To begin with, we need a working definition of SCM because its definition varies depending on which constituency discusses it. Supply chains have also become increasingly larger, encompassing more aspects of an organization's work as it became more possible to do so. Before exploring SCM, managers and workers in the Information Age have to face a basic problem with the subject, namely, coming to an agreement about what it is because of the fact that SCM is currently changing so rapidly in scope and form. For my purposes in this chapter, I define SCM as the activity that links and optimizes the processes, tasks, technologies, and terms of operation necessary to design, acquire components, and bring a product to market, to sell and deliver it, and to service it. The flow from one end to the other of such a supply chain can also involve just a service, such as dry cleaning or mailroom management. The origin of SCM came from managers breaking down the walls of highly optimized functional silos, such as sourcing, warehousing, transportation, and manufacturing, to manage the linked processes for an optimized result across the chain. The concept implicitly included the idea of sharing information about the logistics of raw material to finished products among all handlers. For example, Ford Motor Company can tell its suppliers of tires what cars it will build next week, allowing suppliers to look at the production database in a Ford computer system to know what kinds of tires to deliver each day next week. The concept expanded to include backward forecasting, that is to say, retailers or customers telling vendors and suppliers what they thought they needed.

If this sounds very much like the electronic data interchange (EDI) of the 1970s and 1980s, it is because EDI taught participants in SCM about the value of information shared across multiple enterprises using telecommunications and computers, particularly in manufacturing industries. EDI and the sharing of information and knowledge facilitated the expanded use of SCM. Its consequences for how organizations are formulated and tasks performed are far more extensive and, thus, more critical to the successful management of a company than ever before. It is why the overwhelming majority of senior executives today must be familiar with the whole subject of SCM. The historic trend of the past three decades has been from some exchange of data (such as EDI) to sharing of all information related to the design, manufacture, movement, selling, and servicing of goods and services. Collaboration increases as one moves toward SCM approaches. Today we can see collaboration among several companies in the design of new products; we see this all the time with automobiles and their many components, often involving hundreds of firms scattered across the globe. American clothing manufacturers working with suppliers in Asia and Israel, for instance, represent yet another highly visible case. So this is not a topic that just popped up in the past several years.

The theory of why SCM is a good thing holds that when properly implemented, collaboration between trading partners can reduce operating costs and capture additional market share beyond what they could otherwise do on their own, that is to say, within the walls of their enterprises. By tying together the processes of many departments and firms into one megaprocess, additional opportunities for efficiencies and speed can be realized. In practice, the theory works for several reasons. First, most firms, both large and small, have varying degrees of understanding about how to apply EDI. So they know what technical traps to avoid, they have learned to share information, and have realized some efficiencies. This is a very basic component of modern management practice.

Second, most realize the value of speed to market with either new products and services or faster delivery. Increasingly, managers have had personal experience with both. While implementation is not always a positive experience because of the complexities involved in coordinating the development of processes, implementation of technologies, and creation of meaningful metrics of performance, nonetheless, the end results are often positive, even essential.

Third, a generation of managers and their staffs now have experience with process management practices, a crucial ingredient in the development of coordinated activities across multiple departments and enterprises. Put another way, a company cannot have supply chains across multiple organizations operating as sporadic activities. They have to be processes because of the high degree of coordination required to make them work. This means managing activities with the rigors that come from process management and organizing one's organization (people and assets) around such processes. Structured activities become the name of the game for all the same reasons that common language, legal practices, and predictable government policies were always crucial to the successful operation of "for profit" enterprises and capitalist economies. Certainty, predictability, and repeatability are hidden features essential to the effective functioning of processes.

Six features of economic activity have compelled firms to pay more attention to SCM than ever before. First, consumers acquired more power in the 1990s, demanding specific goods and services as a result of their increased purchasing capabilities and access to knowledge about these. As with some of the other features of the economy, use of the Internet stimulated these changes. As a result of this shift in power, we moved toward a pull approach to selling goods, making it attractive for customers to come to vendors. Second, already mentioned in this book, but appropriate to consider again at this point, is the historic shift from mass marketing to mass customization. This shift required more electronic transactions than ever (e.g., purchasing, coordinated manufacturing, and delivery), leading to fewer physical activities per sale (e.g., building and shipping products to stores, then again to customers). Third, markets became geographically larger as firms crossed international boundaries to sell to new sets of customers. Many business professionals refer to this as globalization, but in practice it is more a matter of building the capability to reach new customers with messages and offerings across a larger land mass, either within a domestic market or across national borders.

These first three features concern how the playing field in business has changed in recent years. The second set of three features concerns how the first three were addressed within the context of SCM. Our fourth feature concerns the enormous amount of activity on the part of managers to make their traditional supply chains far more agile and flexible so that they can deliver newer and more varied offerings more quickly. More specifically, for product companies, shorter product life is now driving the need to get to bigger markets quickly before a product dies. Fifth, trading partners within the supply chain have been forced to collaborate in the development and execution of their business plans. That trend emerged as perhaps the most radically different management practice to emerge in the second half of the twentieth century. Sixth, with so many firms now publicly traded, the pressure of stockholders around the world for continuous improvement in efficiencies and overall economic performance has been unrelenting. In some cases this pressure has increased recently, particularly since the end of the Cold War.

These six trends were listed in the past tense as if they had already taken place because many of the world's largest corporations have experienced these, as have many of their suppliers and customers. Things that have already started to be done, of course, lend themselves to study for best practices, while those late to this game have the potential of leapfrogging earlier mistakes, cutting straight to best practices or to outsourcing to those who know what they are doing. As market activities become more closely connected, thanks to growing standards of living around the world, mass media, and to the Internet, these six trends can be expected to become more the case than in the past. It is very clear that this is an economic process still underway.

A variety of recent studies identified the benefits of modern supply chain management practices. The studies provide strong evidence that the new SCM processes, which are characterized by the extensive use of information technology, are delivering tangible business benefits. Two examples illustrate the point:

What experts will tell you is that SCM processes go in faster than Enterprise Resource Planning (ERP) approaches, often in less than one year, frequently building on existing EDI-like infrastructures already familiar to trading partners. One can, for example, construct SCM processes with little or no dependence on such massive projects as ERP implementations. One can roll out new franchises to gain economies of scale. One can use SCM to create industry standards, as was necessary, for example, in the banking industry in the 1950s when it became one of the first to create industry-wide EDI practices for the exchange of money.

Studies and work done by IBM's own consultants, working with clients implementing both SCM processes and the technological infrastructures that underpin these demonstrated the possible kinds of economic benefits firms were beginning to harvest. For example:

In the area of business growth:

• Increased market share (due to better execution and broader reach)

• Increased customer retention with 3 to 7 percent increases in sales (target marketing combined with mass customization and speed of delivery represent a new configuration of capabilities evident in the 1990s)

• Increased flexibility to change based on new circumstances (caused by management teams willing to change their practices and to exploit already-installed technical infrastructures)

• Increased capability to reaching markets faster (e.g., by providing online services)

So far we have seen that as supply chains extended further back into the product and service development arena and into customers with flexibility, accuracy, and speed, benefits occurred through cost savings, improved customer service, and business development.

Are there any rules of the road emerging on how to get this done? Veterans of the process speak about understanding the positive impact that changes in one's supply chain management processes have on their competitiveness. It is not just simply an issue of lowering costs and improving customer service. Those experienced with SCM have found that there is a counterintuitive "virtuous cycle" that occurs when inventory is taken out of a supply chain. In order to function, process and quality have to improve, collaborations with trading partners and customers rule improvements, and speed becomes critical. When properly done, the results are lower costs, higher customer service, fewer writeoffs, and fewer assets required for a given level of sales.

Second, it is increasingly becoming evident that execution and decision making must be tightly coupled with all involved trading partners to ensure that the whole works as desired. In recent years Dell Computer has become a classic example of this at work. However, increasingly, other firms have learned to link execution and decision making. To a large extent, the decision of some.com firms to expand to additional offerings emerged out of such a linkage. The capability, for example, of Wal-Mart or Amazon.com to play on the Net are clear examples.

Third, senior executives point out that SCM does, just like ERP, fundamentally change how many tasks are performed. The effects on policies, practices, and internal politics is nothing less than profound. The cases of Amazon.com, eBay, and Priceline.com come to mind as modern examples of this phenomenon at work. In short, what we are learning about ERP implementations applies to SCM, even though the latter go in much quicker than the former because managers tend to implement them in piecemeal fashion. A piecemeal approach is not possible with most ERP software tools, where so many elements are integrated by design within their software packages by the vendors who sell them.

By definition, supply chains increase in value as they expand, becoming increasingly comprehensive and reaching more customers. That is why I argue that everything management does should be viewed as potentially in a supply chain. A question for us to ask always is how a specific function of the firm can be woven into the fabric of the supply chain. In other words, would a particular activity be more effective or efficient as a formal part of a supply chain management process? Loaded into such a question are two suppositions: that the real work of the firm should be devoted to selling and servicing customers, and that such activities need to be disciplined, and often routinized.

If you accept my proposition about the significance of supply chains, then what questions might one want to ask as he or she modernizes their SCM? Five increasingly are on the minds of executives who remodel their SCMs.

1. Do you have a supply chain management strategy? To a large extent this is a question of becoming aware of what supply chain-like activities an organization is already involved in, possibly also what these should be. By the end of the 1990s, organizations of any size were either managing their own SCMs or were participating in someone else's. The issue, therefore, is to understand the state of one's own use of a supply chain and link it to the overall business strategy of the firm. Managers want to understand as well what value their supply chain delivers. With an appreciation of existing circumstances, it becomes easier to answer a second question.

2. What would be the specific advantages to a firm if the existing supply chain management process were expanded or made more comprehensive? Before reinventing the world, it is appropriate to see if the existing one can be leveraged to yield further results without total reconstruction. The effort to invigorate an existing supply chain can range from more use of the disciplines of SCM with suppliers and product developers all the way to expanded marketing to other geographies through partners linked via telecommunications, such as with EDI or the Internet. A caution at this point is the need to understand how differing SCM improvement activities may interact with each other to reinforce or cannibalize each other.

3. Are there first entrant advantages to be gained through the expanded use of SCM, or does one have to have an SCM just to remain relatively competitive and profitable? The answer to this question varies by industry and company. The answers are not obvious or assumable because circumstances can change, often rapidly, as I suggested in the first two chapters of this book. When Ford and GM both announced on the same day that they were going to convert their procurement processes rapidly to Internet-based trading hubs, they changed the future shape of thousands of suppliers' supply processes in one bold stroke. So managers have to constantly ask the question and not be surprised if the answer keeps changing. The question is an excellent one to ask of an existing bricks-and-mortar firm, although increasingly it is the sort of question that drives a creative entrepreneur to a venture capitalist because of first entrant opportunities. People serving as brokers—intermediaries—in the world of e-commerce, for example, fit into this latter category. They can operate only if they have a supply chain built around what they do. Dell does not manufacture personal computers, but commissions others to do so, even making IBM part of its SCM process because of the components built by Big Blue. Intermediaries sell insurance online, making mainline insurance companies providers of insurance to customers brought to them via the Internet, often leading to rapid consolidations of market share in the hands of a few entrepreneurs.

4. What technical capabilities and infrastructure does one need to pull it off? The underlying message is that technical wherewithal is often more crucial today than the rationale for SCM. Putting all the technical pieces together is daunting, even for a large multinational corporation with its army of computer and telecommunications experts. Managers often outsource some technical functions because building one's own proves too expensive or too slow to accomplish. Increasingly, they also find they must either concentrate their energies on industry-specific capabilities or go buy those as well so that they can expand into markets otherwise closed to them. Partners and candidates for mergers and acquisitions are often chosen in part because of their technical capabilities and the information technology infrastructures they already have in place.

5. To what extent do we have the knowledge and capability of operating an extended enterprise? It is not enough to read the writings of Harvard Business Review authors on the subject; you have to know how to do it. Opportunities for extending this brave new world have been enormous and varied:

• Managing across traditional boundaries in response to new market opportunities

• Getting rid of old supply chains or competitors in response to the opportunity of providing new goods and services

• Optimizing and managing networks and processes (insourcing for others), and a newly emerging area called reverse logistics (e.g., taking in repair work for other product providers)

The normal way of describing a supply chain is constrained, even inaccurate. Usually, one views it left to right, perhaps because in the Western World we read our texts left to right. So, you inevitably will have a picture of raw materials or product development on the left side on a piece of paper and the customer on the far right. SCM is then depicted as moving from raw material through a chain of activities to end in the hands of the customer. Information flows then are seen moving either from right to left (what the customer wants) or left to right (what we are delivering to market). However, what information has done is to make the management of a supply chain bi-directional and simultaneous. That is to say, information moves back and forth, left to right, right to left, and also within each major step left to right, right to left at various speeds, and does this in various types of supply chains which themselves are evolving, as illustrated in Figure 5.1. Understanding the flow of information, when it is used, and how, helps management win control over the supply chain and answer the five questions in ways that will determine a course of action.

Figure 5.1. Evolving Supply Chains.

Most managers know that operating a supply chain well means focusing on efficiently executing steps they have long understood: product development, logistics, marketing, purchasing, and so forth. The new element in today's SCM is its holistic quality made possible by the increased use of information technology. Because of what telephones and computers make possible, competing on operational excellence—the heart of SCM—means being very good at organizing around supply and demand chain processes. It means being very good at rewarding suppliers for their efficiencies and replacing them for noncompliance with the SCM as the megaprocess, the way of doing business with vendors. It calls for synchronizing SCM based on a far more intimate understanding of customer demand than one ever needed before. Keeping score does not change from what it has always been. Remember to focus on the basics: inventory turns, service levels, profit margins, market share, inventory levels, and total landed costs.

Thus, at the tactical level within that part of SCM, it is not information technology or strategy that are the central issues, rather, the traditional activities. They include forecasting and demand planning, sourcing and procurement, order fulfillment and service, distribution, warehouse operations, transportation, production logistics, and accounting. While these change as a company integrates them tightly into an SCM, they remain, nonetheless, the stuff of which business is made. That is the good news. The difficult news is that they have to be integrated more tightly and often more quickly to deliver the kinds of benefits individual components did decades ago. Again, as with so many other aspects of business activities today, it comes down to a footrace. Who gets there first, wins. In this case, winning is creating a new value proposition that works in the market.

Before we move to a discussion of emerging value chains, a subject directly connected to SCM, there remains one question concerning technology and supply chains: the role of the Internet or, as we are becoming more accustomed to saying, e-business. Does the Internet change things for a supply chain? The answer today is far clearer than it was even in the mid-1990s. The answer is a resounding yes. The Internet has created differences that are both important and subtle.

From the start of the 1970s and continuing through the early 1990s, firms usually had a dedicated technical infrastructure with private networks. Today, a company is more likely to have a network that is the Internet with shared global networks. Prior to the 1980s, most firms did not share a great deal of electronically-based information outside the walls of the enterprise. When a firm did share, it was most often with suppliers and always at some great expense, usually a third party or Value Added Network (VAN); networks were not cheap to build or maintain. Today, information is shared with whomever it makes sense to share it with, on a global basis, yet with controls over whom the firm authorizes to participate in access to its electronic files. Teaming used to be intracompany, with outsiders difficult to manage. The same was true for teams made up of employees from the same firm scattered around the country or world. Today, intracompany teams are very common, along with others made up of employees from widely dispersed geographic locations within the enterprise, following the flow of information, and coming in and out of departments more frequently than in the past. Control over who had access to a corporate network used to be physical or through passwords on internal systems. Today, an individual is given permission to access, shares information via authorization, and uses complex security systems to constrain who has access to sensitive data. Process management used to be a question of all process participants sitting around a table to discuss whatever issue was on the agenda. Today, you see such things as virtual product modeling, simultaneous engineering on a global basis, groupware for collaboration, and now effective video conferencing, Internet hookups for voice, combined video and text, and the use of such IT tools as Lotus Notes. They work, they are cheap, and people increasingly like them.

I suggested earlier that the world was changing; this is a good place to remember where and how. The Internet has a direct influence on any SCM in five areas: globalization, digitalization, compression of time and space, convergence of everything from products to industries, and empowerment of employees and customers. We do not need to cover this ground again. However, we do need to keep in mind that the Internet reduces distance, time, and physical barriers on the one hand and, on the other, increases speed, access, and responsiveness. These characteristics of the Internet are just as evident in SCM as in any other aspect of business practice where communications and information technologies are in evidence.

Since the first time someone tried to sell something to another individual, the primary measure of a successful transaction has been the degree of profitability. All the elegant theories about buying market share, temporarily pricing at or below cost, and so forth, all melt away at the end of the day in the face of profit. Revenue is good but profit is best of all. That axiom of business is as sound today as it was 5,000 years ago. When the great merchants of Europe of the Renaissance began sending ships around the world to trade in Asia and in the New World, creating in the process many of the modern accounting processes we have today, their concern was to make a profit. In the twentieth century, many debates were held about the social role of the corporation in society, a discussion held in Europe, Asia, and in the Americas, but the answer was always the same: They are engines of profit. With publicly held firms so numerous today, the emphasis on profit is more prevalent than ever in the history of modern business. Therefore, emerging value chains are attractive only if they lead to profit. The introduction of the Internet, and more important, telecommunications and computing linked together over the past half century, have sometimes confused managers, employees, and professors alike about what value chains should look like. But even in the emerging world described in this book, the requirement for profit has not changed. Market share as a goal will continue to be attractive, rising and falling in fashion as it has throughout the history of modern corporate capitalism, but it is not enough. Amazon.com must become profitable at some point, along with all the new Internet players who were the darlings of Wall Street in the late 1990s, or they will disappear. That is why, for instance, so many Internet stocks finally lost 40, 50, or more percent of their value during April and May 2000—investors lost faith that many new firms would turn a profit in a timely fashion. It is almost impossible to envision a time when profit would not be the ultimate measure of a business's success.

Given the reality of profit, what does managing and working in the Information Age mean? Adrian Slywotzky has spent as much time as anybody looking at this question and he argues that we will need to know how people make money in our companies and in our industries. We still need to know where profit zones exist in our firms and markets. We must still design processes that concentrate on generating profits where markets allow a business to profit in the new Digital Economy. His perspective makes good sense because it is a callback to a time honored business reality.^[2] Slywotzky argues that value migrates within industries. In the computer industry, for example, for many decades patterns of profit generation were linear, then they shifted. Instead of growing profits by selling either more profitable machines or additional quantities of them, reality shifted to software and hardware becoming less profitable. That is how we got Microsoft, today valued more by the marketplace than General Motors. As profitable products of the past became unprofitable, value migration was at work. In short, the source of profit moves on to some other part of the business or industry. For IBM in the 1970s, computers were THE source of all its profits. By the end of the 1990s, the firm's annual reports documented that the primary sources of profit were services and software. Value migration occurs in all industries, especially those experiencing rapid change. In fact, rapid changes are really sources of profits migrating to new points. Technology often causes or accelerates value migration. In other words, this migration results from doing all the things discussed in this book.

The challenge for management looking for value (profits) is less a question of designing a Porteresque value chain than it is building an organization that can quickly understand where profits can be had, how, and move there. No-profit zones within firms, markets, and industries are expanding, particularly in traditional forms of business where the impact of upstart, technology-based firms are in full view. Recognizing that your nonprofit zone is expanding and that profit zones are shifting is not an easy task, even if an obvious one management should perform. Understanding how a company makes profit today is clearly a first step toward any appreciation of how to continue to do that in the future. Coca-Cola, for instance, for decades made its profits by manufacturing syrup, advertising, then distributing product through independent distributors. Then its ability to make profit "the old fashioned way" began to shift, even erode, requiring a new business model. Its traditional source of profit—fountain and vending—was weakening. So Coca-Cola had to find other places within the value chain to have an influence if it was to sustain profitability. I tell this story because it illustrates a very important point: not all shifts in profit opportunities are a direct result of the Internet. My point is, you know the Internet is causing shifts (and potentially accelerating them), but shifting is a much wider issue, one affecting all industries and often in subtle ways.

So what did management at Coca Cola do? They used SCM as the tool to recapture control over their sources of profit. They decided to take control of the entire value chain. Coca Cola bought bottlers, optimized its investments in fountain operations and vending sales, and rebuilt its business model to reflect the fact that Coca Cola was operating on a global basis. These actions made it possible for the firm's management to grow shareholder value at a rate of about 26 percent compounded over the period between 1985 and the end of the century. This achievement occurred within an industry that had historically grown at about three percent in the United States and closer to seven to eight percent in other countries. Coca-Cola next began reexamining its value chain because its competitors had responded to its new ways of doing business. So the process started all over again.

Over time, Coca-Cola increasingly evolved into a channel manager, not simply playing out its historic role of being a product manufacturer. Disney Company did the same thing under Michael Eisner's leadership. That is why you see Disney owning some theaters, and licensing products and movies. High-tech companies, such as IBM, Intel, and Dell, make money by constantly introducing new products, building and delivering them cost effectively and fast, and then starting the process all over again. Speed and efficiency are crucial sources of profits for these firms. Their use of information and SCM practices are different than one might expect at Coca Cola, Pepsi, or Disney. GE started by wanting to be #1 in market share (the original Jack Welch strategy to making profits in a manufacturing firm), adding services, quality, and e-business to support share with productivity. GE did what IBM and so many others had. GE executives looked at their entire range of activities and offerings, taking a holistic approach. They sold products but also services wrapped around them. The services' piece of the equation increasingly became more profitable for all these firms. The moral of the story: Reconfiguration of value chains using SCM is occurring in all businesses and industries, offering every business team the opportunity to improve profit performance.

But within each industry and business, the actions firms need to take vary at both strategic and tactical levels, and these change over time. This is what happened at IBM, Coca- Cola, and GE. Managers, therefore, constantly have to ask themselves several questions as a routine part of building their business strategy. Even the.coms are not immune to this requirement. For example, both eBay and Amazon.com expanded and changed their offerings in 1999 to remain competitive. Simply listed, the questions that must be asked are:

The definition of "constantly" when discussing the ongoing flow of changes in business situations unfortunately is difficult to pin down. At a minimum, managers normally probe immediate and perhaps some well-established assumptions during each cycle of strategic planning, whether this exercise is done annually or biannually. In some businesses such as product developers in the PC market, such strategic planning and dialogue can occur even more frequently, since it changes so quickly. On the other hand, in less dynamic industries, managers could get by with asking these questions every two or three years, although those sectors of the economy are becoming as rare as hen's teeth.

Slywotzky's work suggests a less intense schedule than I would propose. He argues that these kinds of questions have to be answered and acted upon every five years. That is about the same rate at which change occurred historically during periods of major transformations in business; the 1880s, 1920s, 1960s, and early 1990s. My sense of things is that change in the market has sped up enough to require more frequent assessments. Ultimately managers are responsible for concluding how frequently reviews need to take place, and that is always going to be a result of an individual's perception of the rate of change underway in their portion of the economy. I just don't know of any industry of any consequence that is so stable that one can avoid long-term strategic planning for more than about two years. The best do it constantly, with two-to-five year windows, but the key learning point is my emphasis on constant.

Regardless of frequency, fundamentally redesigning a business does generally lead to greater profitability over the long term. If you looked at the average performance of the S&P 500 firms from 1980 through 1996, you would see that firms normally grew at about eleven percent, but market share leaders grew share by seven percent. If you looked at a portfolio of companies that reinvented themselves on a regular basis, such as ABB, Coca-Cola, Disney, GE, Intel, IBM, Microsoft, Schwab, and others, you would see that their growth reached 23 percent. The percentage themselves are not the point, reinvention of the value proposition every few years as routine management activity is the message.

This notion of reinvention is a difficult one to implement, and so it is not always the most popular item on a manager's agenda. The notion is far from new. Business gurus and economists have to remind us of that fact every generation. However, let's acknowledge one of the most important original sources of this discussion, economist Joseph A. Schumpeter (1883–1950). An Austrian professor by birth and training, he joined the faculty at Harvard in 1932, long shining as perhaps the most brilliant member of what was before World War II one of the best economics departments in the world. As early as the 1930s he was pointing out that innovations, such as technological ones, stimulate demand for new products. As that demand is met, firms enter the market with yet more innovations. By inference, he made it clear that in periods of change, managers must transform their products to meet new conditions.^[3] The most recent research on these themes urges managers to hurry up and get out of the past and into whatever the new innovation/opportunity is so that their focus and energy are applied quickly and effectively.^[4]

Schumpeter's going-in assumption is that change is constantly occurring, although there are points where bursts of change happen in rushes, such as after 1780 with steam and the Industrial Revolution, again after 1840 with what we now call the Second Industrial Revolution, and so on. That is not a bad assumption for a manager to adopt. Just because someone may not sense there is change underway does not mean it is not occurring anyway and our poor manager just has not heard about it. The change could be percolating in another industry and, thus, not appearing on some manager's industry-centric radar screen. Ice cutters of the 1800s did not develop mechanical refrigeration, nor did large mainframe computer vendors invent the personal computer.

We live in a time, however, where competent senior managers understand instinctively the issue of change and, thus, the need for reinvention from time to time. Those managers concentrate a great deal of attention on understanding who the future profitable customer will be, what new products are possible to build, where the emerging profit sweet spots are. They exploit information and various types of information technology in order to develop and deliver products and services in a timely fashion. They link execution to strategy. One affects the other. They are routinely customer-centric and process driven. They align their core competencies behind an anticipated future and go out and get the resources and skills needed to build the new business model. Courage to change, confidence born out of repetitive reinvention, and a combined emphasis on change and the endurance to wade through the resistance and lethargy that inevitably block the way, characterize these managers. A bias for performance (results) combines with all of these other characteristics to lead to a set of management skills often overlooked by textbooks, but which clearly are important for any manager to have and use at just about any level in an enterprise.

As the pace of change has grown, so has the hunt intensified for ways of keeping up. An interesting exercise becoming increasingly evident is that of companies creating "Destroy Your Business.Com" teams. Their objective is the business equivalent of probing for weaknesses in current business models that could be exploited by existing or nontraditional competitors. They either deliver warnings to the business about dangers or identify new opportunities that their employer should pursue.

Regardless of what you do, begin by recognizing that future value chains will look quite different than those of the past. Increasingly, what we see emerging are value chains with the customer at the head of the line and assets of companies and industries at the end. In chart form the customer is now on the left, unlike on the far right of old. As one moves left to right after the customer, the value chain might have customer needs, channels of distribution, offerings (goods and services), raw materials and core competencies, and on the far right a firm's assets (e.g., factories, employees, and business partners). This is not the value chain designed by Michael Porter we grew up with. His models taught us to think in a new way and we did, applying the reality that made it clear value chains were useful. What is changing is that we now know they need to be dynamic and bidirectional. For that reason, you will not see a graphic of a value chain logically laid out on paper reprinted on this page, because such an illustration would suggest a static condition, exactly the wrong message to deliver.

This whole discussion, of course, is another way of saying that the customer is first. It is a practical call to arms that says processes need constant redesign, information flows change, and who performs the work of profit generation does too. Value chains also say that everyone in the workplace gets to use skills and knowledge they have acquired: process redesign and management, use of digitally-based technologies, and formation of partnerships and alliances. Supply chains transform, sometimes even becoming demand chains instead, but the idea is fairly clear. Customer care processes now become the tip of the iceberg. But in each circumstance, business professionals focus on applying their various skills to preserve profit flows while recognizing that these flows change in content and form every few years, or even more frequently.

What we know today is that within industries, standard value chains are not as relevant in teaching managers how to make money as they were even as recently as the early 1990s. Too much is changing. Deregulation, for example, turned electric and gas utilities on their ends, radically changing by 180 degrees how they can make money and profit. Rapidly disappearing, for example, were their government granted monopolies over specific communities where they could be the sole provider of energy; today a firm from another part of the nation can do that in many countries. In large manufacturing industries, mass customization and efficiency created new rules of engagement. In services it was the ability to provide new offerings and yet understand if they were delivered profitably. As a concept, a value chain is a useful way of thinking about one's business, because the hunt for relevant ones preserves intact an intrinsic set of core values useful from one generation of managers to another. At a minimum they remind everyone that such values are relevant all the time and should not be forgotten.

What are the handed-down values that these value chains remind us to focus on? Knowing that new value chains share some common elements with older value chains is useful. Both should account for:

That list is simple but powerful. Does your current value chain address these issues? Does it help you develop points of view and tactics to leverage your thinking? Does your supply chain management process support an effective value chain? Is it comprehensive and holistic enough to get the job done? How do you know?

Are there some best practices to keep in mind as you answer these questions? There is one overriding best practice that fundamentally affects the performance of the organization both strategically and tactically. It is to link functional strategies, such as those for SCM, IT, customer value management (CVM), and product innovation, to an overarching business strategy that sets the principles and competencies around which the firm will define its contribution and participation in the value chain.^[5]

The cement between the bricks, the glue that binds in the world of supply chains, is information. This binding agent comes in many forms:

This list, it seems, is increasingly becoming more varied and extensive. Supply chain management used to be about physically moving goods around and managing inventory. Warehouse management techniques became the hot supply chain topic in the 1970s and early 1980s, although controlling and tracking inventory provided the lion's share of complicated business practices through much of the twentieth century.

If you were to discuss with IT industry long-timers what computers were used for during the past half century, they would tell you a slightly different story. They would argue that inventory control by itself was always high on any company's list of priorities, first in manufacturing and later in distribution. As firms grew in size in all industries, inventory control also became important because everyone, it seemed, had supplies on hand (inventory). The utility company had an inventory of electric lamp posts, restaurants had an inventory of frozen foods, a school an inventory of pencils, paper, and text books. Every organization had inventory. Inventories were assets that cost money and thus had to be optimized and accounted for. One IBM salesman with over 30 years' experience told me in the early 1970s that "this industry (meaning data processing) was cost justified on inventory control." Computers were sold to help companies manage inventory.^[6]

Increasingly, by the late 1980s managers had come to recognize that the ability to manage supply chains was an IT issue, not just one of logistics and forecasting. The challenge became—and continues to be—one of understanding and then managing several types of technologies in support of a supply chain. Simply listed they are:

This is a much broader list of IT issues than we might have seen even in the late 1980s or early 1990s. While bits and pieces were around for discussion for many decades, the list of IT components gradually increased. The most recent additions to the list, of course, were knowledge management and the Internet.

The benefits to management achieved directly from computers are few but powerful. First, most activities related to supply chains can be done more quickly using computers. Robotic devices performing the physical movement of goods and automated packaging machines are both commanded by software. Given the competitive advantage of being able to deliver faster than a rival, this is an important benefit. Second, getting the right components or products through the manufacturing and delivery channels to a customer is a crucial element in mass customization, again another competitive advantage. Third, driving down the costs of making, selling, and shipping is directly possible and, in fact, is often the first benefit management receives from the use of computers. Table 5.1 lists many of the SCM processes in evidence today and in which organizational departments they reside. Each process is normally assisted by software. Every process is linked to other components of SCM and other departments by telecommunications and software tools.

Increasingly, use of information technology is stimulating activities related to the management of supply chains. The first, already mentioned, is the synchronization and optimization of supply chain processes. Second, computers are making it easier to measure and enforce compliance of participants in a process, providing anticipated levels of performance. Third, as illustrated by the processes listed in Table 5.1, the breadth of activities that could be tied together has sharply increased.

Yet we still face many challenges. Software and hardware tools keep changing, in some cases obsoleting recently acquired items. The good news is that many of these tools are not as capital intensive as in previous decades because often they are highly dispersed small components (e.g., software, PCs, and hand-held units), linked together through wireless or telephone lines to software and databases on existing mainframe computers, and in the future may be accessed on a transaction basis through ASPs. In other instances, parts of the supply chain are being managed by partners and allies using their own telecommunications and computer systems. This means a manager can change the structure of a supply chain a great deal faster today than ten or twenty years ago.

An important challenge is dealing with the fact that as one tightens up the supply chain, he or she is forced to do three things well. First, the manager must develop a clear idea of what the supply chain has to do and why. That includes understanding expectations and being able to measure them. This effort causes a manager to organize and do things fundamentally differently than might have been the case even a decade ago. Look at how Dell Computers, for example, taught its industry that it could provide personal computers and not own a factory or a store! Second, organizations need to be able to use their computers effectively to perform tasks involved in a supply chain, but also to draw from those systems information and insights about what is happening within the supply chain's processes. This allows a manager to change a product mix, or the timing of a delivery, identify areas of cost control, and so forth. Third, a manager must be prepared to change frequently and quickly how business functions.This third duty is the one executives often find the most difficult to perform. There are many obvious barriers to change. These include insufficient desire to do the hard work, measurements and incentives that motivate individuals to leave things as they are, danger to one's political power or career, lack of appreciation for what really needs to change, and fear of risk, particularly the concern over potential lost revenue or increased surprise costs. Yet, at the end of the day, these challenges must be overcome.

The good news is that over the past half century managers have injected information technology into their supply chains without knowing that this was what they were doing—automating major portions of their supply chains—until we began to see whole bodies of linked activities as SCM by the early 1990s. Today inventory control with computers is a very familiar area of expertise found in almost any company. Telecommunications and use of personal computers, even hand-held units, is now a widely understood body of technology. POS and scanning technologies are as well understood in manufacturing as they are by retail and distribution firms. However, wireless technologies, really the basis of a new telecommunications industry first evident in the second half of the 1990s, represent a frontier of unknowns. New products and price/performance levels are just emerging. Governments are regulating and deregulating wireless activities as you read this book. New applications are only just now being realized, while old wire-based ones are being replaced with wireless systems. All of this is going on around the world, in poor countries in Africa and in those East Asian and northern European states with the highest standards of living on our planet.

One challenge we face is an inadequate supply of best practices in the world of SCM and value chains. The business press, particularly in North America, has sharply increased its coverage of supply chain management and related IT components, beginning in the second half of the 1990s. That reporting on specific technologies and case studies of how companies are doing one aspect or another of SCM is beginning the process of creating a body of knowledge about best practices and sound insights.^[7] Empirical research on what constitutes best practices, however, has hardly begun. We know what they are for specific components of a supply chain (e.g., use of POS systems and inventory control applications), but not for the whole collection of processes from end to end nor about the value chains associated with these, especially about modern e-enabled systems and processes. Given the fact that these supply chains are now becoming longer and more comprehensive (also cutting across corporate and industry borders), and, thus, more complex to operate, manage, and measure, we can expect to be shy of best practices for some time to come. People will have to network with each other to compare notes, draw on those narrower bodies of best practices that exist, and experiment. This is not a perfect strategy, but it has always worked. That approach is, in itself, a best practice.

As the whole subject sorts out, successful participants in the Information Age will exhibit four kinds of personal and professional behavior. They will have to pay attention to what new technologies appear and how to mix and match them up in ways never done before (e.g., cell phones with mainframe databases). They will have to be open intellectually to new ideas about how to streamline old ways, design processes that are very computer compatible and which cross traditional organizational and industry boundaries. These efforts call for creativity as well, a third feature of the successful participant. Finally, lessons and best practices must be learned and borrowed from new sources. These include other industries, companies, and agencies that are not competitors (e.g., armies and navies in industrialized nations which are quite good at supply chain management, especially inventory control, where they have always provided best practices throughout most of the past two centuries).^[8] Why can these four behaviors be seen so confidently as critical to future success? Simply put, they have always been keys to success in earlier periods of transformation and are the behaviors those currently thriving in the Information Age are displaying.

Increasingly, the knowledge needed will not be in one person's head. In the case of what types of telecommunications and computing to use, a number of experts already have to be in constant dialogue with managers and users of the supply chain. You can expect to see more of that kind of interaction in the future. That is why, for example, many companies are creating supply chain councils and task forces that are, in effect, permanent and extend beyond their enterprises. You can even see supply chain executives appointed, charged with responsibility for lashing together all the players, many of whom are experts in information technology and telecommunications, not just simply manufacturing and warehouse gurus.

This requirement of lashing together parts of an organization raises the inevitable question of how high in an organization the key decision maker has to be. Ironically, when in the 1970s Peter F. Drucker discussed the issue of where to place decision making in any organization, he used the example of inventory control (precursor to supply chains) as the point at which he wanted to teach his readers.^[9] The moral is clear: While many things are changing, some principles of sound management do not.

The most pervasive trend in recent years has been the integration of SCM with the Internet and other forms of information technology. This integrative activity has reached out to every form of digital technology available to organizations, even stimulating the development of new technical tools in the process. It took management very little time to realize the strategic and operational importance of weaving technology into their supply chains. The returns came fast and furious, making it easy to conclude that a path to new value chains is the transformation of one's supply chain. That insight suggests that further transformation of even recently redesigned supply chains will remain a profoundly important activity for any organization regardless of size, industry, or geographic location.

Early in this chapter I suggested that everything is included within a supply chain. As SCM as a practice incorporates more and more functions of an organization in an integrative fashion, the statement becomes increasingly accurate. The quote at the start of this chapter by the painter Vincent Van Gogh is right on target, "small things brought together" accumulate into great things. It is often how supply chains are transformed and how value chains become obvious. But as with the other areas of business activities discussed in other chapters, effective SCM is a function of how fast one can transform, adapting one's supply chain to changing market realities. It remains a footrace requiring the coordinated action of most functional areas within an organization. The right uses of technology are often obvious, as are many of the market realities businesses face. Less obvious, however, is how to break out from just being reactive to market conditions and perceived opportunities and, instead, shifting to a more proactive lunge into the future. For those willing to take the lead, the next chapter points to the path.