Value Network replaces Supply Network – fact or fiction

Roger OakdenLogistics Management, Supply Chains & Supply Networks

Circular economy

Value Network – the in term.

To get readers’ attention on either the screen or page, it helps if the topic being written about appears to be ‘new’. Using the term Value Network is an example, with it gaining favour in articles and commentary that discuss availability of goods and services for customers and consumers. Is this because authors are tired of using the term supply chain? Are they adopting a different term, so their commentary appears to be more timely and relevant? But what does value network mean?

The objective of a value chain is to create value for the end user (customer or consumer). It is the responsibility of Marketing to identify end user needs within markets and channels and then convert that information into products that will sell. The supply chain group (Procurement, Manufacturing and Logistics) get involved at the time of product development; translating product specifications into supply chain needs concerning handling, storage, making and control processes.

The diagram shows the direction of a value chain is from the end user to sales. For a supply chain it is from the farm and mine to the end user. An organisation has many value and supply chains which come together through the Sales and Operations Planning (S&OP) process. The S&OP provides input to the Master Plan to define what the organisation will actually do over the forward periods.

Value Chain and Supply Chain

The term Value Network implies the potential for interfaces, co-operation, co-ordination and even collaboration between the organisation and other, non-competing organisations. A network also implies that it is a complex, adaptive system. But do these factors comply with the description of a value network?

A Value Network is

A recent report concerning the consumer packaged goods (CPG) industry, written by a major consulting firm stated that a value network comprises:

  • Consumer engagement: through a dialogue via social media, apps, websites, on-line purchase and in-store visits. Providing content and offers with relevance to individuals and their location, while securing the personal data of end users
  • Transparency, through providing customers and consumers information about the key attributes of products – ingredients, nutritional value, provenance (where the ingredients come from), environment and social impacts (e.g. high intake of sugar)
  • Last mile of distribution to the customer and consumer – opportunities to collaborate for speed and customer satisfaction

The first two elements comprise an IT enabled upgrade of a value chain and the third element is what Logistics does as part of its job in a Supply Network. So what is new? Proponents of value networks say that value and supply chains are linear in design and should move to a collaborative network design, which can quickly respond to changing needs because they require less top-down control.

Consider this argument for the value chain shown in the diagram. In a competitive environment for brand and product recognition, the Marketing group will be looking for improved relationships with services suppliers such as market research firms (analysing end user data in addition to focus groups) and advertising agencies. Consumer engagement and transparency will provide added data for analysis. But collaboration with other organisations is unlikely to be high on Marketing’s agenda.

For supply chains the situation is different.  The focus is on the movement and storage of physical items through multiple supply chains, which become a network through the business relationships and links between parties in each of the chains.  The pressure on supply chain professionals for improvement is due to the need to reduce risks associated with uncertainty, complexity, variability and constraints in their organisation’s supply chains. Also, supply chains are physical occurrences that can be measured more easily than marketing concepts.

Current supply chains are linear, as each node in the network has a function to complete before delivering the item via a transport link to the next node. It is possible for multiple process stages to be completed within one organisation (vertical integration), but that is a factor of business fashion and competition laws within countries.

Circular economy

Supply Chains can change from their current linear design to what is called the circular economy. The current business model is called ‘take, make, dispose’; that is, use virgin materials, make a a single sale of an item, use the item, then throw away. The new business model is the ‘circular economy’ with its basis to design for multiple product cycles. This will change supply chains from linear to circular, where recycle, repair, refurbishment, re-manufacture and reuse have the same importance in supply network as the current one way flow. But, this is unlikely to occur throughout an economy without government intervention, through regulation or taxation. Government intervention is required, because change from the current overall business model to another requires investment by individual businesses and investing in change when competitors are not making a similar investment is unlikely to happen.

The circular economy is an integral part of sustainability, but do not expect business leaders to be promoting the new business model – they do not like change any more than the rest of us. However, it is only when the circular economy is implemented that Supply Networks will attain their full capability. Value Networks will also gain credibility, because Marketing will then have to consider the number of iterations a new product will have through its life-cycle and that will require collaboration with the Supply Network.

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About the Author

Roger Oakden

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With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More...