Insight from industry

The general principles

of value chain
management

Introduction

Tom McGuffog and

Nick Wadsley

The authors
Tom McGuffog is Director of Planning and Logistics at
Nestle UK, Croydon, UK.
Nick Wadsley is Logistics Project Manager at Nestle UK,
Croydon, UK.
Keywords
Electronic data interchange, Supply chain management,
Value chain, Internet
Abstract
Explores the principles of value chain management, as
they apply to both public and private products, and
explores the impact of e-commerce and collaborative
planning through the Internet on reducing costs and
uncertainty in supply chains. Drawing on experience from
global initiatives with e-centreuk, and recent applications
within Nestle UK, makes a plea for simplicity and
standardisation in electronic commerce, to support speedy
and certain value chain management across the globe.
Electronic access
The current issue and full text archive of this journal is
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Supply Chain Management: An International Journal

Volume 4 . Number 5 . 1999 . pp. 218225
# MCB University Press . ISSN 1359-8546

Electronic commerce is set to revolutionise

most business and administrative processes.
However, speedy certain value chains are prerequisites for delivering both public and
private products and services competitively.
Simple, standard value chains minimise uncertainty and delay and make the application
of electronic commerce much more cost
effective. The development of value chain
process analysis, supported by collaborative
event management over the Internet, the
structuring and synchronisation of master
data among organisations, and the sharing of
customer focused value chain data, powerfully enhance the performance of value chains
and of electronic commerce. SIMPL-EDI
global data definitions, codes and messages
lead to simple, standard communications
across the Internet and also support enterprise to enterprise communications via EDI.
This leads to simple, standard internal IT
applications a virtuous cycle.
These developments are progressing well in
the UK as part of global initiatives in
conjunction with e-centreuk (EAN) and UNCEFACT.

Specialisation
In his Inquiry into the Nature and Causes of the
Wealth of Nations, Adam Smith (1776)
describes how the division of labour improves
productivity. ``The division of labour occasions, in every art, a proportionable increase
in the productive powers of labour. The
separation of different trades and employments from one another, seems to have taken
place in consequence of this advantage. This
separation, too, is generally carried furthest in
those countries which enjoy the highest
degree of industry and improvement; what is
the work of one man is a rude state of society,
being generally that of several in an improved
one'' (Smith, 1776, p. 5).
The division of labour reduces costs, which
in turn stimulates demand. As the extent of
the market grows, so can specialisation be
taken further. As the degree of specialisation
increases, so it becomes economic to replace
human skills by machinery. As equipment
becomes more specialised, new departments
are set up to operate these. Indeed specialist
work is then often outsourced to another firm.

218

timetables, forecasting methods, systems and

communications institutional factors and also
makes its own mistakes or fails to do things on
time random factors together with the usual
leads and lags between each stage.
The inefficiencies can be even greater, and
also more difficult to identify, as demand and
supply pass not just between departments in
the same organisation, but also between
different organisations manufacturers' forecasting of sales orders from retailers or
wholesalers, production planning at factories,
materials planning at intermediate and raw
material suppliers (or GPs linking to clinics
and to hospitals).
For many years, one of the main solutions
to these problems has been to try to improve
forecasting of demand from one department
(or organisation or ``silo'') by its supplier(s).
This has too rarely been successful, mainly
because it is based on a misunderstanding of
the nature of both the problem and the
solution. If departments or organisations in a
value chain do not understand the constraints
under which each operate and are not
operating to a common, quantified objective,
it is all to easy to misinterpret signals and all
too difficult to forecast future actions (because there are too rarely consistent
independent variables).
If value chain participants do not behave as
``partners'' and have a shared view of underlying consumer or base demand and of each
other's constraints, they are condemned to
suffer the consequences in poorer service and/
or greater total cost. This is not to argue that
each function can or should behave exactly in
line with the base demand pattern. It is rather
that shared awareness of that base demand,
and of each other's constraints, reduces
fluctuations along the value chain and also
focuses total service at each stage on the
ultimate consumer (who can be the patient in
a hospital, the citizen requiring a public
service or the consumer of a product).
Uncertainties are reduced by value chain
participants agreeing what data need to be
shared across particular time horizons and
making such data appropriately transparent.
The increasing degree of specialisation applies
to most organisations in a modern economy.
For example, there are some 40 to 50
specialist skills needed to run a modern
hospital, each with their own rules and
regulations, and budgets!
While specialisation reduces the unit cost of
production or service and can be an aid to
accountability, it can also be wasteful. This
waste arises from the operation of ``the silo
syndrome'', where each department or firm
operates according to its own separate rules in
semi-isolation from its customers and suppliers. This effect was first identified by Jay
Forrester (1961) in his book Industrial
Dynamics.

Value or supply chain management has

traditionally focused on maximising the opportunities to add value while minimising
219

Consider a product or service for which there is

a stable demand (Figure 1) (an unstable
demand caused by a price reduction or product
change would make the inefficiencies described
below even greater). If one group of people sell
this product to the consumer, say in a shop, and
another group at a regional warehouse decide
what stock should be sent to the shop to
maintain product availability, and another
group at the retailer head office place orders on
the manufacturer to replenish the warehouse,
only too often each operates to its own rules in
semi-isolation from the other groups.
This does not occur because each group is
deliberately ignoring the effect of its actions
on the other. Too often it is because the entire
process operates sequentially and has not
been sufficiently well analysed in relation to
its overall objective of consumer service. Also,
appropriate overall flows of information,
related to a time structure suited to the
required reactions of value chain participants,
have not been put in place to enable all the
groups to operate in a unified way focused on
a common objective.
Patterns of behaviour as illustrated above
have been documented in a number of supply
chains. The result is a combination of less
than ideal customer service, excess capacities
at various stages, excess inventory, waste and,
thereby, a higher than necessary total cost of
supply.
These inefficiencies are caused by growing
uncertainty up the supply chain (see Figure 2)
as each group operates under its own particular
constraints and applies its own decision-taking

The dynamics of waste

Maximising net added value

Supply Chain Management: An International Journal

Volume 4 . Number 5 . 1999 . 218225

Tom McGuffog and Nick Wadsley

The general principles of value chain management

Figure 2 Degree of uncertainty in the supply chain

Supply Chain Management: An International Journal

Volume 4 . Number 5 . 1999 . 218225

of capacity and of waste have usually also

been reduced. A fundamental enabling factor
is the reduction in uncertainty among trading
partners (see Figure 3).
Added value analysis can be applied equally
well to administrative and social processes.
For example, the treatment of a patient can be
made both more efficient from his or her
standpoint and more cost effective for the
hospital, by analysing the events where real
value is added and comparing them with the
times where costs continue to rise but no
value is being added (Figure 4).
This technique can also be applied to
measuring the impact of governmental requirements on private processes. For
example, in association with exporting, the
acquisition of export certificates and the
inspection of goods, even when strictly
necessary, adds no value. Hence, new methods need to be sought to minimise the time
and cost involved to maximise net value
added value.
220

total cost. Net added value is increased by

compressing the times when no value is being
added and costs continue to rise. t1 is reduced
to t2 and net value added has been substantially increased because it has been possible to
cut the times and hence the costs involved in
testing, storing, counting, processing and
controlling materials and products. The costs

Figure 1 Supply chain inefficiencies

Tom McGuffog and Nick Wadsley

The general principles of value chain management

Supply:
Lead time to supply how predictable is
this?
.
Quantity supplied can the delivery be
accepted without being counted?
.
Quality of supply can the supplies be
used without testing and without subsequent waste and inefficiency?

The key elements in value chain uncertainty

are best analysed in terms of how they
contribute to inefficiencies in both demand
and supply:
Demand:
.
Timing of an action or order how
predictable is this?
.
Size and composition of an action or
order are there unexpected elements,
and is it subject to change?
.
The degree to which intermediate demands are influenced by institutional and
random factors rather than by final
consumer demand.
.
Data accuracy on products required,
prices, delivery points and timings.

Reducing uncertainty

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Figure 4 Added value analysis can be applied equally well to administrative and social processes as well as manufacturing processes

Figure 3 Maximising net added value

Tom McGuffog and Nick Wadsley

The general principles of value chain management

Data accuracy on products supplied and

prices.

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Volume 4 . Number 5 . 1999 . 218225

The more simple and standard can the joint

processes in a value chain become, the more
speed and certainty will be achieved, with all
the concomitant benefits (McGuffog, 1999).
Most firms and organisations have developed different ways of doing things for
historical reasons. They have made such
processes more difficult to change by computerising them, but have failed to get the full
benefits of computerisation because they have
not simplified and standardised their value
chains.
Furthermore, an order to deliver is basically
the same transaction as an order to move
something, or to process a metal, or to treat a
patient, provided that the detail is handled via
master data and not in the transaction, i.e. all
value chain orders are in essence performing
the same function, although hitherto this has
rarely been recognised either in internal
procedures or external communications.
There needs to be an agreed time structure
detailing how an event is to be planned and
managed which functions or departments or
individuals need to be involved across all the
concerned organisations in relation to each
decision that needs to be taken. The approach
outlined in Table I (this example is a product
promotion with a four month lead time) helps
to define clearly which groups really need to
be involved, communicated with, who needs
to authorise what, the required lead times and
the flows of data and information. In this way
processes can be simplified and clarified.

Standard value chain processes and

messages

changes to plan as they occur. As plans and

master data are confirmed, they can be
automatically and consistently downloaded
into each collaborator's internal computer
applications. In this way both the quality of
the plan and the joint commitment to both
the process and the plan are greatly improved.
The silo syndrome is ameliorated.
It has to be emphasised that the first priority
is to make the process across a shared value
chain as simple and standard, and hence as
speedy and certain, as is practicable. The
second priority is to gain comprehensive
commitment to the shared process, and the
third priority is to apply electronic communications to the process. All three are vital.

222

Value chain management aims systematically

to reduce these sources of uncertainty
through the active co-operation of the key
players in each value chain. By reducing
uncertainty, total service is improved and
overall cost is reduced (McGuffog, 1997).
This requires a structured approach which
is not only aided by electronic communications, but is also made more essential by
them. For example, if an order is going to be
automatically processed and actioned with
minimum lead time it must be accurate in all
respects and it must contain no unexpected
elements. This can only be achieved by the
synchronisation of master data between departments and organisations prior to the
exchange of orders. Each group needs to be
using the same code numbers for the same
products and services, prices, costs, specifications, processes and trading locations. If,
for example, orders and invoices are exchanged every day, then master data should
be synchronised in advance, say, once per
week using electronic data interchange of files
or via a shared electronic catalogue.
However, for orders to be successfully met,
a great deal of prior planning needs to take
place among value chain partners several
weeks or months ahead. Traditionally much
of the communication which took place
between companies passed between the
salesman and the buyer. Even assuming that
each fully understood and communicated the
same details of their agreement, and each had
the authority to action the agreement within
their organisations, there remained the uncertainties caused by each internal
departmental silo in both companies.
To avoid these problems, there needs to be
a vigorous definition of the overall joint
process of decision-taking and communication.
Improved processes can now be powerfully
supported by the application of Internet
technology to collaborative event management (CEM) systems, such as the EQOS
software developed jointly by Nestle and
J. Sainsbury. All those who need to reach
agreement to achieve the successful outcome
of a value chain event can build up shared
data on screens seeking electronic authorisation as required, tracking each stage, each
provisional and confirmed action, and any

Tom McGuffog and Nick Wadsley

The general principles of value chain management

Provisional plan (Internet)

Marketing Production

Purchasing

The main value chain message is the order.

An order should only be for the delivery of
one or more items to one place at one date/
time. This is because each delivery of a
product or service can only be to one place at
one date/time. An invoice can then be easily
matched to both delivery and order, thus
aligning all the key value chain transactions,
and logically relating these to both operational
and financial information.
Most firms and organisations have developed different ways of doing things and

The order

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Adam Smith (1776, p. 102) also contributed

greatly to economic development by encouraging competition at the expense of
restrictive practices and trade barriers. In his
famous phrase he said that ``people in the
same trade seldom meet together even for
merriment and diversion, but the conversation ends in a conspiracy against the public, or
in some contrivance to raise prices''. How can
both competition and co-operation be fostered without the one endangering the other,
with the consequent loss of overall benefit to
the final consumer of the product or service?
Simply purchasing from suppliers on the
basis of tenders without understanding the
opportunities to provide better total performance at a lower total cost through value
chain management is no longer the way to
achieve world class standards of operation.
Equally, great care has to be taken to safeguard competition and foster innovation and
enterprise. Commercial competition needs to

Co-operation and competition

chain

Supplier functions

be enhanced while stimulating the simplification and standardisation of value chains

across both the public and private sectors.
Value chain management and, in particular,
collaborative event planning and management, supported by electronic commerce,
enable substantial improvements to total
performance and cost without inhibiting
innovation and enterprise.
Electronic commerce is already revolutionising the means by which markets are
developed, potential customers attracted and
value chain partners co-ordinated. Value
chain restructuring needs to precede the
application of electronic commerce to achieve
maximum competitiveness.

Evaluation (Internet)

Invoices (EDI)

EPOS analysis (Internet)

Consumer sale

Delivery orders (EDI)

(EDI or catalogue)

Master file synchronisation

Sales

Supply

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Volume 4 . Number 5 . 1999 . 218225

Production/Supply plan
Delivery schedules (EDI)

Collaborative event management can be

applied beneficially to all value chain events
designing a product or service, engineering
projects, administrative changes, government
campaigns.

Buying

...

chain

Supply

+2
+3

+1

0 days

1 day

2 days

3 days

4 days

6 days
5 days

7 days

1 week

2 weeks

3 weeks

4 weeks

2 months
1 month

3 months

4 months

Marketing Operations Distribution

Customer functions

Table I Possible time stucture for event management

Tom McGuffog and Nick Wadsley

The general principles of value chain management

Other
agencies

and master files using collaborative systems.

When such master data have been synchronised in an error free form in the near term,
using common access codes, the key value
chain messages such as orders and invoices
can be automatically processed and routed
and actioned without delay.
Unfortunately most organisations and industries have defined their order processes
differently and have developed different data
definitions. This makes computer applications within companies complicated, and
even more so the electronic communications
between companies. Expensive cross reference tables have to be maintained, and errors
are commonplace.
Recently, we at Nestle UK and e-centreuk
(recently merged Article Number Association
and Electronic Commerce Association) have
attempted to solve these problems by directly
linking the principles of value chain management to electronic communications via
SIMPL-EDI the Simplest Value Chain
Messages for Electronic Data Interchange
(Fenton et al., 1998).
The key message is the order, which at its
simplest consists of:
(1) Order type to deliver, to move, to
produce, to process, to treat etc.
(2) Value chain participant:
.
customer order generating location;
delivery location;
.
supplier order receiving location;
order fulfilling location.
different ``cultures'' over many years as they
have grown in size via mergers and take-overs,
and as a consequence of developing new
products and services. Most management
analysis goes deeply into new product development, or acquisitions, or financial control.
Little goes into simplification and
standardisation, and less into how to achieve
these across the whole value chain including
customers and suppliers. In this fast changing
and complex world, simplification and standardisation may well have more to offer than
sophistication. Too little education and
training is related to the effect of individual
actions on other parts of the value chain.
Indeed, reward systems which focus simply
on growing sales or on gross margins, rather
than on overall service, performance and cost,
encourage the silo mentality.
However, it is not only possible to do this,
but also essential for competitive survival. It is
the firms and organisations which can make
their value chains most simple, standard,
speedy and certain which will be able to
provide the best customer service at the
lowest total cost. This will be achieved by
combining value chain management with
electronic commerce direct electronic communication with consumers and value chain
partners allied with low cost value chains. For
example, bookselling over the Internet allied
to direct home delivery of books from the
publishers or even the printers (or direct
delivery to the reader in electronic form),
without book wholesaling and retailing, can
supersede High Street book retailing. When
there is no physical product to deliver, as in
financial services, new value chains can
appear even more quickly and powerfully.
To achieve low cost, simple and standard
value chains and electronic commerce, the
following must also be simple and standard:
(1) the key processes
(2) the supporting flows of information
business and administrative messages
(3) the definitions of each data element
(4) the definitions of each master file which
will be built collaboratively, which will be
synchronised between organisations, and
which will be used to process transactions
(5) the codes or number which will link the
data and messages to the master files

224

Value chains are driven most efficiently by the

sharing of knowledge in the medium or longer
term, and by structuring this into shared plans

Customer and supplier locations, and products or services, are each defined by EAN
(International Article Number) codes, which
cross refer to master data files, where all the
necessary details are held.
All data elements are defined according to an
international standard (UN/CEFACT). The
greatest benefit comes when these definitions
are not only used for communication between
organisations' computer systems, but also
within each organisation's internal systems i.e.
when SIMPL-EDI leads to SIMPL-IT
Simple, standard computer applications.
Master data should be categorised as follows:
(1) Value chain participants:
.
customers;
.
suppliers;

(3) Date/time of supply.

(4) Product or service.
(5) Quantities required.

Supply Chain Management: An International Journal

Volume 4 . Number 5 . 1999 . 218225

Tom McGuffog and Nick Wadsley

The general principles of value chain management

agents intermediaries such as banks,

insurance companies, freight forwarders, transporters etc.;
authorities governmental bodies,
customs, licensing authorities, inspection bodies etc.;
people employees, patients, citizens
etc.;

Supply Chain Management: An International Journal

Volume 4 . Number 5 . 1999 . 218225

Fenton, N., McGuffog, T., Wadsley, N. and Whittaker, A.

(1998), ``SIMPL-EDI The simplest value chain
messages'', e-centreuk.
Forrester, J.W. (1961), Industrial Dynamics, MIT Press,
Cambridge, MA.
McGuffog, T. (1997), Managing the Supply Chain with
Speed and Certainty, Article Number Association.
McGuffog, T. (1999), ``K.I.S.S. Keep It Simple, Standard,
Speedy and Certain The principles of value chain
management and electronic commerce'', e-centreuk.
Smith, A. (1776), Inquiry into the Nature and Causes of
the Wealth of Nations, Modern Library (1994
Edition).

References

syndrome requires collaborative planning and

management and the sharing of data in a
structured manner in the medium and near
term as well as in the short term it follows
that there need to be common data definitions
and common coding. These require to be
used not only to support external communications between value chain participants,
but they can then also with great benefit be
used for internal computer applications
SIMPL-EDI leads to SIMPL-IT. These
definitions apply equally well to the Internet
and to enterprise-to-enterprise bulk data
transfers.
As in many of life's situations, so in value
chain communications does the 80:20 rule
apply. There will be some occasions when a
particularly complex process requires a correspondingly complex computer application
or message. For 80 per cent of applications
and communications, simplicity and standardisation are not only practicable but desirable
and competitively mandatory. With the rapid
growth of electronic commerce and the
practicability of setting up new low cost value
chains, both to communicate with and to
supply consumers in most corners of the
globe, simplicity and standardisation of applications and communications to support
speedy and certain value chain management
may well be essential for competitive survival.
Nevertheless, no one should underestimate
the brain pain involved in thinking in a more
simple and standard way, and the cultural
changes involved in implementing such processes. And of course, even then, there is no
substitute for creativity and drive in developing new products and services which the
simple, standard, speedy and certain processes will then support.

225

Once it is recognised that eliminating the cost

penalties imposed by the operation of the silo

Conclusions

Master data files need to be not only kept

accurate and up-to-date within each organisation (a notoriously difficult but essential
task), but also synchronised between value
chain participants. This is best achieved by
collaborative event planning and management
in the medium term and the near term
electronic exchange of master files or use of a
common electronic catalogue.
For a modern value chain to function well,
its participants will not only be exchanging
orders or invoices, but will also wish to share
forward plans and past performance data.
Depending on the nature of the value chain,
mutual benefits can be gained by jointly
managing deliveries, inventory levels, service
etc. by communicating forward plans for
distribution, production or supply and jointly
agreeing the required response. (This approach is variously described as vendor or comanaged inventory (VMI/CMI), distribution
requirements planning (DRP), and continuous or efficient replenishment planning
(CRP/ERP).)
The standard SIMPL-EDI value chain
order as defined above can be used to support
these value chain management techniques by
simply changing the tense future tense is a
planned order, past tense is a fulfilled order
and therefore a record of performance. Also
the time period to which data relate can be redefined to suit the value chain and its
participants daily, weekly, monthly time
buckets. Thus value chain participants will
share forward plans and objectives and also
reports on past performance.

(2) Products or services:

.
descriptions and key characteristics;
.
prices and/or costs;
.
technical specifications;
(3) Processes or treatments.

Tom McGuffog and Nick Wadsley

The general principles of value chain management