Value nets

Vol. 22, No. 7 (3 parts) Part 1, July 2000
2000 Soundview Executive Book Summaries* Order # 22-16
FILE:
STRA
TEGIC MANA
GEMENT
Breaking the Supply Chain to Unlock Hidden Profits
VALUE NETS
THE SUMMARY IN BRIEF
If your company is like most, substantial profits are locked away where you would least expect to find them — in those activities commonly calledthe supply chain. Whether your company is a young dot-com company or aseasoned incumbent, enormous new value can be found and unlocked in theoperating end of the business — how you handle orders, source compo-nents, build products and get them to customers.
The key, according to authors David Bovet and Joseph Martha of Mercer Management Consulting, is for your company to adopt an entirely
new business design, the value net.
CONTENTS
Value net design combines strategic thinking and recent advances in The Power of Value Nets
supply chain management, resulting in a flexible system that is driven by customer choice, not the company. This customer-driven system — with a Five Characteristics of Value
mindset focused on value creation, not supply — replaces the traditional supply chain business design that fails to deliver the exceptional conven- ience, speed, reliability and customization that today’s customers demand. Supply Chain vs. Value Net
In this summary, you will learn how to use the business design method- ology first introduced in The Profit Zone (written by a Mercer Management Value Nets
Consulting team of authors led by Adrian Slywotzky) to develop your com- and Business Design
Value Proposition:
Crafting the Offer
choose among the different types of value propositions — service, convenience or customization — that you must offer customers; Scope: Deciding Where
● define the scope of the business design — which activities need to be and How to Play
performed, and by whom, to deliver the value proposition; Profit Capture:
Casting the Net
gain strategic control to keep those profits coming in; and ● execute the transformation from supply chain company to value net Strategic Control:
Staying in the Game
But before you begin dealing with these five elements of the new busi- ness design, you will first learn in more detail how the value net improves Designing for Execution:
on the old supply chain model — and why your company needs this new Realizing the Net
Lessons from the Innovators
Page 8
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VALUE NETS
by David Bovet and Joseph Martha
— THE COMPLETE SUMMARY
The Power of Value Nets
A new business model is emerging. If you’ve ordered a computer over the Internet, you have already been in contact with this model. It links increasingly stringentcustomer requirements to flexible and cost-effective manufacturing. It uses digital information to move prod-
ucts rapidly, bypassing costly distribution layers. It
adapts to constant change. This new model, which is
replacing the traditional supply chain business design, is
the value net.
Value Net Defined
new economy, you must learn to respond to customer A value net is a fast, flexible system aligned and driv- demand the way these companies have. When you adopt en by customer choice. It is a dynamic, high perform- the value net as your business model, you will.
ance network of customer and supplier partnerships and A value net looks nothing like the old supply chains, information flows. A value net begins with customers, which relied heavily on demand forecasting followed by and builds to satisfy actual demand. It is nothing like the manufacturing and delivering products or services to a old supply chain theory, which relied on manufacturing customer who might or might not want the product.
products and pushing them through distribution channels Instead, a value net places the customers at the center of in the hope that someone would buy them. In fact, a the entire process, as shown in the figure above.
value net is not about supply; it is about creating value The choices of these customers are captured in real for customers, the company and its suppliers. The value time and transmitted digitally to other value net partici- net replaces the sequential links of the supply chain (see pants. In the next concentric circle, surrounding the cus- figure below) with a network of two-way customer/sup- tomer, is the company. It controls the customer contact points by accessing customer information, nurturing the Customers Choose
relationship, and managing satisfaction through digitallyintegrated service and support.
A value net views every customer as unique. It allows customers to choose the product or service they value At the outer circle of the value net are the providers most. Manufacturing, delivery and associated services who perform some or all of the sourcing, assembly and are differentiated to meet the needs of each customer Five Characteristics of Value Nets
Companies like Dell Computer, Gateway, furniture There are five characteristics distinct to a value net busi- ness that give it an edge over a traditional business design Streamline.com are in the vanguard of creating value that relies on supply chain thinking. Value nets are: nets. These companies allow customers to configure (continued on page 3)
their own orders, then build and deliver them to theirdoorsteps in a matter of days. No hassles. No mistakes.
The authors: David Bovet and Joseph Martha are vice
No excuses. And they are killing competitors who can- presidents with Mercer Management Consulting’s Supply not do the same. If you want to survive and thrive in the Chain Strategy Team. Bovet is a well-known speaker onthe subject of supply and value nets. Martha leads the Supply Chain Strategy Team, building Mercer’s supplychain practice into a market leader. Copyright 2000 by Mercer Management Consulting.
Summarized by permission of the publisher, John Wiley & Sons Inc., 605 Third Avenue, New York, NY 10158-0012. 270 pages. $29.95. 0-471-36009-0.
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Soundview Executive Book Summaries®
Value Nets — SUMMARY
The Power of Value Nets
Supply Chain vs. Value Net
(continued from page 2)
Supply chains and value nets differ in five Customer-aligned. Customer choices trigger sourc-
ing, building and delivery. Customers command thevalue net.
Old Supply Chain
New Value Net
Collaborative and systemic. Each activity is
assigned to the partner best able to perform it, with many operational activities delegated to specialists.
Agile and scalable. Value nets are responsive to
changes in demand, new product launches and rapid growth. Working capital shrinks and process time is col- Fast-flow. Order to delivery cycles are fast and com-
pressed. Delivery is fast and convenient, at the cus-tomer’s plant, office or home. Inventories are low.
Digital. E-commerce is a key enabler, and new digital
information pathways link and coordinate the activities ✓ Profits are migrating elsewhere. If your revenues
of the company, its customers and its providers.
per customer are stagnating, you need to change your Herman Miller’s Value Net
business design to compete with all players, includingthe incumbents and the dot–coms.
You need look no further than office furniture maker Herman Miller for an example of value net design. A You equate “customer-centric” with a good
new unit, Miller SQA, makes office furniture with a marketing department. Nothing could be further from
twist. Its products and the entire furniture-buying expe- the truth today. Superb service doesn’t happen when it’s rience are designed to be “simple, quick and afford- designed after the product and service mix decisions able.” Take, for example, the ordering experience. With the use of a digital interface, customers can configure a ✓ Your managers view suppliers as enemies.
purchase to order. Once an order is placed, the informa- Think partnership rather than playing one off against the tion suppliers will need to build the furniture is instantly other. Collaborative initiatives define value nets.
transmitted for just in time delivery. So fast and effi- ✓ Senior executives view the supply chain as an
cient is the operation that order to delivery time is operational issue. It must be much more if your busi-
measured in days not months. Orders are being shipped
ness is going to be reshaped into a value net. ■ 99.6 percent on time and complete. It’s no wonder salesare growing at 25 percent a year.
Value Nets and Business
Time for a Value Net Design?
Take this test to see if your company or one of its There are profound changes occurring in the market- units needs to migrate from supply chain to a value net design. Look for the following indicators and ask your-self the tough questions they raise: Demanding customers. Consumers and business cus-
tomers today want it all. They want speed, service and Your business isn’t meeting customer demand
customization, all at a low price. Overnight and even for speed, reliability and convenience. A good product
instant delivery is becoming the norm for a growing isn’t good enough anymore. Today’s customers want spectrum of goods and services. Books, clothing and rapid fulfillment, on-time delivery and convenience in computers arrive at a consumer’s doorstep in a few doing business with you, and won’t settle for less.
days. Today, with leisure time scarce, customers want ✓ Your customers are defecting. Your most prof-
and will pay for time-saving convenience, delivery, sup- itable customers don’t necessarily fit the “average” port and maintenance, and ultimate disposal of a wide mold. Don’t let the customers who want customized offerings shift their spending to the competition.
Digitization of the economy. The digitization of the
✓ You worry about being “Amazoned.” You need
economy is revolutionizing the way companies do busi- to meet the Internet challenge and view e-commerce as ness. The Internet is the most visible manifestation of (continued on page 4)
Soundview Executive Book Summaries®
Value Nets — SUMMARY
Value Nets and Business Design
(continued from page 3)
digitization, and the catalyst for thousands of new busi- nesses. But many of these new businesses have beenbetter at designing fancy web pages than fulfilling their potential as value nets. The key to success is speedy e-fulfillment rather than a slick order page. Meanwhile,whole industries are being transformed by the power of the Internet. Postage stamps and music can now bedelivered digitally.
Digital technology is impacting every aspect of busi- ✓ Profit capture — how the company aims to earn a
ness. Software can connect customer orders directly to compelling return on shareholder capital. shop floor activities, algorithms optimize production auto- ✓ Strategic control — the ability to protect the profit
matically, wireless global positioning systems guide deliv- stream over time through sustainable advantages. eries, and remote sensors control machine maintenance.
✓ Execution — the human capabilities and digital
High competition. Competitive pressures are emerg-
technology that hold all the elements together.
ing from unexpected quarters. Obscure entrepreneurs The first and third elements represent the company’s can launch new ventures that suddenly threaten estab- ability to grow profitably. The second element represents lished businesses. Venture capitalists are major players.
the efficiency with which the capital is employed. The last Globalization. Finally, globalization is providing new
two elements determine a company’s ability to sustain markets and new supply sources as never before. Low- profitable growth over time. These five elements are the cost, low-skilled labor is located in one nation, state-of- keys that will help you create a value net company. ■ the-art contract assembly plants in another, and a pool oftechnically specialized workers can be tapped in yetanother country.
Value Proposition:
Value Migration
Crafting the Offer
The four change drivers just described cause value The first piece of the business puzzle is understanding migration. Value migration is the flow of profits and customer needs and serving them with unique products value away from outmoded business designs toward oth- and services that respond to each segment’s most rele- ers that are better designed to maximize utility for cus- vant priorities. It is no simple matter. The value proposi- tomers and profits for companies. A perfect example is tion is the utility-creating product or service that a com- the computer industry, which has shifted from tradition- pany offers to customers. In many cases, product and al manufacturing and distribution to a build-to-order service are tightly bound together. Purchase decisions model. Dell Computer and Gateway together benefitted are determined by the service and information attributes from this shift to the tune of $134 billion in added mar- that enhance tangible products; a pleasing store ket value from 1990 to 1999. During the same time, ambiance, next day delivery, expert assistance and after more traditional computer manufacturers Digital sale service. These are the service wrap.
Equipment and Compaq created only $22 billion in Three Powerful Value Propositions
market value. Migration patterns like these are signals The innovators who have capitalized on the demo- graphic and social trends that are emerging offer three Business Redesign
There are three essential factors that determine market ✓ Super service — including speedy and reliable
value. These are the growth rate of profits, capital effi- ciency and the ability to sustain profitable growth.
✓ Convenient solutions — delivering complete and
Taking into consideration these three factors, Mercer targeted services addressing a broad set of customer Management Consulting developed a business design ✓ Customization — providing customized products
✓ Value proposition — what the company will offer
and services, bundled together in unique ways.
to potentially profitable customers.
To take advantage of these value propositions, you ✓ Scope — which activities need to be performed
must target them at the right customers: those who (continued on page 5)
Soundview Executive Book Summaries®
Value Nets — SUMMARY
Value Proposition: Crafting the Offer
(continued from page 4)
Reliability at Cemex
place a high value on the offer and are profitable to Cemex has almost made reliability its trademark.
serve. The key is to stay focused on the needs of specif- The company is the world’s third largest cement ic profitable customer segments, develop a proposition producer, and sells cement, ready-mix concrete, they value highly, and design a value net capable of aggregates and clinker primarily to the construction profitably delivering on the proposition.
industry. It has operations in 10 countries and sells Super Service in Action
Reliability is an important virtue in the ready-mix Super service is a quantum leap. Super service business since delivery delays can wreak havoc with delights the customer and differentiates the provider. It construction schedules. Yet reliability is difficult to may be product availability, quality service or easy achieve since many customers, unable to control returns, or it may be rapid, reliable product delivery.
their own schedules, frequently cancel or reschedule There are two key aspects of super service: speed and orders. For years, delivery was chaotic. Then the CEO began to rethink the entire operation with an Consider what happened when the nation’s fifth largest auto insurer, Progressive, changed its delivery Using state-of-the-art communications and infor- design to make settlements happen fast. Until the 1990s mation systems, Cemex now boasts “Quality cement Progressive took days or weeks to settle a claim. The available anywhere, anytime.” The delivery of company had banker’s hours. Every Monday started cement product is now tracked from plant to cus- with taking loss reports. The rest of the week was spent tomer via wire, satellite and the Internet. The com- catching up, as claims agents were dispatched into the pany now boasts a 98 percent on-time performance field. Then the CEO redesigned the organization to respond immediately when the customer called. Beforelong, the company had an on-the-spot system for set- The end result for Progressive has been increased cus- tling claims. An Immediate Response® fleet of 1500 tomer retention, increased referrals, reduced fraudulent Ford Explorers equipped with cell phones, laptops and activity, reduced car rental costs and rising insurance wireless modems made it possible for claims adjusters premium revenues. While the rest of the auto insurance to access the company’s databases immediately and set- industry grew at an annual rate of about five percent, Progressive has grown at a rate of 25 percent.
Reliability is the other component of super service.
Reliability means predictable, on-time delivery of “per-fect orders,” as expected by the customer. A perfect Shrinking Leisure Time =
order is one that is shipped on time and complete andreceived at the customer’s desired location within a pre- Demand for Service and
cise time window, in excellent condition, and ready-to- Convenience
use. It includes the flexibility to respond to last minutechanges requested by the customer.
Shrinking leisure time and larger household incomes have boosted the demand for all types of Convenient Solutions
services, from house cleaning to personal chefs.
Convenient solutions is another powerful value propo- They have also spurred demand for time-saving sition. Customers today are looking for solutions. To conveniences like home shopping and delivery.
offer this, you must do two things well: pinpoint the Busy people don’t like spending their scarce leisure convenience needs of the customer, and deliver the solu- time doing routine errands or milling around malls.
tion without a slip. Value nets pinpoint needs by captur- At the same time, the public appetite for fast and ing critical customer information at “touch-points” dur- reliable service has mushroomed. E-mail and fax ing the ordering and selection process, while tracking provides fast communication, as do cell phones, order status, and during delivery and maintenance.
pagers, ATMs, one-hour photos, 10-minute loan Streamline.com for example is one of the new breed of approvals, downloadable software and drive- companies providing convenient Internet-enabled home through liquor stores. You now have a culture in delivery of goods and services. Streamline was created which people expect that anything can and should as a service enterprise, offering scheduled delivery of (continued on page 6)
Soundview Executive Book Summaries®
Value Nets — SUMMARY
Value Proposition: Crafting the Offer
(continued from page 5)
A Virtual Company
groceries, personal care products and dry cleaning.
SOHO Inc. is a virtual company with an expansive Streamline’s aim is to simplify the lives of busy fami- mission, a narrowly-defined scope and brilliantly- lies by eliminating the need for trips to the supermarket, executed value net operations. The California startup the dry cleaners, the florist, and so on.
makes ergonomic computer desks and sold $8 mil- Streamline Delivers
lion dollars worth of them in 1999. Initial capitaliza-tion was a mere $100,000. SOHO used 14 suppliers Streamline’s targeted customer segment is the busy and six retail partners from around the U.S. Those suburban family with children, high income and homes partners do everything except marketing, order entry close to its distribution facility. The set of products and and customer service. The company now operates services include food and non-food items that ordinarily on $400,000 working capital and fixed costs per year would require trips to many stores. Customers place and does no advertising. Instead, SOHO relies on orders via the Internet directly into the company’s order offering retail partners promotional discounts in entry system. These are then routed to the warehouse return for premium shelf or catalog space.
management system. The warehouse is supplied by drygrocer vendors, a local bakery, a top of the line meatsupplier, a UPS package service, Blockbuster Video, Second, a choiceboard captures real demand by linking their desires to its operational design. A choiceboard Each customer is on a fixed weekly schedule, and allows companies to determine real choice instead of selects items for the week at least one day before deliv- guessing it from customers’ purchases. Companies can ery. There is a “Don’t Run Out” list, along with a selec- observe buyer reactions and gain accurate insights into tion that the customer can change. Delivery is to the exact customer preference. Third, a choiceboard allows customer’s special refrigerated “Box” in an accessible choice management by the company as it makes avail- part of the house such as a garage. Customers pay $30 able limited choices. For example, Gateway is using monthly for the service, plus the price of goods pur- choiceboards to manage demand by steering customers chased. The company has identified a consumer prob- to components that are in better stock positions, result- lem and provided a convenient way to solve it.
ing in lower inventory and superior profits. Finally, a choice board allows product definition as each customerconfigures a product or service to his requirements.
Scope: Deciding Where and
Value-Enhancing Delivery
How to Play
A value net does not see delivery as an afterthought.
Instead, delivery is an important opportunity to enhance Every business must define the critical activities it the value of the offer, delight the customer and make will perform in creating value for customers, maintain- money. But delivery is more than getting the product ing strategic control of the customer interface, and cap- from the company to the customer. It includes physical turing the profits it needs to prosper. These activities delivery, installation and training, ongoing support, represent the scope of the business designs. Scope product returns and end-of-life retrieval.
decisions determine what activities must be performed Outsourcing
to deliver on the company’s value proposition and whowill perform them — the company or outside partners.
Value net companies face a major question, “Which Three categories of scope must be incorporated in the activities should we outsource to others?” They place a value net design: customer choice, production and high value on delivering performance through whomev- er has the ability to execute with superior efficiency andadded value. You should control customer touch-points Choiceboards
like ordering, customer service and delivery, and out- The choiceboard is a new phenomenon made possible by the Internet. Companies now can enjoy real-time Outsourcing provides flexibility and scalability, all two-way interaction with customers. When you config- ideal characteristics for a young start-up company. If you ure a personal computer at Dell or Gateway, you are are an entrepreneur with a vision for a new product or using a choiceboard. Choiceboards have four key ele- service, you can take that concept to market faster and ments. First, choiceboards involve a fast two-way con- with less cash by outsourcing production, distribution and versation between the company and its customers.
(continued on page 7)
Soundview Executive Book Summaries®
Value Nets — SUMMARY
Scope: Deciding Where and How to Play
(continued from page 6)
Iomega Slashes
other functions, creating an almost virtual company.
Inventory Stockpiles
Every company needs to understand that the best place Iomega, a $1.7 billion manufacturer of data stor- to play in the interconnected world of customers and age systems, demonstrates the benefits to be gained suppliers is not constant. Outsourcing is about collabora- when companies create direct information links in tive business cultures and support for the spread of tech- the supply chain. The company creates several i2 nology. Outsourcing is no longer a trade-off between Technology software packages. These packages, lower cost or better service. Both are possible. ■ including the Demand Planner, the Factory Plannerand the Supply Chain Planner, enable an efficient Profit Capture: Casting the Net
information flow through the company’s value net.
With the software deployed, the company has A company can grow if it has a powerful and appeal- ing value proposition. But growth only benefits a com-pany when it can capture profit from the value it createsfor its customers. A value net uses elements of its oper- are shifted. The Limited can get the right products to the ating design to generate and capture superior profits. right stores and change the floor layout of every store Profitable revenue generation is driven by the ability to provide super service and convenient solutions. On Money in Solutions
the cost and asset side, value net designs drive profitsthrough magnitude reductions in inventory, extremely There is money to be made by value net companies efficient operations processes and the ability to grow that provide a more complete solution for customer rapidly with limited cash for working capital or fixed needs. Nowhere is this more true than in the business- to-business world. GE Medical is an example of a com-pany that realized the value of providing a complete Profits from Super Service
solution to a customer problem. Broken medical equip- Companies that provide superior service are often ment costs the medical profession plenty in lost time.
able to charge a premium for that “customer wrap.” So GE began servicing not just its own equipment, but Companies can also increase profits by increasing prof- other makers’ equipment also. By 1998, services repre- itable volume rather than raising margins.
sented almost half of GE Medical’s revenues.
Consider an example from the fashion industry. Rapid Cost and Assets
and reliable deliveryplays a critical role By adopting a value net system to replace an older Rapid and reliable delivery
system, companies can dramatically cut costs and opti- plays a critical role
mize asset usage. Companies do this by melting inven- [in the fashion industry]
tory stockpiles, achieving operations effectiveness through digitization, and growing without cash. since customer tastes
An important factor in shrinking inventory levels is can change in the
reduced product complexity. Remember that about 90 blink of an eye.
percent of customer demand is satisfied with about 10 percent of a product line. Don’t complicate matters with The key in the fashion industry is to make products too many choices. Concentrate instead on mass cus- available when and where they are hottest. The Limited tomization rather than a large inventory of every possible has designed a supply chain delivering $10 billion worth combination. One powerful technique is to use standard of goods through the company’s ten main brands.
components to reduce inventory. You must also manage Getting the trendy new products into stores quickly is a supply reliability by building supplier relationships must. To maximize profits, the company has developed rather than stockpiling components for a rainy day.
an operating design that prioritizes time, service and cost Digital technology forms the backbone of a value net.
By digitizing the manufacturing of custom doors, for How do they do it? They meet every Monday night example, Weyerhauser has turned “a dead dog” plant into for an “information scrub.” By 10 p.m. the conference a profitable center. Gone are hand-written notes stapled to room walls are lined with data on what’s selling where.
doors as they move through the production line. Door Product redeployment plans are developed, and products design instructions are now delivered via computer. ■ Soundview Executive Book Summaries®
Value Nets — SUMMARY
Strategic Control:
place, the next big challenge is to get people on boardwho can carry through that vision. A team-oriented cul- Staying in the Game
ture is essential. Everyone must be on board, including After companies begin making money through profit capture, they must turn to strategic control to protect Value net companies must also take full advantage of those profits over time. Value net companies achieve digital technology to communicate with customers and strategic control through mechanisms like a brand that
provides differentiation in the eyes of the customer,
through a hook that holds customers, through a solid
Lessons from the Innovators
provider relationship with supply partners, through
The companies who are successful value net opera- innovative design that puts your service ahead of oth-
tions can offer valuable lessons for any company that ers’, and through a low price that competitors find hard
wants to reinvent itself as a value net company.
to match. The more your value net focuses on brand andhooks, the less likely competition will move in and Customer Focus
deprive you of long term profitability. The more it First, clarify the offer. Successful value nets don’t try focuses on design innovation or low price, the more to be all things to all people. Instead, these companies likely you will face significant competition in the identify and target market segments and offer value propositions with powerful appeal to those segments.
Value net companies hook customers with superior Value nets then deliver to that segment.
service and convenience. Consider Ritz Carlton Hotels.
Second, use a choiceboard as your customer interface.
The chain keeps a database that lets a returning cus- A choiceboard’s ability to accurately gather customer tomer skip the usual check-in questions, no matter in preferences and feed them digitally to supply partners which hotel the original information was gathered. ■ lays the groundwork essential for customer knowledgeand rapid turnaround.
Third, compress the order-to-delivery cycle so that cus- Value Net Brands
tomers get the speed they want. And finally, provide con-venient delivery no matter what your product or service is.
Product brand can account for as much as 100 per- Operating Effectiveness
cent of sustained profitability. Consider examples likeCoke, Tide, Advil and Sony. Over time, brand holders Customer focus must be complemented with effective can spend less on customer acquisition, experience systems for production and distribution. Operational fewer defections, and charge a premium for the “innards” must be digitized to make good on the promise name. Brands are more than names for products, made to customers. Learn to build to order. Design your however. Value net companies like Gateway don’t net to be fast, to provide customization, and to respond to have a distinct product. Instead, the brand is com- actual orders, not guesses about what customers want.
prised primarily of the value associated with cus- Next, select strategic supply partners, including out- sourcing partners, who can offer flexibility and scalability. Digitizing the Value Net
Designing for Execution:
Design the information flow first. Decide which part- ners need and should have access to information, taking Realizing the Net
into account that suppliers may also work for competi- Execution is the fifth element of value net business tors. Then automate communications across the value design. It translates business design into fast, reliable net, especially communications from customers. Use and flexible value-creating activities. Execution links all software to harness bits to power decision-making.
other design decisions. Nothing else you have done to create a value net will work unless you can execute.
Management Techniques
Adopt simple and clear goals to drive successful per- You will have to create a breakthrough culture with formance. To make the transition from supply chain to leadership vision, an entrepreneurial team, simple and value net company, don’t create a formal organizational clear goals, and new skills. Visionary leadership structure. Instead, use a small, strong, entrepreneurial requires commitment from the top; it does not percolate team that sees the company vision, identifies the goal, from the bottom. Once the visionary leadership is in and works across functions to build the value net. ■ Soundview Executive Book Summaries®

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