Supply chain management is changing from strategically decoupled, price driven to being strategically coupled, value driven.

This is the view of Steven Melnyk PhD (a professor of operations and supply chain management at Michigan State University in the US) and Nick Little (assistant director of Executive Development Programmes at the Eli Broad Collage of Business at Michigan State University in the US). Simon Foulds met the two internationally recognised supply chain experts when they visited South Africa.

According to Melnyk and Little, supply chain management is changing from being strategically decoupled, price-driven to being strategically coupled, value driven.

While the two may look similar in terms of functions, investments, and staffing, there is a world of difference in terms of performance and impact. The first type of supply chain can be described as output driven, with the focal outputs often very well defined and highly specific. This is the most common type.

In contrast, a strategically coupled, value-driven supply chain is far more complex as it is focused on the outcomes desired by its key customers rather than making cost the dominant outcome. In many cases, this type of supply chain allows firms to focus on the higher levels of performance.

It is dynamic because the value proposition continuously changes as a result of customer demands and expectations, corporate strategies, governmental legislation, competitive actions, and technological advances. In contrast, strategically decoupled, price-driven supply chains are static in nature because the focus is always on cost, quality, and delivery.

The challenge ahead is how to transform strategically decoupled, price-driven supply chains into strategically coupled, value-driven supply chains. The answer to this challenge lies not in the supply chain but in the firm’s business model. Simply put, supply chains become strategic when integrated into the firm’s business model.

Business model

To develop and maintain a sustainable competitive advantage, the business model must be aligned with the desired outcomes, not specific outputs. That is, the outcomes desired by a key customer (and for which the key customer is willing to pay) must be aligned with the promise of the value proposition (the desired outcomes offered to its key customer), and the outcomes ultimately delivered by the firm, through its capabilities. Corporate success, as measured by performance (the fourth element), is strongly dependent on this alignment and synchronisation. This means that if we understand the business model, we must also understand the desired outcomes and how they should be structured to deliver value – the overall purpose of any supply chain. A good way to think of this is to segment the company’s supply chain operations according to customer needs as capable of satisfaction through the business model(s).

Blended outcomes

When supply chains focus on a single outcome, it becomes difficult to use the supply chain to create differentiation, a real source of competitive advantage.

What is needed is a method of blending the outcomes so that they generate a desired outcome that is highly attractive to key customers, while also helping the firm differentiate itself in the marketplace.

The attraction of this approach is that it creates strategic richness, which helps firms competing in the same market for the same customers to differentiate themselves even if their desired outcome is the same. It provides a set of guidelines that can help direct decision-making, helping guide management in determining how to respond to “problem” situations. Furthermore, this approach helps organisations segment their supply chains and realise that there is a lack of homogeneity and a need to manage and control the critical supply chains impacting current and future financial success.

Strategic response cycle

In today’s turbulent environment, it is not enough for firms to merely develop and implement business models; they have to be able to respond quickly to changes, altering their business models rapidly when needed, and to subsequently deploy these changes. It is this ability to respond rapidly to strategic changes that differentiates the successful firms from those less successful.

Key to this rapid response is the ability to manage the strategic response cycle, which consists of the following six elements:

1. Sensing –the ability of the firm to quickly identify systematic changes in the environment or new developments and to separate these factors from the other more random changes.

2. Assessing –the ability of the firm to quickly assess the developments flagged in the preceding step and to determine whether these developments are sufficiently important to merit a change in the business model.

3. Formulating/Responding – if the development is sufficiently important, then we have to formulate a response.

4. Deploying – once the response has been developed, it must be deployed (implemented). This element concerns itself with how well the response is implemented.

5. Recalibrating – when a significant strategic change takes place and a response has been formulated and successfully deployed, then it is very likely that the prior goals and objectives are no longer relevant. Consequently, new goals and objectives must be developed and implemented.

6. Learning – whenever a change takes place, the firm must be prepared to assess past actions with the goal of determining what went wrong, what went right, and what was missing. This information can be used to improve further response cycles.

Transforming tomorrow’s supply chain operations to be truly strategic

Managing with a supply chain perspective is not inherently strategic; supply chains are only strategic when they are integrated into the firm’s business models. Supply chains, after all, define capabilities. These capabilities have to be in sync with the needs of the key customer and the promise made toward the value proposition. Maintaining this alignment over time is not easy as there are pressures acting on the elements of the business model seeking to pull them apart. Yet, when management can maintain this alignment, it effectively makes the supply chain strategic. By focusing on the business model, we observe the emergence of a new competitive thrust. By emphasising the business model, we effectively change how firms compete in today’s turbulent environment.

In the 1990s, we focused on firms competing against firms.

The focus shifted to supply chain against supply chain. The second decade of the 21st century is seeing another shift – of business models competing against business models. Those supply chains that are integrated into the business model and that contribute to the business model’s evolution over time are effectively strategic in nature – the goal of effective supply chain management.