Following on from the concept of the Value Chain we now have a thinking frame for articulating Business Value. By virtue of its components, it forms a Chain of interdependence. It establishes two sides of the whole system - Demand & Supply.
While the nature of desire on the Demand side changes - the population of people that constitute the demand - does not change other than for the size of this population as it fluctuates. We will come back to the demand side dynamics in a little bit.
However, on the Supply Side, evolution takes hold via the Value Creation capability (people driven). The core assets at Value Creations disposal are Specialisation & Synergy.
What unfolds, are additional interdependent links with defined roles at each link that increases the efficiency of the whole supply side.
The Supply side is now forming a chain - This is the first level of the Supply Chain - Organisational Interdependence bound by a common promise to fulfil on the desire of the demand side.
When New Value is first brought into being via a system - The supply tends to be localised if not performed completely by the one organisation. This is not entirely true in this day and age as establishing an organisation that only structures organisations into new value producing systems is possible and occurs. For the purpose of the illustration, assume that, like it was early in the evolution of the market economy, new value producing systems tend to be provided by the one organisation.
In the case of our Mom who buys the wiggles bread, the bread shop performs all activities - growing grain on the farm, milling grain into flour, baking bread, delivering it to its store in the village and sells it to Mom and her peers.
More new value is created in the form of Milk Shakes - again resulting in a farm that tends livestock, that produce milk that is processed in a creamery and converted into the Milk Shake and is sold in another shop across the street from both the Bread & Cake shops.
The three shops are operating in three separate buildings that were created by Bob - who is a builder. Bob rents the shops to the three company owners.
I won't go any further in the development of the local market economy and I am purposely ignoring the role of Capital which will be discuss in a later post. The main point is to demonstrate that as the market economy evolves - as new value is being created and the whole process of conversation is being conducted by single individuals or organisations - many opportunities for synergies present themselves to those who are able to see and willing to act. There is an opportunity for 1 farmer, someone to distribute the raw materials and finished goods between the farms and shops. This creates two new organisations to fill this opportunity. Now the town has 6 organisations based on 3 discrete demand signals. As long as those demand signals are being serviced - dancing the dance of delight and fulfilment - every body in the 6 supply chain organisations are in business.
The other point is that - there are thee promises that form the links between the 6 organisations. These promises are implicit in the existence of the supply chains. Fulfilment must be on time, to spec, at the right place and for the right price. This needs to flow from the farmer, to the distributor to the shops and from Bob to the shops also.
Mom and her peers and the delight displayed by her boy and "Dad" keep this whole ecosystem operating.
So long as the cake shop, bread shop and the milk shake shop can be in tune with the movements in desire and can effectively translate & communicate to all supply side participants, the necessary supply side modifications that are required to meet this desire - the whole system continues to work.
Thinking of the Supply Chain at the level of interdependent organisations beholden to a promise to the customer - I believe - is a central concept. It can be a major blind spot if the tendency is to focus inwards and associate the supply chain as being and internal organising & product/material movement capability.
True competition is supply chain against supply chain at the upper level. Lets follow a scenario to demonstrate.
Where is the Scarcity ?
At the Value Chain level - is the scarcity on the Demand side or the Supply side? In the case of the bread value chain example above, and assuming that bread is one of the essential food groups for the purposes of illustration - then Mom has no substitution choice so she must purchase from the bread shop. It is in effect a monopoly and the scarcity is on the side of the Supply. (Monopolies tend to promote inefficient operations)
If however, there were at least 2+ bread shops in town then Mom would have a choice and the scarcity would be on the Demand side - therefore, the supply side would be in a state of competition and this promotes efficiencies on the supply side.
On the supply side, the question of scarcity is also applied. As we look at the current example, the bread shop, & cake shop are both reliant on the both the distributor and the farmer. There is no choice regarding distribution of grain or growing of grain. The bargaining power has now shifted from both the Bread shop and the cake shop to the distributor and the farmer. This poses a great threat to the inherent commitment to the promise that is the back bone on which the whole supply chain exists. In particular, ignorance of the inherent commitment and/or selfish or greedy behaviours threaten the whole supply chain.
This brings me to the supply side concept of the "power of partnerships". As mentioned earlier, true competition is Supply Chain vs. Supply Chain. The promise to the end consumer/customer is the one true directing & aligning signal. The strength, resilience and performance of the links between one end of the supply chain and the end consumer/customer is the competing combination. If there is Demand side scarcity - the supply side is now operating in a competitive environment, therefore the more powerful links will survive and dominate.
This presents an interesting phenomena; we are all in the value equation together. Anyone's failure to meet their end of the promise chain, reflects badly on the whole chain - everybody looses. Delight is impacted through a broken or the diluted fulfilment of the promise, and the link(s) that did not keep to their commitment were to blame and everybody suffers. Performing partnerships are paramount for sustaining existence. So the Dance of Delight and Fulfilment now requires the synchronisation of all of the supply side links.
Thinking of Value as the whole system and only coming into existence when delight has been achieved is the reason why mantra's such as - right product, right place, right quality, right quantity and right time are actually very important - and not only for your company, it applies to every company in the supply chain. The measure of Right is the sum of all links across all dimensions (product, place, quality, time & quantity) compared with the promise made to the demand side consumer.
Before finishing on this topic for now, I would like to introduce one more critical dynamic - time preference. This is intricately linked to the role of Capital in the structure of production (the higher level supply chain), however, The Role of Capital is for another post. Today, I would like to focus on the "time preference" at the point of purchase.
Most purchases are of either a fully finished good or one that can be rapidly assembled. In either case, the person on the demand side with the desire and the will & means to transact wishes to consume the product within a time horizon that they believe to be acceptable.
Acceptable is a subjective measure and depends on the choice and nature of consumption. However, the key point is that there is a trend towards reducing the time. There is a preference on the demand side for not having to wait. So, Mum is not going to walk into the bread shop and place an order for a loaf of bread, wait for the farmer to sow the seeds, grow the grain, harvest the grain, mill the grain, bake the bread & deliver it to the shop for starving Mom to bring it home to the hungry family. It is an extreme example, however, the essential time preference point is that - unless the structure of production can be marshalled from ground zero to demand side fulfilment in almost real time - the supply side needs to guess and forecast the demand that they expect to be required to service. Like the promise chain, the demand forecasting chain is a central efficiency signal and survival signal for the whole supply chain. The reality is that, the forecast can never be 100% accurate; it will always be below 100% ... maybe significantly, therefore safety buffers are required across the structure or production to offset this dynamic and deliver on the promise.
Across the Supply Chain, there is a race against time and a need to forecast accurately. Capital Funding, Information & "Peoples capacity for creative thinking" are the essential ingredients.
We will follow the trail deeper into the organisation and tackle the concept of "Functional Dysfunction" in the next post ...
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