Here is part two of my seven-part book review series of Lora Cecere’s Bricks Matter.
Well, as good as chapter 1 was in laying the groundwork for the rest of the book and a blueprint for supply chains of the future, chapter 2 – Building Value Networks – was a real wake up call in a number of ways. I have been guilty of thinking “value networks” are just the next logical evolution of “supply chains” and I have even likely used the terms interchangeably. Value networks are bigger than supply chains – they are made up of the many supply chains of the partners in the value network. Here are some distinctions:
- Supply chains tend to focus on cost; value networks focus on value (at every node).
- Supply chains are based on inside-out (supply side) thinking; value networks are based on outside-in (demand side) thinking.
- Supply chains are focused on functional excellence (being the best at plan – source – make – delivery); value networks are focused on maximizing value horizontally across all trading partners, and most importantly, the customer.
There are so many other useful pieces to this chapter – rules of thumb of value networks, the number of supply chains individual companies have (and need), the three types of extended value networks, risk management strategies, shifting to value-based outcomes, and examples and case studies (both good and bad) – that it would take a 3000-word blog to cover them all. There is one section that I did want to focus on, including bringing in a small, but personal example. The area of focus that was the most interesting to me is “Why Are Value Networks So Hard to Build?” The idea of an integrated, end-to-end, multi-enterprise network where each node is focused on value is so compelling, then why do so few exist? Here are the challenges Lora points out:
- Frayed Ends
- Penny-wise and Pound-foolish
- Clarity of Supply Chain Strategy
- Focus within the Four Walls
- Reward Systems
At this point, let me wrap up with a personal story and the one that started me on my journey to a career in enterprise/business-to-business software. It is a small example of a value network, but it was definitely a value network that was fraught with the challenges, which Lora points out that even very small value chains face. The year was 1993. I had recently graduated with a degree in Pharmacy (although my heart was always in computer programming) and was working as a dispensing pharmacist in a small community pharmacy which was filling approximately 200 prescriptions a day. Although I was pretty green and did not have a business background of any kind, the inefficiencies of the dispensary were pretty glaring to me. Specifically:
- We were shorting 2 people on prescriptions a day (only a 99% successful fill rate)
- We were carrying $165,000 in inventory (which seemed high)
- We were ordering from a wholesaler and 12 or so pharma companies directly (many orders to receive and accounts to manage)
- Only one person could place an order – literally by shaking and looking in every bottle in the dispensary (about 3 hours a day)
- We were turning inventory approximately 6 times
I though this had to be wrong. So, with the support of the store owner, I worked with our wholesaler to negotiate a deal where they could supply us with all drugs (with a flat 2% markup vs. the regular 14% markup, making the direct drugs more expensive, but wholesale drugs much cheaper), worked with our software vendor to write a program to do automatic ordering and educated our customers that it was in their best interest to call in prescription refills a day ahead of time. We called this initiative “Preferred Provider (PP)” – not a great name in hindsight, but the results were significant as seen in the table below.
Even though this was a relatively small value chain, and the results were pretty significant (in a relative sense) for all parties, it did start to come apart in time. Despite the wholesaler receiving all our business, they started to look for higher margins on drugs only they could supply (penny-wise, pound-foolish), the owner started to buy really expensive drugs direct from manufacturer (penny-wise, pound-foolish), the technician who did the ordering felt minimized in her role (reward systems and four-walls focus), and many other challenges. All this to say that end-to-end value networks have to continue to develop because they just make too much sense. But … the road is not going to be easy. For me at least, the development of this value network resulted in our software supplier hiring me as a product manager. And the rest, as they say, is history.