The New Operations Management

David Walters
Sydney Graduate School of Management
&
Mark Rainbird
Sydney Graduate School of Management

Abstract

Operations Management in the emerging “new economy” can no longer be just about Supply
Chain efficiency. A New Operations Management philosophy and practice needs to be based
on harnessing and fusing the dynamic but often conflicting forces of not only a firms Supply
Chain but also its Demand Chain, to maximise overall value by minimising internal
transaction costs and friction while best responding to customer requirements.

By looking at a number of retail examples, and in particular McDonalds Corporation, the

importance of recognising that a firm’s Value Chain comprises these two quite distinct drives
–a Supply Chain and a Demand Chain – is illustrated.

It is proposed that the interaction between Supply Chain requirements and Demand Chain
opportunities forms the catalysis that gives a framework for the operational management of a
firm’s business model.

The major implication for the “New Operations Management” is that operational
management of the effectiveness of the day to day business model is complementary to, and
just as important, to the creation of overall value in a firm as its strategic positioning.

Introduction

The term “Operations Management” has too often in the past been associated with a narrowly focused
emphasis on supply chain efficiency, and in particular efficiency through cost control and savings. This
is not a perspective that can, or should, persist.

Business operates everywhere in an environment that is increasingly dynamic and challenging. Markets
have globalised, technology has become all embracing, and relationships with suppliers, customers and
competitors are undergoing constant change. New business models are emerging, ones in which
competitive advantage is based upon managing processes that facilitate rapid and flexible responses to
‘market’ change, and ones in which new capabilities are based upon developing unique relationships
with partners (suppliers, customers, employees, shareholders, government and, often, with
competitors). These models are based on an understanding of, and the ability to use and to manage new
technology, and to understand the impact of knowledge creation and its distribution.

The distinction between a firm’s business model and its strategy is an important one. A business model
is the “system, how the pieces of a business fit together” (Magretta 2002), while a firm’s strategy is the
choices made about how to deploy that model in the marketplace. The business model has often taken
second place to strategy in management thinking and focus.

It is proposed however that in the emerging new economy the effective management of a firm’s day to
day business model will not only be a competitive necessity, but is itself a potential source of
competitive advantage just as important to the creation of value as strategic positioning.

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It is this day to day tactical management of the firm’s business model that is the domain of the “New
Operations Management”. The design and engineering of this business model should be based on a
clear understanding of its constituent parts. This paper argues that the Value Chain is a useful way of
dissecting and analysing a firm’s business model as a basis for then evaluating and redesigning the
processes that underlie that business model to maximise competitive advantage. The term “Value
Chain” is often misused or used interchangeably with concepts such as the Supply Chain. This paper
suggests that the Value Chain should be seen as the collection of all the processes going on within a
firm. It is further suggested that this Value Chain can be usefully broken down into two generic
components – the Supply Chain being those processes that are orientated towards satisfying customer
expectations, and the Demand Chain being those processes that are orientated towards defining those
expectations. The “New Operations Management” therefore is not just about Supply Chain
management but about, but is based on a holistic view of Value Management.

This paper then first examines some of the changes taking place in the emergence of the new economy
and what the implications are for generic business models. Secondly at the micro level of the individual
firm it takes a new look at the notion of the Value Chain as a framework for analyzing business models.
In particular this paper focuses on breaking that Value Chain into its constituent Supply Chain and
Demand Chain components and how this helps us understand both the sources of friction and of
dynamism in a business.

Causes
The view that ‘market turbulence’ has resulted in fundamental changes in consumer and business
markets has been supported by Glazer (1991), Pine (1993), Ashkenas et al (1995) and Day (1999).
Changes in these markets are reflected in instability, low predictability, uncertainty, increased demand
for quality, ‘fashion’ and service. In addition there are also changes in structural factors. These have
been identified as a shift in power towards the buyer, highly competitive saturated markets, shortening
product life cycles with little predictability, high rates of technological change, smaller and less
predictable customer orders in terms of order volumes and ordering frequency, and an expanding
number of distribution channel alternatives.

One result is that "value" is migrating in many industries. For example the automotive industry is
experiencing a shift in value profile. Hitherto, value was maximised in the production process.
Current indications and expectations for the future are that this will migrate towards the marketing and
service processes

Effects
These changes collectively and cumulatively are giving rise to what has been termed the “new
economy”. They alter the macro environment that any business operates in, and require new responses
and changes to business models.

In particular the focus is becoming less on organisations as stand alone entities and more on the
business networks they operate in. While customisation, flexible response, and other models based
upon organisational efficiencies and interdependencies were concepts of the late 1980s, the more recent
emphasis is on changes in inter-organisational relationship management and the investment and
ownership of assets, giving rise to the concept of the “virtual organisation”.

While business historians suggest that this notion of the virtual organisation has its forerunner in the
craft and merchant structures of the middle ages, companies such as Dell Computers refer to “asset
leverage” as now possibly the only option for effective competitive organisation.

Ashkenas et al (1995) have compared the critical factors that influenced organisational success in the
recent past with those currently required and likely to be required in the future:

Old success factors New success factors

Size Speed
Role clarity Flexibility

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 Specialisation Integration
Control Innovation

Arguably if the new structures are to be made effective then a fifth factor is also necessary -
coordination.

Normann (2001) discusses "a new strategic logic". He suggests that:

" …managers need to be good at mobilizing, managing, and using resources rather than at
formally acquiring and necessarily owning resources. The ability to reconfigure, to use
resources inside and particularly outside the boundaries of the traditional corporation more
effectively becomes a mandatory skill for managements."

Drucker (2001) notes that while the traditional response to market pressures was vertical integration on
a large scale, citing Standard Oil and Ford as leading examples, today even the large corporations are
leading the changes in strategic posture. General Motors for example are creating a business for the
ultimate car consumer - they aim to make available what car and model most closely fits that
consumer's preferences. As Drucker notes the changes to facilitate this are not just sales and marketing
driven, but encompass design and development, and production. Products and services now have
multiple applications and business organisations are redefining their core capabilities and processes. In
other words "value chains " are competing with "value chains". At this macro, industry level value
chains can be seen as business network structures, or confederations, that are developing from
traditional corporations.

A number of authors support this view. Hagel and Singer's (1999) argument is that as the exchange of
information and "digestion" increases through electronic networks, then traditional organisation
structures will become "unbundled" as the need for flexible structures becomes an imperative and
“specialists” offer more cost-efficient strategy options in each of these basic businesses.

The holonic, or virtual, organisation structure is another model that is finding favour. The holonic
organisation or network is:

“…a set of companies that acts integratedly and organically; it is constantly re-configured to
manage each business opportunity a customer presents. Each company in the network
provides a different process capability and is called a holon” (McHugh et al 1995)

Holonic networks are not hierarchical structures. Instead each business within the structure should be
seen as equal to each of the others. The network is in dynamic equilibrium and it is self-regulating.
Access to, and exchange of, information throughout the network is open, as is access to and exchange
of information across the network boundaries. The network is evolutionary and is constantly
interacting with its environment. It is a knowledge network, a learning organisation.

Pebler (2000) in describing the development of holonic or virtual organisation structures in the oil
industry offers a prescription for the generic virtual organisation:

“ The virtual enterprise of the future will be much more dynamic and sensitive to the need for
tuning operational parameters of the enterprise as a whole, including capital spending for both
producers and service companies, optimising the whole chain of value creation. The future
world will be characterised by knowledge management and collaborative decision-making by
way of virtual teams. Virtual enterprises will be empowered by a willingness to do business in
more productive ways and by information technologies that eliminate barriers between
stakeholders and radically improve work processes.”

Magretta (2002) suggests, using the example of American Express and the invention of the travelers
cheque in the nineteenth century, that: " a successful business model represents a better way than the
existing alternatives. It may offer more value to a discrete group of customers. Or it may completely
replace the old way of doing things and become the standard for the next generation of entrepreneurs to
beat". In particular:

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 "… all new business models are variations on the generic value chain underlying all
businesses. Broadly speaking, this chain has two parts. Part one includes all the activities
associated with making something: designing it, purchasing raw materials, manufacturing and
so on. Part two includes all the activities associated with selling something: finding and
reaching customers, transacting a sale, distributing the product or delivering the service. A
new business model's plot may turn on designing a new product for an unmet need … Or it
may turn on a process innovation, a better way of making or selling or distributing an already
proven product or service".

Magretta also cites Dell as a company that has created a powerful business model by identifying value
chain activities that it would do, and has sought partners, complementors, to undertake those it will not.
In this way Dell, by selling directly to end-users, has the vital information necessary to manage
inventory better than its competitors and avoids the high costs of holding such inventory and the very
high cost of obsolescence due to the rapid application of technology.

Responses
This leads to the question – how does a traditional business organisation understand and adapt to these
changes and modify its activities to take advantage of emerging industry value chains and networks?
How does a manager understand if activities and processes within the organisation add value or destroy
it, thereby giving a basis for making sensible decisions about what the firm must do as a matter of
competitive necessity and how it might generate competitive advantages?

It is suggested that in the “new economy”, with its demands for flexibility and speed, the development
by firms of new effective business models and their effective implementation will be as important as
the high level corporate strategies which have traditionally attracted much of the focus and attention.

There is of course no ready made answer that can apply to every business model and to every tactical
operational problem, but a framework for decision making is vital. This paper proposes an adaptation
of the traditional Value Chain at the micro level of the firm which it is suggested allows an organisation
to analyze how its various processes interact and whether these add or destroy value in the business
context in which the firm operates. This framework is intended to provide the basis for Operations
decision making based on Value Management.

Processes not Functions

First the importance of taking a process based perspective of the organisation needs to be recognised.
This means that the focus is on what activities the firm undertakes, rather than the department or group
of individuals within the firm who is responsible for them.

Hammer (2001) argues that as businesses become accustomed to the customer economy 'process
thinking' becomes essential. "In order to achieve the performance levels that customers now demand,
businesses must organise and manage themselves around the axis of process; moreover, they must
apply the discipline of process even to the most creative and heretofore most chaotic aspects of their
operations". He adds, "…processes are what create the results that a company delivers to its
customers". Hammer continues by providing a customer economy definition of a process. He offers:

"… an organized group of related activities that together create a result of value to customers'.

A strategic perspective is taken by Armistead et al (1999). The authors identify themes “associated”
with business process management. Strategic choice and direction suggests that an organisation cannot
pursue every opportunity. It makes choices, or trade-offs and these determine the resource patterns of
organisations and, eventually the development of core competencies. These, in turn, lead to
competencies that influence subsequent strategy. Strategic business process management forces
companies to “examine their form and structure” having an influence on boundaries, structure and
power within organisational design.

An important component of the authors’ model is the market value chains which “links the stages
which add value along a supply chain”. They suggest that within an organisation the market value

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chain is taken to be the conceptualisation of the core processes and activities which represent the
organisation in process terms: “ They capture the activities which start and end in the organisation and
link with other organisations in the chain”. They further suggest that the market value chain reinforces
the resource-based view of the organisation because it forces the identification of core processes from
which core competencies and competitive advantage emerge.

Concepts Converge Rather Than Collide – the Supply Chain

Supply chain management first appeared in the literature in the mid-1980s, but as Cooper et al (1997)
suggest it is based upon fundamental assumptions emanating from managing organisational operations,
which in turn can be traced back to channels and systems integration research in the 1960s and more
recently work on information management and inventory control. Supply chain management has been
defined by members of “The International Centre for Competitive Excellence” in 1994 as:

“Supply chain management is the integration of business processes from end-user through
original suppliers that provides products, services and information and add value for
customers”.

Important from the point of view of this discussion is the direction in which supply chain planning and
coordination ‘travels’. Initially the view held was that it covered the flow of goods from supplier
through manufacturing and distribution to the end user (Keith and Webber 1982). Stevens (1989)
expanded this scope both upstream and downstream to include sources of supply and points of
consumption.

Waller (1998) discusses “customer driven” logistics as an increasingly accepted concept; “……as
businesses begin to understand that their future existence depends upon the loyalty of the end users of
their products”. In particular he noted that “For retailers, it has been their focus on the supply chain
back into suppliers that has provided the mechanism for value chain visibility and control as a formula
for generating effective end-delivered cost and consumer satisfaction”. He cites Marks and Spencer in
the UK as having “long been regarded as leaders in this”.

The notion that an effective supply chain alone will ensure adequate customer satisfaction through
reducing costs and therefore prices is not necessarily an adequate model by itself. Sainsbury (the UK
former market leader in food retailing) noted in the late 1990’s in an annual report the positive impact
on overall profitability of its increased logistics productivity and saw this as a key corporate strategy.
This reflected a business model dominated by a downstream oriented supply chain, assuming a
relatively “steady state” amongst its customers. The problems that Marks and Spencer, and to a degree
Sainsbury, have experienced of late are not because they mismanaged the operational effectiveness of
the business, but rather because they missed the shift in customer expectations and did not respond to
those expectations.

Thus it could be argued that the supply chain as a stand-alone concept has outlived its usefulness.
Waller suggests modifications to the traditional Supply Chain concept that may increase productivity
through cost trade-offs. These include outsourcing and the issues of core competencies, shared product
development and, for retailers, the formation of regional buying alliances to support their international
aspirations. Some authors suggest that the supply chain has changed through evolution and that its
focus is:

" upon the management of relationships in order to achieve a more profitable outcome for all
parties in the chain…. It could be argued that it should be termed 'demand chain management'
to reflect the fact that the chain should be driven by the market, not by suppliers. Equally the
word 'chain' should be replaced by 'network' since there will normally be multiple suppliers
and, indeed, suppliers to suppliers as well as multiple customers and customers' customers to
be included in the total system". (Christopher 1998)

Bovet and Martha (2000) introduce the notion of the value net as:

" a business design that uses digital supply chain concepts to achieve both superior customer
satisfaction and company profitability. The traditional supply chain manufactures products

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 and pushes them through distribution channels in the hope that someone will buy them. In
contrast, a value net begins with customers, allows them to self-design products, and builds to
satisfy actual demand. The old supply chain is tactical, and its primary mission is cost
efficiency with "acceptable" service. It works hard to optimize this goal within a variety of
constraints".

And qualify their view with:

" A traditional supply chain is designed to meet customer demand with a fixed product line,
relatively undifferentiated, one-size-fits-all output, and average service for average customers.
A value net … …is strategic. It seeks solutions beyond the old constraints… …views
every customer as unique. Manufacturing, delivery, and associated services are differentiated
to meet the needs of each customer segment - and to do so profitably."

New Lamps for Old Or New Lamps? The Demand Chain.

There would seem to be little argument that the old downstream Supply Chain model is too limiting
and that the customer needs to be brought into the equation. One approach has been to modify the
scope of the Supply Chain, another as we have seen has been to develop the notion of the Value Net.
These models are valuable to the extent they explicitly recognize the role of the customer and their
demands in maximising value for the firm. However it is proposed that rather than some composite
model it should be explicitly recognised that there are in fact two different forces at work that are not
necessarily complementary and indeed are often in conflict – the Supply Chain and the Demand Chain.

The Demand Chain is not simply another re-statement of the marketing concept. Marketing is a
philosophy, stressing the customer centric goals of an organisation. The Demand Chain is a practical
description and analysis encompassing all those processes within the firm that adopt and apply that
philosophy. It should not be seen as the sole domain of the firm’s marketing department. It should be
thought of as cross disciplinary, encompassing all those processes which contribute to orientating the
firm’s activities to the needs and requirements of the customers. This potentially incorporates a range
of processes like production planning that would not be traditionally associated with direct customer
interface.

While both the Demand Chain and the Supply Chain are clearly specific to organisations and
situations, some broad features may be identified. Figure 1 identifies the basic components of the
Demand Chain and Figure 2 performs the same role for the Supply Chain. It should be emphasised
that the characteristics identified are intended as generic features. A particular feature may well
become more focused in some situations and in others may be replaced with other features more
relevant to that particular firm’s business model.

It should also be noted that characterising a process as “supply’ or demand” is somewhat arbitrary. As
will be argued below, a fundamental force within any business is the interaction between supply and
demand, so that any particular activity or process will, or should be driven by both requirements.
However its is possible to identify some processes as principally supply orientated and some as
principally demand orientated. The reason for doing this is not to pigeon-hole activities, merely to
identify what is, or should be, the principal impetus behind that activity allowing a better understanding
of its place in the firms overall Value Chain as described further below.

For example, technological products may require considerable design and development to reach the
levels of sophistication and reliability necessary for market success. In such situations design
management (the management of internal and external partners who can contribute knowledge and
expertise to the capabilities of a focal (coordinator) firm for the design and development of a product)
might be traditionally thought of as an engineering and therefore Supply Chain process. In fact a better
perspective might be to see it as essentially Demand orientated. This has implications for how an
Operations Manager perceives these processes and manages their interaction with other activities.

The Demand Chain is therefore not something to be added to the end of a “Super Supply Chain” – it is
a dynamic in its own right. As will be explored in detail below, these notions of Demand and Supply

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fundamentally overlap and interact and should be seen as constituent, but independent elements of what
has been termed the firm’s Value Chain.

It is also worth noting that having both competent and workable Supply and Demand Chains are
competitive necessities. The best factory in the world is useless if it is producing the wrong product.
The best innovation is worthless if it cannot be implemented.

Competitive advantage can however be spawned by excellence in either Supply Chain processes or
Demand Chain activities, or of course preferably both.

An Example – McDonalds Corporation

Leaving to one side whatever views one may have on the merits of its products, the growth of
McDonalds Corporation over the last four decades from a hamburger stand to a major international
corporation has been impressive. However McDonalds has for the first time reported a quarterly loss
amidst widescale discontent amongst franchisees, changes of CEO’s, and a plunging share price at ten
year lows. What has gone wrong?

In many respects McDonalds was one of the pioneers of both efficient and effective Supply Chain
management and of marrying these with traditional marketing techniques, fostering a whole new
category of food retailing. McDonalds delivered new levels of product consistency through
standardised menus and strict supplier controls. It maximised the impact of its delivery points by
developing and applying demographic research to its store placement. It maximised throughput and
asset and inventory utilisation by focusing on speed of production and delivery through new standards
of staff training and process control. It deployed economies of scale and bargaining power to deliver
affordable products. By fostering the concept of franchising McDonalds in effect not only outsourced
the actual production and delivery of its products, but also outsourced operational risk by putting the
onus to raise and manage working capital on the franchisee. In this sense McDonalds was a business
orchestrator (Hagel 2002) long before that term was coined.

Despite the historical excellence of its supply chain it would be misleading to see McDonalds as a
purely supply driven operation. Again from an historical perspective the company has excelled in
implementing classical marketing techniques, particularly the “4P’s”. “Price” competition has been a
consistent theme with “dollar deals” the latest attempt at retaining market share against direct
competitors such as Burger King. “Place” has been reflected both at the level of individual store
placement and at a broader level in a still expanding campaign to open more stores in more locations in
more countries. Indeed the company seems to measure its own performance by this as much as
anything else. “Promotion” has seen the Golden Arches, Ronald McDonald and a myriad of successful
advertising and point of sale campaigns successfully targeting various market segments, including in
particular children where again it was a pioneer, albeit it has been criticised for doing so. Finally
McDonalds traditional “Product” set, including the ubiquitous Big Mac, set new standards for
consistency and reliability.

Overall this was a stunningly successful model where the process fusion between the demands of the
emerging fast food market were skilfully combined with new Supply Chain capabilities to the extent it
is arguable if McDonalds created fast food or the other way around. Most importantly this model was
not a creation of the emerging “new economy” of the 21st century, but was a child of the 1970’s.

In the face however of falling profits and investor wariness, these are the strategies and themes the
company is persisting with. One recent presentation was described as follows:

“The top team’s wooden presentation on April 7th (2003), liberally doused with
marketing cliches and soundbites about the importance of “people, product, place,
price, promotion” and “improving focus” only reinforced the
impression………..(that management) ‘lacks the vision or stomach to make the
necessary changes’”
The Economist 12th April 2003

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The reality appears to be that the nature of the market McDonalds is operating in is changing, at least in
its more mature geographic segments. For example in Australia a BIS Shrapnel study (2003) suggests
the average Australian is eating out less often, 83 times in 2002 compared with 94 occasions in the year
2000. Furthermore the reasons have changed. “Whereas ‘convenience’ was the main determinant
three years ago, the principal reasons now are ‘special occasion’, ‘break in routine’ and ‘meeting
friends’. The report also identifies changing tastes; consumption of hamburgers is down, consumption
of takeaway Thai, Sushi, and Indian foods are increasing.

This is reflected in McDonalds’ stagnating growth and poor financial performance. The company is
reluctant to reveal same-store sales growth but rivals estimate that in 2002 it was less than one percent.
Comments by Peter Bush (a senior executive) and reported by Shoebridge (2003) suggest that the
company is art least partially aware of its problems:

“Our rivals are not just other fast food chains; they are any other informal eating-out occasion.
For example, about 6500 new coffee shops have opened over the past four years, all competing
for a share of the money people spend on eating away from home”.

And:

“The real opportunity for McDonald’s is to develop compelling reasons for people to visit us
more often. … …That means having more relevant menu variety, and offering menu solutions
rather than promotional products. There are lots of promotional products on the menu at the
moment, but they need to be underpinned by changes to the core offering. (McDonald’s is
seeking to become) more relevant to contemporary consumer values”

In this changing environment Bush also indicates the rigidity of the McDonald’s operating and supply
chain systems is not longer a competitive advantage but a limiting factor in its response. It is admitted
that the new menu activity; “ placed strains on McDonald’s purchasing department, operating systems
and restaurant staff”.

McDonalds appears to be a good example of the limitations of simply pursuing Supply Chain
efficiency and what might be termed classical marketing exploitation techniques in a rapidly changing
environment. In effect McDonalds has responded to new pressures with a traditional response – lower
the price and use cost efficiencies to wear out the competition.

What McDonalds seems to have missed, or only partially realised, is that the market has been changing
around them and it is arguable that the firms Demand Chain has fundamentally failed to respond to
this. Can the company now simply realign its Supply Chain to meet new Demand requirements using
its traditional techniques and expertise? This appears to be the company’s strategy.

Some commentators think the issue is a more fundamental one and question the on-going viability of
the company’s business model, calling on it to “manage for cash” rather than growth, liquidate some of
its vast real estate holdings and return that cash by way of higher dividends. In effect they are casting
doubt on the efficacy of McDonalds Value Chain and the business model supporting it as the
fundamental alignment between what McDonalds produces (its Supply Chain) and what the customer
wants (its Demand Chain) seem to have faltered.

The Demand Chain and the Supply Chain Merge: A Source of Friction and
Costs
The notion that the key processes within the firm form a Value Chain for that organisation is not a new
idea (Porter 1985) nor is the idea that supply forces and demand forces are constituent elements of this
Value Chain. The use of the terminology “Chain” is however an interesting one and its use by Porter
and others an imaginative way of describing the concept. It is a very valuable analogy to the extent that
it identifies that processes within the firm are, or should be, interlinked. As will be explored below the
analogy can be further extended so that identifying “weak” and “strong” links in the chain can be
useful in describing or identifying a firm’s competitive advantages or weaknesses.

The notion of the “Chain” may however be misleading to the extent it gives the impression such links
are as a matter of course neatly sequential – that inputs are turned into outputs and value created in a

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necessarily neat and ordered series of links or events. Different processes do not necessarily work in
tandem and may often conflict. Production does not always produce what Sales wants to sell and R&D
does not always formulate what Marketing says the customer wants. These differences should not
however be seen as symptoms of something dysfunctional in an organisation, but rather as legitimate
expressions of conflicting basic drivers – those of supply and demand. If the manufacturing manager
more closely associates with supply driven issues, that is the perspective he will take, just as the
salesman will take the opposite.

Butler et al (1997) note what they call “Interaction Costs” namely “the money and time that are
expended whenever people and companies exchange goods, services and ideas ….."In a very real
sense, interaction costs are the friction in the economy”. This same notion can be applied at the mirco
level of the firm. A firm’s Value Chain is not a smooth synchronous link – its has its own friction and
its own interaction costs.

It is suggested that much of this friction arises as core demand and supply processes interact and fuse –
if Sales and Manufacturing cannot be managed in tandem there will be wasted time, energy and money
and potentially non-legitimate conflict. Obviously then a principal task for the Operations Manager is
reconciling these supply and demand issues. This is not just a resource planning issue, but needs to be
incorporated into process design and management, and therefore the firm’s overall business model.
Indeed the ultimate effectiveness of this process fusion will be essential to the creation or destruction
of value.

A Source of Dynamism

Though it does not sit well with notions of scientific management, this tension between supply and
demand processes should not be seen as an inherent weakness, or a nuisance. It is instead a source of
dynamism and is central to the adaptability of the firm in the face of changing customer demand. Again
borrowing an analogy from economics, the dynamism of the Value Chain is similar to that of the
market economy compared to a command driven economic model.

In more simple terms a firm will create value when what the customer demands can be brought into
synchronisation with what the firm can supply, minimising friction and internal interaction costs and
maximising the dynamic forces of the interaction. Where they are not synchronised, value will either
not be realized or actually destroyed. This may sound simple, but the reality of complex organisations
is such that this process fusion is in fact problematic and represents the key tactical task for
management on a day to day basis.

The optimum management objective then should be to foster and develop business models for the firm
that optimize the relationship between supply and demand: companies need to understand customer
demand before they can manage it, create future demand and, of course, meet the level of desired
customer satisfaction. Demand defines the supply-chain target, while supply-side capabilities support,
shape and sustain demand, (Walters 2002).

Taking an analogy from the physical sciences this is best described as a catalysis effect between core
demand and supply chain processes, between competitive necessity and competitive advantage. This
catalysis has to coalesce the limitations of a company’s assets and its ability to transform them into
products and the demands of the market. This catalysis effect is what ultimately determines the ability
of the firm to create value. This creates a large incentive to purposefully manage this Value Catalysis -
it provides new opportunities for creating (or adding extra) value. This is illustrated in Figure 3.

This leads to the important question of what exactly is the catalyst that forms this interaction between
Supply and Demand Chain drivers. While external factors such as the introduction of new technology
can no doubt enhance this interaction, the answer must be that it is primarily a function of management.

A Value Chain then is not a neat single series of process links between expectations and outcomes.
There has to be a process fusion not only within the supply or demand chains but more importantly
between them. It is suggested that understanding that such tension between processes within a firm is
not only normal but potentially a source of deriving competitive advantage through managing it
effectively is a simple but key issue for management practitioners.

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Hagel and Singer's (1999) description then of “unbundling and rebundling” of organisational structures
as a means to adapt to new market demands is a useful one. As noted above it is suggested that in fact
there is a constant realignment of core processes going on within any firm on a day-to-day basis as
demand and supply chain drivers interact with each other and coalesce to form the firms Value Chain.
Again such constant realignments are not a negative force, but the ability to manage them pro-actively
optimises the ability to create value.

Successful organisations appear to be those who understand the role of the Demand Chain and how to
use the Supply Chain to deliver customer value. At a day to day level it " may turn on designing a new
product for an unmet need … Or it may turn on a process innovation, a better way of making or selling
or distributing an already proven product or service". (Magretta 2002).

Value Management
It is proposed therefore that the “New Operations Management” is not about tasks or activities or
efficiencies or minimising costs in a “downstream” orientated Supply Chain, but is about Value
Management.

Value Management is proactively establishing a competitive market position by identifying, fusing and
co-ordinating core demand and supply chain processes to maximise the effectiveness of the firm’s
business model.

This requires a good understanding of the demands of the “new economy” and in particular that the
firm is not a stand alone, self contained entity, but operates in an industry context that may well be
increasingly driven by holonic business structures, virtual organisations, and networks.

Value Management is based on processes not functions. The Operations Manager’s objective should
not be to maximise the outcomes for his particular functional area of responsibility, but to increase
value for the firm by optimising the business processes for which he is responsible. It is proposed that
this optimisation is ultimately a function of synchronisation of demand and supply drivers to minimise
friction and internal interaction costs. The fact that these drivers are often in conflict is not in itself
dysfunctional, but instead a dynamic force to be harnessed and managed. In this sense the links in the
firm’s overall Value Chain are forged in the catalysis of competing Demand and Supply requirements.

The analogy of the chain is a very valuable one in the sense that strong and weak links in that chain can
be identified, or to put it more realistically, processes that add and destroy value can be identified. Does
my product warranty repair group add value or would value be enhanced by outsourcing these
processes to someone else?

The answer to this question should not simply be a cost analysis that potentially ignores the customer
or Demand Chain impact of that process. Instead it is suggested that four key questions need to asked,
weighing up the available alternatives in each case.

The first two questions are Demand Chain driven. Customer expectations need to be identified. This in
itself involves two elements. The first concerns the value components that customers are seeking, while
the second is concerned with ascertaining the full costs involved by the customer in acquiring,
operating and maintaining the product, and finally any disposal costs that may be involved. The
second question involves developing a value proposition. The purpose of the value proposition is to
make an explicit response to the customer, making clear the total benefits and also to identify the roles
and tasks that will be required by the organisation and its partners if the benefits are to be delivered
successfully.

This leads to the Supply Chain driven questions, as clearly in meeting Customer Expectations and
delivering a viable Value Proposition there are resource requirements which have direct and indirect
costs. At this point basic issues such as capabilities and capacity requirements are determined. Finally
issues of value delivery need to be examined, how is the product to be delivered to the customer and at
what direct cost.

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The answers to each of these questions needs to be measured in terms of contribution to the firms
overall value outcomes and an equation developed in each case that derives the best overall outcome.
This is illustrated in figure 4. Value Management then becomes the co-ordination and orchestration of
these questions and issues to maximise value.

The seemingly low-level decision to outsource a repair activity should then be the result of the
weighted consideration of the impact on the firm’s Supply and Demand drivers. Observable changes in
the structure of the economy suggest that unless the answer to this equation is heavily weighted in
terms of a particular Demand or Supply requirement, such that warranty repairs is a core process for the
firm, then there is likely to be another business to whom repairs is a core process and to whom it can be
outsourced, better maximising the overall value outcome for the firm.

The implications for Operations Management is that what may seem like a series of tactical issues –
how to maximise the effectiveness of individual processes within the firm - collectively becomes a
driving force in the transformation of the traditional business in the context of the “new economy”.

Concluding Remarks and Future Research

A number of changes have occurred in the environment of the "new economy". Changes continue and
do so at an increasing rate. Many of the tasks and techniques that comprised management practice
have either disappeared or have changed radically. Management functions have either been modified,
merged, replaced or have disappeared. Businesses have become a collection of relevant, focussed
processes - the era of the functional specialist appears over.

We have identified the development of the value chain and its importance in forming a structured
response to market-led opportunity. Within our discussion we have suggested and identified examples
of an emerging qualification for competitive advantage – pro-actively managing the fusion of demand
and supply chain processes to minimise friction and internal transaction costs enhancing overall value.
This concept is represented in figure 3.

In doing this we have identified an expanded role for operations management in the creation of value in
the business. Where however does this fit with the firm’s overall strategy?

As noted above Magretta (2002) draws a distinction between a firm’s business model and its strategy,
citing the example of Wal-Mart who initially adopted a fairly standard supermarket business model, but
prospered by adopting a strategy of building its supermarkets outside metropolitan areas in rural
locations. The two notions of business model and strategy are however clearly linked. As Magretta
acknowledges Wal-Mart only made their strategy work by improving on the base business model
“through innovative practices in areas such as purchasing, logistics and information management”.

It is proposed that constant refinement of business models is as important to the success of the firm as
its strategy and that both are critical to the integrity of the firms overall Value Chain. This is illustrated
in figure 5.This implies a far more important role for Operations Management than may have been
traditionally recognised.

We suggest that an important topic for research concerns the implementation of the value chain model
and its implications for operations management in the emerging new business models. In figure 6 we
suggest a starting point. The demand chain and supply chain processes have been identified and fused
into a value chain process model. There are a number of issues that need to be researched. These vary
from quite simple issues concerning structure and communication through to the more complex issues
relating to intra and inter-relationship management structures and performance planning and control.

286
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Appendices
Figure 1 : IDENTIFYING THE DEMAND CHAIN
Identify the "Macro-Market" Characteristics

• Identify market segments and segmentation variables

• Ascertain market volumes by segment
• Identify price points, product-service feature offers and their suppliers

Identify the "Micro-Market" Characteristics

For each segment:

• Identify customer purchasing influences
• Ascertain segment and adjacent segment market volumes
• Identify the consumption chain characteristics

Create "Value Profiles"

For each segment:

• Identify the Customer Value Model
• Customer expectations
• Customer acquisition costs
• Quantify the "ideal" customer value model (the benefits, costs and value driver imperatives)
• Identify the required assets, capabilities and processes

Establish Alternative Value Propositions

• Review the customer value models, identifying;

• Customer expectations
• Relative competitive positioning
• Relative costs
• The role that can be played by partner/complementor organisations

Develop Product-Service Options

• Determine the unique/exclusive value drivers that are important to target customers
• Forecast the potential revenues
• Cost the options
• Establish cost structures and the asset "ownership" & funding implications
• Identify the risk/return profiles
• Project the long-term economic free cash flows
• Estimate the potential for sustainable competitive advantage of the product service options

Evaluate the Value Delivery Options

• Identify the optimal value chain structure

• The role that can be played by partner/complementor organisations
• Compare the "returns" to shareholders and stakeholders as well as to end-user customers
• Consider the implications of alternatives for asset, capability and process leverage
• Consider the implications of these on the effectiveness and efficiency of the control of the value delivery process

"Service" the Value

• Service support levels and infrastructure comprising

• Service intermediaries, roles, tasks and location
• Technical support, installation, operation & maintenance
• Presale liaison
• Information & advice
• Design services
• Transactions systems
• Ordering systems
• Payment options
• Financing
• Post-transactions
• Installation
• Training
• Operations
• Maintenance
• Warranty operations
•Product/service liability commitments
•Product-recall programmes
•Customer loyalty programmes
•"Brand" reinforcement

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Figure 2: IDENTIFYING THE SUPPLY CHAIN

Order Receipt & Entry

•Order acknowledgement
•Credit checks
•Inventory availability
•Manufacturing instructions
•Price & discount extensions
Order Processing
hOrder administration
- generate invoice
- generate picking documents
- scheduling information
hDetermine & report order status
hCreate distribution documentation
•Manage order location communications

Manufacturing

•Process selection
•Capacity management
•Materials requirement planning & management
•Quality control
•Cost management
•Supplier/partner liaison

Order Assembly

•Liaison with manufacturing

hOrder picking
hPacking
hUnitisation
Order Transportation
Order delivery management that meets customers'
service expectations. Selection of:
hMode
hFrequency
hReliability
Customer Services Management

The management of; time, dependability, communications & convenience by

providing:
•Product availability
•Agreed OCT
•Flexibility
•Relevant & timely information
•
Evaluate the Value Delivery Options

•Identify the optimal value chain structure

•Compare the "returns" to shareholders and stakeholders as well as to
end-user customers
•Consider the implications of alternatives for asset, capability and process
leverage
•Consider the implications of these on the effectiveness and efficiency of
the control of the value delivery process

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 Order Order
Order Customer
Supply Chain receipt Order transportation
processing Manufacturing services
Management & entry assembly management

THE VALUE CATALYST PROCESS FUSION Value Chain Management

Product & Macro-

"Value" "Value" Micro-market Demand Chain
service market
proposition profiling characteristics Management
features definition

Figure 3: Using process fusion to develop the value chain

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 Value Proposition

•Customer Offer
•Production & Delivery roles Demand Chain Management

and tasks

Value Resources Requirements

Customer Expectations
Management
•Capabilities
• "Value" Attributes •Capacities
•Customer Costs • "Ownership & Location"
Options and Decisions

Supply Chain Management Value Delivery

•Production
•Delivery
• "Servicing" Figure 4: A Value Management
Business Model

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From: An emphasis on cost reduction and efficient administration
To: An emphasis on creating corporate and customer value through innovation within an integrated value chain

Creation of Value

Value Chain Strategy and

Management

Operations Organisational
Business Model Strategy

From: A reactive response to customer From: A centralised internally focussed and

requirements at a minimum level of costs ‘mechanistic’ function

To: Becoming a proactive function which To: A devolved, empowered and customer
coordinates products and process to maximise focussed orientation
corporate and customer satisfaction

Figure 5: A Changing View of Value Chain Management

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 Supply
Sourcing and Chain
Product procurement
modification and Management
development
Materials Figure 6: Working
Prototype production
management the demand/supply
and testing
chain as an
Manufacturing integrated Value
Product/service / processing Chain
specification management
Identify value
expectations Product
Customer
Create the modification
Demand Chain research
value
Management
Value
Chain
Management Reseller/ distributor
communications
Customer Deliver the
follow-up value Communicate
research the value Customer/end-user
communications

Customer Internal customer

service communications
programs
Product/service
Product recall
delivery program
programs
• availability Demand
• frequency
Chain
• reliability
Management
Supply Chain Management
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294