A Supply and Value Chain Management Methodology for the Internet ...

A Supply and Value Chain Management Methodology
for
the Internet Environment
by

Hannu Vanharanta & Rainer Breite

Industrial Management Department
Tampere University of Technology
at
Pori
FINLAND
E-mail correspondance: hannu.vanharanta@tut.fi



Abstract

In this paper we try to tackle following problems: How it is possible to combine theory
and practice in the Internet environment? How it is possible to combine fast technologi-
cal development and sound commercial progress? How it is possible to create a com-
mon view to small and medium size companies as well as to big international enter-
prises in Internet environment? To answer these questions we need a bridge between
theory and practice, i.e. a good methodology with practical methods. The result of our
theoretical research has revealed a new management methodology both for supply and
value chains.


1. Introduction

In many companies and especially in small and medium size companies e-business and
e-environment have been a problem in practice. People in small and medium size com-
panies have not had time enough to go through important technological aspects of the
Internet environment. They have not had time enough to think their companies' internal
and external business processes especially how to change them according to the new
requirements. On the EU-level there has been also a problem how to organize facts and
rules round this new technology and how forcefully should EU policy makers sell this
new technology to small and medium size companies (cf. Deeds-project objectives).
The question has been raised: What kind of policy is needed for this new Internet Busi-
ness Media?

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Vanharanta & Breite, Tampere University of Technology, 2003
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In this paper our aim is to construct a new theoretical framework to help both business-
men and policy-makers to manage this challenging new environment. The main idea is
to look at both supply chain and value chain from a systemic view and to create con-
structs, concepts and variables for managing purposes.


The basic idea of our methodology is described in the following Figure 1. We start with
different management theories and combine the new business environment with differ-
ent methods to the theoretical framework.

In the theoretical side we analyse both supply chain and value chain in detail, i.e. we
use management theories to find first main constructs and concepts, which are fixed to
supply and value chains. We then find out the main characteristics, parameters, vari-
ables and indicators, with which we can position the company position in supply and
value chains and find out the new paths for business change processes. The overall
metaphor we are using is "Digitizing Business Practice".

DIGITIZING BUSINESS PRACTICE
Methodology
New Practices
x
y
Theory
www
Facts
ASP
Rules
s
Z
@
Methods
EDI
RosettaNet
S
XML
Standards
Laws
3
Policy-making
Copyright: Vanharanta 2002

Figure 1.1. Digitizing Business Practice

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2. Analysing Current Supply and Value Chain Management

In this study the supply and value chains are separated so that both concepts are dealt-with
and analyzed apart following in many ways Samuelsson's Systemic view (See figure 3.3).
On the theoretical level this course of action means that supply chain and value chain are
two different concepts that have to be studied separately. This research view is supported
by Porter’s (1985) and Cox’s (1996) descriptions of the supply and value chain (Figures
3.4 and 3.10). Porter (1985) stressed the managing of the value chain and supply chain in a
single separated part of the network. This focus was based on the view of competitive
advantage throughout the whole value system. Cox (1996) has developed more holistic
(network) view of supply and value chains (See also Hines figure 3.6.). The basic idea of
these views are that at the beginning of the supply and value chains the supply and
value for the customer both are 0 % and after the whole “value creating process” (at the
end of the supply chain and after all the companies’ value chains) the value for the
customer is 100% and the products/services are fully delivered. This, in turn, according
to Cox means that the company has to control its suppliers and their core competencies
continually, because the suppliers’ core competencies have to support the company’s own
core competencies (Cox 1997, cf. also Kidd 1994).
T h eo ry o f syste m s, ch ain s, n etw o rk s, etc.
•F o c u s: C u stom er d em a nd
•F o c u s: T h re e m ain flo w s, i.e . m atter , in fo rm atio n a n d e n e r g y
(c.f. H in es )
•F o cu s: S up p ly ch a in a n d v a lu e ch a in s
(c.f. S a m u e lsso n )
4
V an hara n ta & B re ite 2 00 1
(c.f. C o x )



Figure 2.1. Theory of Systems, chains and networks

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As a result, we can conclude that the company should maximize its own value adding and
“minimize” number of suppliers. Thus it is able to control its own supply chain in a
holistic manner. The basic idea of these different descriptions is to find properties which
affect effective and efficient material, information, and capital (funds) flow between the
“lowest” supplier and end customer in the supply chain.

A detailed and separated examination of these two chains is important because it makes to
possible to find out the real properties behind the supply and value chains. After revealing
the properties it is possible to manage these chains and we can start to speak supply and
value chain management.

3 The Supply and Value Chains

3.1 The Supply Chain

For a company, the supply chain is normally a big and wide concept that describes the
means by which the company produces products or services to meet its customers’ needs.
It seems to play a key role in the modern efficient manufacturing concept. In most cases,
however, a total or full supply chain concept consists of several networked companies,
which all have the same basic objective: “to fully meet customer requirements”. (See eg.
Handfield and Nichols 1999, Hughes et al. 1999)

In the New Economy, information and information technology seem to drive the supply
chain to new requirements and dimensions (cf. Evans and Wurster 2000). To understand
these new demands in the supply chain and in supply chain management, it is important to
analyze the supply chain and supply chain management in detail. It is also important to
know what kind of elements the supply chain consists of and what are the main
characteristics with which it is possible to manage the supply chain in the best possible
way.


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To better understand the new trends in the supply chain it is good to go through the latest
definitions from the literature. Kalakota and Whinston (1997) define the new supply chain
as follows: “A supply chain is a collection of interdependent steps that, when followed
accomplish a certain objective such as meeting customer requirements”. Aitken (1999)
defines the supply chain as: “A network of connected and interdependent organizations
mutually and co-operatively working together to control, manage and improve the flow of
materials and information from suppliers to end user.” Tan et al. (1998) describe the
supply chain in slightly different words: “A supply chain is a network of business units and
facilities that procure raw materials, transform them into intermediate goods and then
final products, and deliver the products to customers through a distribution system.”
Handfield and Nichols (1999), in turn, emphasize the importance of the material and
information flow so that the supply chain encompasses all activities associated with the
flow and transformation of goods from the raw materials stage (extraction), to the end user,
as well as the associated information flows. Material and information flow both up and
down the supply chain. Hughes et al. (1999) have highlighted different types of supply
chain. According to them, supply chains have to be examined in totally different ways in
different business situations. Saunders (1997) stresses the business strategy and
manufacturing views in the operational levels of the supply chain. Poirier and Reiter
(1996) concentrate optimization of the supply chain. The supply chain should be an error-
free, totally efficient network, from original supply to final consumption. Also the Supply
Chain Council’s SCOR-Model emphasises efficient optimization of the supply chain (see
http://www.supply-chain.org). The SCOR- Model itself is based on the standardized and
structured model. With the help of this model, the supply chain can be optimized to a
reference level by using information technology tools.

Each of the above mentioned definitions stresses that the supply chain consists of
interdependent organizations of suppliers and that the supply chain consists of different
business processes controlled by these organizations. It is therefore important to all
member companies of the supply chain to know how materials, services, and information
flow through the supply chain from the “lowest” supplier to the end customer in the most
efficient way. In many cases the supply chain seems to be a tool by the help of which a set

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6
of networked companies compete against another set of networked companies in a specific
market. It is therefore also important to understand how to manage the supply chain and
what it looks like.

On the basis of the above mentioned and other supply chain literature, the researchers
have picked up main features (characteristics) of supply chain to be used for purpose of
supply chain management. These properties roughly cover the general features of
current supply chain concepts but they do not define the supply chain concept in general
terms. With the help of these properties this study tries to describe the “mechanisms”
which further efficiency and effectiveness of the supply chain. In the classification
below some of the features are clearly overlapping and the differences between the
properties are not therefore absolutely clear. However, using these properties, a single
type of supply chain can be analyzed to find its own specific characteristics.

Comparison of the Features

The features were compared with Croom’s et al. “Content-oriented Criterion” (Croom
et al. 2000).

On the basis of a rough interpretation of Figure 3.1, the following could be said:
1. All of the researched and found features are presented in the content-oriented
criterion and as a result of this it is supposed that the features represent essential
characteristics of the supply chain. It is assumed that characteristics of the
supply chain can be managed using these thirteen different features.

2. The main goal of the content-oriented criterion is more in the transactions of the
supply chain.

3. The Chain Approach category seems to be better than the Network Approach if
added value will be the basis of study.





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Classification of Supply Chain Management

Our classification of supply chain management based mostly on business management and
decision-maker’s view. The aim of this view is to help decision-maker describe his/her
company’s current supply chain management in the company’s business context.
Moreover, the aim is help decision-maker to develop company’s supply chain
management. Our examination view is little bit different than “conventional” literature
view of supply chain management. For example, Saunders (1997) describes supply chain
management as containing different relationships between suppliers and as controlling
supplies in the supply chain. He also stresses that supply chain management does not form
company organizations. Monczaka et al. (1998) in turn see that a strategic view in supply
chain management is important. The chain has to contain elements that guarantee a fast
information flow between each of the member elements. The whole supply chain must
also be agile and flexible in order to compete effectively and to respond quickly to
changing customer demands. Kuglin (1998) has found that supply chain management
varies from one enterprise to another. His definition of supply chain management for a
manufacturer stresses the concept of extended enterprise, which means that a company
produces a product and/or service that is, low-cost of high-quality and delivered quickly to
the marketplace. In this way customer-centred supply chain management extends the
concept to cover the whole life cycle of the product and service, as well as customer
satisfaction. Taylor (1999) further combines logistics management and purchasing
management to the supply chain and Handfield and Nichols (1999) would like to create a
sustainable competitive advantage.

The different definitions and views of supply chain management mentioned above do not
cover all supply chain management descriptions. A final and overall description has not
yet been made. (see e.g. Croom et al. 2000, Saunders 1995, Cooper et al. 1997, Cox 1997)
However, they all give us a possibility to find important constructs behind supply chain
management. According to our analysis the impact of the supply chain management seems
to lie on two constructs: The Knowledge Level of the Supply Chain (Commercial

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Challenge) and the Utility Level of Technology in the Supply Chain (The Technological
Challenge). These constructs form the basis of our research dimensions.

The Knowledge level of the Supply Chain -construct describes the knowledge level in
the supply chain. If the knowledge level is high all the individual members of the supply
chain are conscious of their own position in the supply chain and they know how to add
value to the supply chain. A low level means that the member companies do not know or
understand the meaning of the supply chain concept (see Figure 3.2).

The Utility Level of Technology in the Supply Chain -construct describes what state
of technological readiness the members of the supply chain possess. If the level of
readiness is high, the use of IT between the members is formalized and structured (e.g.
extranet, EDI etc.). If the utility level is low a single member may possess good techno-
logical readiness but no uniform system or policy for the use of IT exists between the
various functions in the supply chain. By using these two constructs as factors, it was
possible to roughly classify supply chain management into four different management
categories, i.e. Functional Management, Information Network Management, Technical
Network Management, and Dynamic Network Management (see Figure 3.2).









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High
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Figure 3.2 Classification of Supply Chain Management

Functional Management
Companies that follow Functional Management are companies that do not use long-term
contracts and do not like to build partnerships. This means that they do not co-operate with
other companies and that their business activities are mostly based on the “ad hoc” -
principle. These companies are not used to utilize IT in their normal external activities and
they do not belong to any formalized business network.

Information Network Management
According to our evaluation the Information Network Management area contains the
companies whose purchasing and supply chain management is already very well devel-
oped on the conceptual level. The companies have formed an active network, which has
clear and consistent objectives. Every member in the supply chain has a structured and
qualified position in the network, where all member companies know the needs of their
end customers. Moreover most agreements between different companies are based on
the “win-win” principle. In this area integrated use of IT is still low. Typically the com-
panies have their own IT systems, but they do not have special applications, e.g. EDI or
Extranet, to be used for horizontal and vertical integration in the supply chain.

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