Integrated Logistics and Value Chain Management (A new model approach to value chains)

Integrated Logistics and Value Chain Management
(A new model approach to value chains)
Eirik Borgen, M.Sc.a, Heidi Dreyer, Ph.Da,
Håkon Hynne, M.Sc.a, Kristin Olstad Schea, M.Sca
aSINTEF (The foundation for Scientific and Industrial Research at the Norwegian Institute of
Technology). The institute for Industrial Management, the department for Economics and Logistics,
Trondheim, Norway
Abstract
In an ongoing Norwegian research project, which started in
the spring of 1998, the research team1, in co-operation with
In an ongoing research project between researchers from
companies in a builder’s merchants value chain, is dealing
SINTEF and participants from a builder’s merchants value
with such issues in order to build an integrated logistics
chain in Norway, we try to come up with a method and a
management model2. The research project is at the phase of
management model for development and implementation of
finalising a pilot study, which shall contribute to establish a
integrated logistics value chains. Our hope is that this
close co-operation between the participant companies at
method and model can be used to handle generic cases of
three different logistics levels; strategic, tactical and
logistics integration. During the project work we have
operational.
identified the need for a new consideration approach to
value chains. With basis in Porter’s enterprise model, other
This paper is concentrated around the strategic level of the
relevant theory and from discussions and reflections with
co-operation. According to our experiences so far, decisions
the representatives from the involved companies, we have
tied to different ways of co-operating, clarify roles and
moved towards a process oriented model for such value
process designs are important key elements of the strategic
chains and have in that work uncovered some, in our
level in building an integrated logistics management model
minds, interesting findings about the model. This paper
for value chains. At the strategic level, and from a logistics
presents the process-oriented model, some characteristics
value chain’s perspective, we think that the major research
of the model, how we came to that result and our arguments
questions are:
for this kind of approach to the value chain.
• Who should do what of the companies in a value
Keywords:
chain?
Logistics, value chain, strategic level, management, model,
• How should the relationship between the companies
builders’ merchants, extended enterprise
be?
• What implications do this have for the design of
Introduction
processes in the value chain?
Based on preliminary results, we are confident that rather
high logistics integration of companies in a value chain
from producers to retailer creates competitive advantages.

1
In order to realise such competitive advantage, co-
The study is accomplished by the authors of this paper which are
operation, co-ordination and the process for closer
all researchers from the Foundation of Industrial and Scientific
relationship among the participants in the value chain is a
Research at the Norwegian University of Science and Technology
criterion for success. Questions like; what is the best-suited
in Trondheim (SINTEF).
integration level, and how to integrate, are the main
2 The integrated logistics management model will take into
challenges in order to ensure an efficient value chain.
consideration core business, contracts and forms of co-operation at
a strategic level; control areas, product categories, principals of
controls, communication systems and organisational structures at
a tactical level; training and implementation of systems and
routines at an operational level.

---

As a consequence of trying to answer the above-mentioned
questions, we have found a need for a new consideration
Towards a new theory for integrated logistics
approach to logistics value chains. With basis in Porter’s
value chains
model of the value chain and the research work we have
done so far, we suggest a new integrated value chain model
The project’s objective is to create an integrated logistics
with a logistics perspective.
system to minimise the production costs and transaction
costs within a value chain, and thereby obtain a lower price
The main topic of this paper is to present this new approach
and better service for the customer.
to value chains, how we became aware of that need and the
work towards this new approach. In addition we focus on
The first research question we tried to answer was who
some uncovered interesting characteristics of the model and
should do what. To be able to answer that, all activities in
discuss this kind of approach to the value chain.
the companies were identified and categorised. With the
value chain model of Porter [9] as a basis, we have in co-
Method
operation with the companies, divided each company’s
operations into primary and support activities. For this
An essential aspect with the project is the case study of the
purpose, we used the company oriented Porter’s model to
previous mentioned builder’s merchant industry. The case
each of the participating companies. The model of Porter is
consists of four companies; a manufacturer, a wholesaler, a
illustrated in figure 2.
retailer and a transportation company all with different
roles in the value chain. One of the objectives with this case
s
study, is to come up with contributions to the integrated
tivitie
logistics value chain management model which we are
Firm infrastructure
t
ac
going to create.
Human resource management
ppor
Technology and development
u
S
Both qualitative and quantitative data are obtained in an
Procurement
interactive process between the case companies and the
s
e
researchers. Quantitative and qualitative data are defined,
s
n
nd
s
s
i
c
u
ies
und
r
v
atio
o
e
ting
le
collected and analysed by representatives from the case
t
b
k
er
Se
tivit
c
p
companies in co-operation with the researchers. The
Inbo
logistic
Ou
logistic
nd sa
a
O
Mar
a
researcher through empirical and theoretical discussions
r
y
and reflections guides this process [4] [11]. The following
ima
Pr
figure 1 illustrates the interactive process:
Figure 2 – Porter’s model
The next step was to analyse which of these primaries and
Ideas, guiding,
support activities are core business of the company. That
suggestions
was done together with the companies in the project, by use
Theory
of their own strategic documents combined with a study of
and
Case
Experience,
which activities are value added for the customer [6] [8].
method
results
Core business of the company could be both primary and
support activities [9].
One assumption is that core business of a company is more
efficient than other activities in the company, A second
An integrated logistics
Integrated
assumption is that a core activity of a company is more
value chain model
implementations
efficient than the corresponding (but not defined as a core)
activity in another company. It is in the core business the
Figure 1 – The interactive research process
knowledge, the experience, and the skills are. In other
words, it is the competitive advantage and the identity of
In that process, we have step by step tried to identify the
the company.
different elements of the value chain as building blocks of
an integrated value chain model. Through this analysing
Improved efficiency within a value chain could therefore be
process, we identified the need for the new approach to
obtained by transferring a non-core activity from one
model integrated logistics value chains.
company to another company, which have the same activity
as their core business. In this process we found it more
Searching the literature, we have not found any models or
suitable for each participating company to redefine non-
theory that fulfils the needs and requirements we have to
core activities as support activities. We then end up with a
represent this. Through discussions and reflections in the
classification of activities as either core activities or support
group of researchers we have come up with a suggestion to
activities as illustrated in the following figure 3, but still we
that approach which is presented as follows.
have a company oriented perspective on the activities.

---

costs are going to be studded. The more there are of these
factors, the closer the relationship should be between the
companies. A formal contract, for instance, could reduce
the transaction costs by getting less opportunism and risk
Support activities
[5].
Agency theory and methods for analysing processes are
used to discuss the factors of Transaction Costs further.
Core activities
Agency theory is among other things a method used for a
deeper analysis of the two first factors of Transaction Cost
Theory opportunism and risk. The expressions hidden
information and hidden actions in Agency Theory are
Figure 3 – Identifying and classifying the core and support
essential in that respect. The risk is higher, and the
activities for each company
possibilities for opportunism is bigger if there are
participants in the value chain that hide information or their
Some of the companies in the project defined similar
actions in order to sub-optimise in the benefit on others
activities as their core activities, and due to that they could
costs [3].
be competitors instead of being complementarily of each
other. Co-operation within a value chain is then less
The level of hidden actions and hidden information depends
relevant.
on the market situation. The more imperfect the market is,
the more it could be of hidden information and hidden
After discussions with the companies combined with
actions [3]. Under such circumstances the transaction costs
further analyses, the core business was divided into new
could be reduced by a closer relationship between the
and more limited core activities. The similarities were then
participants in the value chain.
far less. However, this was quite a long discussion because
it influenced on the different companies’ strategies in what
The factors’ frequency and specificity of the Transaction
they should actually do and what they should outsource to
Cost Theory could be discussed by identifying and
other members of the value chain.
analysing processes in the value chain. The two main
processes found are the process of Orders and the
It should, according to that, be mentioned that the
Distribution process. The logistic processes within these
companies, in some cases, decided to perform core activity
two are in almost all cases product oriented. Products
which was placed to another participant. The reason for this
should therefore be categorised for both the Order process
is that those companies in settings with other customers,
and the process of Distribution. Conditions, standards, and
decided to keep their old ways of doing business with those
what kind of product decides in most of the cases the most
customers. From our point of view, is this outside the
suitable type of transaction. Level of technology for
context of the integrated value chain we tries to study.
different parts of the transaction is also important in that
respect. These analysis of processes are as mentioned inputs
This approach to concentrate on core business and
to estimate the frequency of the transactions and the
outsource other activities to companies, which have that
specificity, the two factors of Transaction Cost Theory.
particular activity as their core business, would most
probably increase the efficiency of production within the
The methods of Transaction Cost Theory, with
value chain [2]. On the other hand such a strategy would
contributions from Agency Theory and processes analyses,
increase transactions between the companies as well, and
could guide us. Whether relationships in a value chain
they would be more dependent on each other. It is therefore
should just be a gentleman agreement, or an agreement by
important to be aware of that the transaction costs could
use of formal contracts, or a partner agreement, or a joint
increase more than the production costs were reduced
venture, or maybe integration by doing it in house is the
within the value chain were reduced [10].
best solution [5].
It is crucial to analyse the costs of transfers before the
As a tentative conclusion the integrated logistics system on
model of concentration on core business is implemented.
strategic level is a method to minimise:
On tactical and operational level of business management
these costs are logistics costs, and including transaction
•
costs as well. On strategic level it is a matter of market

The logistics costs by concentration on core business
conditions and type of co-operation between the companies,
•
in other words pure Transaction Costs.

The transaction costs by getting the best relationship
and co-operation.
The second research question, is as mentioned, how the
relationship between the companies should be. According
The third and last research question is what implications do
to Transaction Costs Theory [10]; frequency, opportunism,
this have for the design of processes in the value chain.
specificity, and risk are essential elements when transaction
Porter put his focus on the Production Company.

---

Schoolbooks concerning value chain models [1] [7], seems
It is the same situation for the primary activity Distribution
to also put focus on the central (often production) company
or flow of goods in the opposite direction. The distribution
and do not emphasis so much the other participants in the
of products goes through different activities like transport
value chain. If we, for a moment, suppress this central
and inventory handling by the different participants in the
company oriented perspective, and only takes into
value chain. In this way the Distribution it self can be
consideration the processes of the value chain – we may
regarded as an overall process involving all participants and
construct a Porter-like model of the value chain based on a
not related to one particular participant.
process perspective. This is illustrated by the following
figure:
When detailing the primary processes, by using techniques
from i.e. SADT3, we can structure the activities of a
primary process without in the first hand take into
s
s
e
s
consideration where the control of the different sub
oce
activities shall be placed. First on a detailed activity level
n
t pr
nt
we may assign control of activities to the different
e
nce
t
io
d
a
n
e
participants as a part of the logistics strategic discussion.
r
t
m
r
m
tena
s a
c
Suppor
oduction
s
o
fo
i
n
a
le
rvi
Pr
As
In
m
Sa
marketing
Se
Conclusions
s
Orders
s
e
Based on discussions that lead to this new approach for
es
value chains, some interesting findings according to this
oc
Distribution
model emerged, and what we think of as important aspect
r
y pr
a
with this approach:
r
im
P
• It seems that all processes (or activities) in this model
is a core activity for one of the companies according to
Figure 4 – A process oriented value chain model
the value chain perspective.
In construction and identification of this model, we
•
identified the primary processes as logistics processes
Outsourcing is probably not a relevant topic in a
concerning all the participants of the integrated value chain.
traditional way for one of the processes, because if that
It is reasonable to consider transfers and transaction of
happens, the new participants per definition will be a
products and information as primary processes, when
part of the value chain, and supplies a product from its
logistics functions are in focus. The support processes are
core activity.
identified as other relevant processes among the
•
participants.

In construction and identification of this model, we
identified the primary processes as logistics processes
The primary process Orders can be considered as flow of
concerning all the participants of the integrated value
information. It is information from the customer to the
chain. The support processes are identified as other
producer about the demands, and to the Transport Company
relevant processes among the participants.
and to the distributor regarding deliveries.
• The strategic choices for each participant may conflict
The information does not necessarily follow the same route
with the best overall strategy for the complete value
as the physical products do. In a value chain the
chain. Our experience is that it is important to put great
information process should be co-ordinated by a logistic
focus on this area.
function by getting different information input from
suppliers, producers, transport companies, and customers.
• In implementation we must put great emphasis to the
transaction costs connected to this construction because
This information input from the different participants could
it can be higher than the savings from this approach.
be looked upon as parts of the primary activity of getting
High specialising can give high transaction costs.
order information correct to the right participant. The
primary activity Orders or flow of information is then
From our point of view, the suggested approach to a value
constructed with contribution from all participants in the
chain model does not contradict Porter’s model of a value
value chain, while each support activity is limited to one
chain. The difference lies in the fact that Porter looks at the
particular participant. That is the reason behind limited
value chain as a set of separate autonomy companies, while
boxes for support activities, and an arrow going beyond all
we in this perspective present an integration focus on the
the sectors or activities for the primary activity (Figure 4).
Quite the opposite of Porters model for a value chain

(Figure 2).
3 A semi-graphic method to describe systems of different
kind. For more information see: Marca and McGowan
(1988) SADT, Structured Analysis and Design Technique,
McGraw-Hill Inc, ISBN 0-07-040235-3

---

value chain and therefore need to see the companies in a
[11] Yin RK. Case study research: Design and methods.
kind of extended enterprise perspective. We think that this
Thousand Oaks, CA: Sage Publications, inc., 1994.
holistic approach is necessary if effective and competitive
integrated value chain systems shall be realised.
Address for correspondence:
In the future we mean that the suggested process oriented
Senior scientist Eirik Borgen, M.Sc.
value chain model will serve as a basis and guideline for us
SINTEF Industrial management
in analysing other generic cases. Or, said in other words,
N-7034 Trondheim, Norway
this approach to value chains will be a part of the method
Email: eirik.borgen@indman.sintef.no
and management model for merchants value chains we are
working towards.
Scientist Håkon Hynne, M.Sc.
SINTEF Industrial management
Acknowledgements
N-7034 Trondheim, Norway
Email: hakon.hynne@indman.sintef.no
To The Research Council of Norway for economical
support
To the contribution companies:
E.A.Smith as, Trondheim, Norway
Linjegods as, Oslo, Norway
Icopal as, Fjellhamar, Norway
Bygger’n as, Heimdal, Norway
References
[1] Christopher M. Logistics and Supply Chain
Management. Strategies for Reducing Cost and
Improving Service, Financial Times Professional
Limited, 1998
[2] Coase R. The Nature of Firm, Economica N.S., 4. ,
1937
[3] Eisenhardt K. Agency Theory: An Assessment and
Review. Academy of Management Review, Vol. 14. ,
1989
[4] Eisenhardt K. Building Theories from Case Study
Research. Academy of Management Review, 1989: 16
(3) pp. 532-50.
[5] Hart O. Firms Contracts and Financial Structure.
Clarendon Press, 1995
[6] Kaplan R S and Norton D. Balanced Scorecard.
Harward Business School Press. 1996
[7] Lambert M L, Stock J R, Ellram L M, Fundamentals og
Logistics Management, Irwin/ McGraw-Hill, 1998
[8] Mcmillan J. Games, Strategies, & Managers. Oxford
University Press, 1992
[9] Porter M E. Competitive Advantage. The Free Press,
1985
[10] Williamson O. The Economic Institutions of
Capitalism. The Free Press, 1985

---