Research Paper: RP—ECBPM/0009

Extending The Concept of Supply Chain: The Effective Management of

Value Chains

Research Paper: RP-ECBPM/0009

By

Prof. Mohamed Zairi1, Dr. Abdullah Al-Mudimigh, Dr. Yasar Jarrar

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 Research Paper: RP—ECBPM/0009

Extending The Concept of Supply Chain: The Effective Management of Value Chains
Mohamed Zairi1, Abdullah Al-Mudimigh2, Yasar Jarrar3
1
Professor Mohamed Zairi
Director of the European Centre for TQM, Bradford School of Management, Bradford University
m.zairi@bradford.ac.uk
2
Abdullah Al-Mudimigh
Ph.D. Candidate, European Centre for TQM, Bradford University
a.al-mudimigh@bradford.ac.uk
3
Dr. Yasar Jarrar
Centre for Business Performance, Cranfield School of Management, Cranfield University
Yasar.Jarrar@cranfield.ac.uk

Abstract

It is generally accepted that Supply Chain Management (SCM) as a contemporary concept can lead to
various benefits of both operational and strategic nature. Indeed, by managing inbound and outbound
logistics effectively, organisations can remove various inefficiencies, introduce consistency, flexibility and
quality delivery. SCM is concerned with smoothness, economically driven operations and maximising value
for the end customer through quality delivery. The limitations are however due to the fact that SCM as a
concept does not extend far enough to capture customer (end user) future needs and how these get addressed
and furthermore, it does not encompass the post-delivery, post-evaluation and relationship building aspects.

This paper will discuss the merits and limitations of Supply Chain Management as a concept and will
introduce Value Chain Management (VCM) as a holistic proposition. It will trace the origins and history of
VCM, its critical factors of success and in particular, the paper will place emphasis on the importance of
managing integrated information and the importance of having a value proposition, the importance of
developing partnerships and building e-capability.

The aforementioned discussion will culminate in a proposed model for the effective implementation of
VCM, which covers 4 key elements supported by a drive on agility and speed.

1. VALUE CHAIN MANAGEMENT (VCM) AND REAL TIME ECONOMY

It is widely acknowledged that in the era of the Internet, speed, agility and value creation are the most
critical components of modern competitiveness. Indeed, it is the availability of planned information that
distinguishes good competitors from the bad ones. This is because decisions are made quickly, inventories
are no longer necessary and the customer is replenished on a regular, continuous and un-interrupted basis

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 Research Paper: RP—ECBPM/0009
(Tapscott, 1997; McGuffog and Wadsley, 1999). In other words, information provides real time for
communication and real time transactions and, therefore, makes the principle of developing relationships
with the customers much easier than ever before. This, therefore, begs the question, as to whether
organisations that have, in the past, found it difficult to compete effectively are going to embrace the modern
concepts of VCM and invest significantly in IT, so that, they too, can manage in real time and develop closer
working relationships with their customers. If this is to happen it is very evidently clear that they have to
adhere to the following two challenges:-

a. Re-engineer their supply chain capability. This would mean that the supply chain would have to focus
on all the activities that get the chain of raw materials into an operation that runs smoothly and is
delivered economically for the end customer. In other words, value chain analysis would have to look
at every step from raw materials to the eventual end user, right down to disposing of the packaging after
use. The end goal of supply chain management is to deliver maximum value to the end users for the
least possible cost.

b. Is to ensure that supply chain is extended to provide VCM. VCM is the model concept where supply
chain becomes only a sub set. VCM is concerned with managing integrated information about product
flow, all the way from suppliers to end users. In order to reduce defects in inventories, speed the
process, achieve time to market and improve customer satisfaction. VCM is concerned primarily, with
the customer from start to finish.

2. BENEFITS OF VALUE CHAIN MANAGEMENT

There are lots of benefits to be accrued from adopting the principles of VCM. These could be classified as
organisational, economical and strategic competitive benefits. First and foremost, value chain management
gives organisations the opportunity to develop their value proposition. In other words, they have to identify
their core competencies and position themselves in the market place, according to their strengths and
competitive abilities. Secondly, value chain management provides organisations with the opportunity to
establish chains that create value and drive out cost and bring in customer needs and wants. In other words,
it is about developing synergy levels and seamlessness, between the various activities involved in converting
the customer needs into tangible outputs. Thirdly, it is about creating customer focus and through a
continuous, uninterrupted relationship with the customers, information can flow both ways and, therefore,
create focus which is so necessary in a modern business environment, that requires organisations to move
speedily, to be flexible and to be agile. The other benefits of VCM, include the development of
partnerships with suppliers and with other stakeholders. Indeed, technology enables organisations to
network on a wider scale and ensures that the customer is better served. Cost advantage is another benefit

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which can be accrued from focusing on the customer in a value creation, value added manner. By
optimising activities and establishing the inter-dependency between the various processes, costs can be
driven out through quality improvement and through optimisation. Agility is a must in a modern business
environment, indeed the ability to innovate, to be responsive, flexible, cost effective, is the only way to
distinguish between various competitors (Sheridan, 1993; Greis and Kasarda, 1997). Lastly, the ability to
manage the network through the information flow, the knowledge base and the databases that customers,
suppliers and other stakeholders can access, will enable firms to compete effectively.

3. BEST PRACTICE CASE STUDIES

This section explores two applications of the principles of value chain management. One in the retailing
sector, the other one in public healthcare context. They both advance the importance of focusing on an end
customer. They both ensure that the pre-requisite is defining customer needs and wants and the flow
throughout the chain through the translation of both customer needs and wants into a valuable output, rather
than focusing on the flow of products and services that are not clearly defined.

Case Study A - ARLA Foods

ARLA is a supplier of milk and dairy products to supermarkets in the retail sector. It has a vision of
applying the full concept of Value Chain Management (Figure 1) and as a starting point, ARLA seeks to
modernise its supply chain. ARLA’s supply chain vision is as follows:-
“A supply chain brand creating sustainable competitive advantage through internal excellence innovation
and external offering.”

B-to-B B-to-C

Warehouse & Customer

Product Development Supplier Management Transport Inventory Category Management
Store Management Relationship
Management
Management

Supply Chain Management

Product Development Management
E-procurement Software
Category Management

Figure 1: Concept of Value Chain management

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In order to do this ARLA has developed the following framework:

CUSTOMER QUALITY METHOD & WAYS OF

PEOPLE & PROCESSES Aral Vision WORKING

& Mission

ARLA Supply
Advantage Chain
CULTURE

CUSTOMER QUALITY
PEOPLE & PROCESSES

EMPOWERMWNT

Figure 2: ARLA VCM Framework

As Figure 2 indicates, ARLA has an integrated framework which brings together the business vision and
mission with ARLA advantage. This component looks at shaping the culture, by focusing on three
propositions. 1, Is the customer, 2, Is quality, 3, Is the people and through harnessing people’s energies and
delivering a corporate empowerment that focuses on the third component, which is the supply chain
strategy, which includes methods and ways of working and, again, focuses on customers, quality, people and
processes.

The ARLA house seeks to achieve the following:-

• To take the business to a new level in developing internal supply chain efficiencies and integrating
demand with supply execution and in improving profitability.

• To create customer focus, which is consistent and continuously and that will be delivered through
understanding and delivering customer requirements, establishing consistent measures of success and
producing innovation in service, as well as product.

• Setting best practices in the dairy industry and that will be delivered through the most effective
delivery process and through visibility of process and costs, through a supply chain and finally
through E enabled supply chain principles. Commitment from top management therefore, is to
engage the whole of the organisation in developing supply chain excellence. To use various means

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and methods of modern management will enable ARLA to achieve the goal and to work in
partnerships for the purpose of building a future for the organisation.

Process Mapping and Optimisation

Process Mapping and Optimisation

Process Mapping and Optimisation

Process Mapping and Optimisation

Time Frame 3 years

Output – delivery of enterprise to enterprise model

Figure 3: ARLA VCM Road Map

As Figure 3 illustrates, the road map put together by the ARLA top management team, is a 3 year plan with
the end output to deliver enterprise to enterprise, value chain model. This would be done through 4
distinctive phases.

Phase 1 - Process mapping and optimisation, while looking and scrutinising all these activities and
at all the levels within the organisation.

Phase 2 - To implement process with design and to introduce the key elements of supply chain
development, again through scrutinising value added activity.

Phase 3 - Supply chain transformation. To integrate and start to apply the ethos supply chain and
value chain.

Phase 4 - To supply chain enablement to automate with IT and produce the enterprise to enterprise
value chain model, through internet based principles.

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Case Study B - The application of Value Chain Principles at Leicester Royal Infirmary

This case study is based on the business process re-engineering approach that Leicester Royal Infirmary has
adopted, to create a focus on the patients and, therefore, deliver a new organisation which subscribes to the
principles of VCM (Figure 4). It all started with a simple question “If we didn’t have a hospital in our city
and we needed to build a new one, what would it look like?” The result of this blank sheet of paper approach
has lead to fundamental re-engineering of all the activities undertaken within the hospital. To focus on
patients needs wants and patients satisfaction.

Entry Hospital Treatment Aftercare

Clinical PRIMARY
PRIMARY Services to CARE
CARE GPs

Planned
Entry

Visit
Re-asses &
Stay Aftercare

Emergency
Entry
PATIENT
PATIENT

Clinical Support Services – Diagnostic, Pharmacy Theatres

Teaching & Research

Figure 4: Principle of VCM

As Figure 4 illustrates the principles can be described as follows:-

1. To look at customer needs and the flow of patients, within the hospital system. It was established that
patients come via two routes, one is the emergency route, the other one is a planned entry route, through
referrals from the GP’s. The challenge here, therefore, was to establish close working relationships with
GP’s and to educate GP’s on the referral process. More importantly, to get them to work closely with the
senior management team of Leicester Royal Infirmary, on ensuring that quality and service is delivered and
patients are seen on time. They called this principle the “single visit principle”. The second route is the
emergency entry and again, using the fundamental approach of single visit approach. Patients are, therefore,

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catered for through one visit, by having all their needs attended to, without disruption, without frustration
and without asking them to make another appointment unnecessarily. This process was well supported
because the IT technology has enabled Leicester Royal Infirmary to build protocols with the GP’s and to
ensure that clinical services are offered to GP’s. Information and advice on the care of their patients is also
made available. In addition to this, the re-engineering approach has produced the seamless chain, where
clinical support services, such as diagnostic services and pharmacy, theatres, are all geared towards looking
after the patient in a synchronised fashion. In order to close the loop, Leicester Royal Infirmary has,
therefore, produced a protocol to follow up on patients progress through their GP’s and provide feedback on
the quality of service provided. What has made this possible is the free flow of patient information and the
innovativeness which was enabled by thorough knowledge of patients, their history, the effectiveness of the
care provided and, therefore, enabling the teaching and research process, which is fundamental to quality
improvement in health care provision.

In all, these case studies, have something in common and that is that in order to produce an E based value
chain approach to delivering quality services, the fundamental point was to re-engineer the structure of the
organisation and to enable each sub-activity to focus on the customer and more importantly, to link the
various activities together. So in other words, getting rid of bottle necks, getting rid of hierarchical
structures, ensuring that communication flows freely both ways and delivering a dedicated focus on the
customer, seem to be pre-requisites for achieving with value chain management concepts.

4. CRITICAL FACTORS FOR VALUE CHAIN MANAGEMENT

It is however, not easy to adopt the principles of VCM and to accrue the benefits which are promised in
various bodies of the literature. For instance, a recent survey undertaken by Ernest & Young (Hernan, 2000),
seems to demonstrate that there are many challenges that organisations are facing, which need attending to,
if the promised benefits are to be delivered.
Challenge 1 - Value chain optimisation. This area, as Figure 5 illustrates, demonstrates that technology is
the least factor of concern. However, many organisations that have participated in this survey, agree that
price pressures for modernising is one of the challenges that they are facing. The difficulty in ensuring
seamless communication and not having value chain management leadership and the commitment process.

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Technology incom patibility

Lack of trus t

Corporate Philosophical
Differences
Sm all Cos
Knowledge/Training Large Cos
All
Lack of VCM Leaders hip

Poor Com m unication

Price Pres s ures

0 5 10 15 20 25 30 35 40 45 50

Figure 5: Major Barriers to Value Chain Optimisation (Hernan, 2000)

Challenge 2 - Value chain performance. In relation to this question the various respondents have been
asked to report on how they perceive the performance of their organisation with value chain concepts and,
unfortunately, it seems that not many organisations can claim to be very effective at using the VCM
principles and optimising their performance in this sense.

Challenge 3 - As Figure 6 demonstrates, one of the critical problems that many organisations are facing in
their inability to put together a value chain strategy which is systematic and based on their future
requirements. Most organisations seem to be starting this process, but do not have it crystallised and well
documented already. Furthermore to the question on the effectiveness of value chain strategy, it goes
without saying that because they do not have systematic value chain strategies in place, the assessment of
their value chain strategy is somehow not very complementary.

IN DEVELOPMENT

Small Cos
NO
Large Cos
All
YES

0 20 40 60 80

Figure 6: Formal Value Chain Strategy (Hernan, 2000)

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Challenge 4 - As to information shared with value chain partners, it is very interesting to note that most of
the respondents acknowledge that their organisations still share information which relates to the
transactional side and which focus on aspects related to the product, rather than information which looks at
strategy and the long term vision of their partners. Figure 5, for instance, demonstrates that when it comes
to customers, the information shared is, again, to do with products and services, rather than the strategic
aspects and the sales forecasts. Similarly for suppliers, the information that is shared willingly tends to be
related to products and services and the least shared information is on strategic aspects and sales order
aspects.

Challenge 5 - Value Chain Management Road Map. This proposed road map, based on extensive review of
the literature and current experiences with principles and value chain management, has mainly 4 key pillars
and places emphasis on the importance of agility and speed. (Figure 7)

Pillar 1 - Value Chain Management Vision.

Organisations that seek to achieve excellent and sustainable performance standards using value chain
principles will have to put in place a value creation, a mission/vision, based on extensive knowledge
of the customer. Furthermore, they have to engage high leveraging capabilities of the organisation
and which deliver their value proposition. Thirdly, they must use information and knowledge as the
most valuable resource and this is more pertinent in a digital era, where real time decision making is
vital for competitiveness.

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IT
Integrated

Infrastructur e

Partnership

Process
Management
Philosophy

VCM
Vision

Figure 7: VCM Best Practice Road Map

Pillar 2 - Process Management.

It is very important, as it has been illustrated with the previous case studies, that processes are
analysed, core activities of organisations are established, optimisation is delivered across the board,
using modern tools, such as business process improvement, business process re-engineering etc.
Processes are surrounded with measurement to ensure that the improvement is delivered and cost
effectiveness is established and the value added is quantifiable. Furthermore, process management
will ensure that processes are controlled to provide consistency and seamlessness and finally process
management delivers effective management in a controlled work environment.

Pillar 3 - Partnership Approach.

It is so essential for organisations in the modern business context to work through partnerships.
Value Chain Management, is based on the notion that partnerships are possible, so a strategy for
enterprise relationships has to be put in place. Collaborative commerce has to be evidently visible
through free sharing of information and the mutual leveraging of various capabilities. Thirdly,
organisations have the chance to improve their overall capabilities by enabling preferences and

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priorities of customers that can be addressed. Fourthly to ensure that the network supply continues to
generate customer value and deliver consequential benefits for all parties concerned.

Pillar 4 - IT Integrated Infrastructure.

The integration is a must if value chain is going to happen and in an E based environment, IT
integration has been established as one of the key challenges. It is, therefore, imperative that
organisations facilitate the expansion of enterprise knowledge, by ensuring that information
technologies are improved and optimised and by producing real time understanding of production
processes, consumer demands and the activities of the various sub-processes, that are essential for
the value chain principle, but also which can be queried at any point in time.

Pillar 5 - Agility and Speed.

Agility is a consequence of various evolutions since the 1970’s (Greis and Kasarda, 1997).
Organisations at that time tended to focus more on cost. This shifted to quality in the 80’s and speed
became a pre-requisite in the 1990’s. Agility is essentially trying to customise mass customisation,
by personalising the delivery of value through the provision of services and products to each
customer around the globe. With IT and the Internet, this challenge can be made feasible.

SUMMARY
This paper has looked at the broad aspects of the value management concept and tried to illustrate the
applications through two, different case studies and, finally, the paper has put together a proposed road map
which organisations contemplating the introduction of these modern principles, can adhere to, if they wish to
optimise their performance and remain competitive, in a real time economy age and digital age.
Fundamentally the paper has established that at the heart of value chain management, are the needs of
customers, the importance of delivering value on a consistent basis to customers and consumers and the
importance of developing relationships through continuous information flow, continuous focus and the
ability and agility of organisations to continuously replenish those wants and needs in a timely, quality, cost
effectiveness and innovative way.

The other aspect that was highlighted in the paper is the importance of focusing on processes and identifying
core critical activities within organisations that have high leverage abilities and, therefore, which can enable
organisations to define their value propositions. Through highlighting one of the key surveys in the field of
value chain management, it has been established that there are two aspects, that need to be taken into
account. One of them is the importance of having a clearly defined value chain strategy that is deployable

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and that can be monitored on a regular basis and that can deliver the wishes and levels of ambitions of any
organisation concerned.

The other aspect that has been highlighted is the importance of focusing on partnerships. Indeed, one of the
conditions for the effective application of Value Chain Management is a clear emphasis on co-operation and
collaborations. This, therefore, requires a new organisational mindset and a new way of behaving when it
comes to sharing information. This is particularly the case when it comes to aspects on future strategic
planning, business growth and development plans, investment inventions and the direction that the business
is planning to take in the future.

Aspects such as these are so critical for partners, as they affect their ability to plan, to commit resources and
to gauge their own strategies so that mutual leveraging takes place and value added is rendered at an
optimum level from all sides concerned.

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References
Greis, N. and Kasarda, J. (1997) “Enterprise Logistics in the Information Era.” California Management
Review, 39(3), Spring, pp. 55-78.
Harnan, P. (2000) “Management: Missing Links.” Industry Week, March 15.
McGuffog, T. and Wadsley, N. (1999) “Insight from industry: The general principles of value chain
management.” Supply Chain Management: An International Journal, 4(5), pp. 218-225.
Sheridan, J. (1993) “AGILE MANUFACTURING: STEPPING BEYOND LEAN PRODUCTION.”
Industry Week, April 19.
Tapscott, D. (1997) “STRATEGY IN THE NEW ECONOMY.” Strategy Leadership, November/December.
.

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