of a supply chain operate within a bubble of possible improvement? Are retailers limited to the area occupied above by Kroger and Walmart? What retailers are breaking this pattern? Target? Costco? And are they doing better or worse than the “retail” sphere defined by Kroger and Walmart?
In addition, what is striking here is that the improvement in supply chain performance have not been shared equally by all members of the supply chain. In the coming value chain world, the gains will be realized and shared by all members, as opposed to a game of one-upmanship, for example, pushing inventory costs to less visible and powerful members of the chain.
This pattern of different regions for members of different tiers of the same supply or value chain is also visible in the healthcare sphere.
Here, Vanguard Health Systems illustrates the lowest C2C (desirable) as well as the lowest gross margin (not desirable). Eli Lilly, on the other hand, shows a path of chaotic evolution in the upper right quadrant of the graph. The gains being made in this graph are not consistent. They are not gradual and sustained year-over-year improvements. The motion is chaotic and often reversing on itself. This value chain is broken.
And what about you? What do you think differentiates a value chain from a supply chain? And what graphical representations do you use to better understand this ongoing evolution in the supply chain sphere? I would love to hear from you. If you would like a custom cut of companies (either value chain based or peer-group within an industry), please reach out at firstname.lastname@example.org or join the SCI Community and find me there as Index Girl or Abby Mayer. Let’s keep the conversation going!