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10 August 2021

Creating Value in the Supply Chain

Creating value through the supply chain is self-evidently a good thing. Everyone, ourselves included, claims that their goods, services and processes ‘add value’ for their customers and end users: a couple of years ago we hosted a fascinating ‘round table’ of clients and academics on this very subject.

But how a supply chain actually creates, as opposed to merely transfers, value is less obvious than might be supposed. It is understood that transforming individual components into a useful product adds value, but where is the gain in simply moving goods from one market to another?

The very phrase ‘value for money’ implies that there are other values that can’t readily be captured in cash terms, but are of increasing significance if supply chains and end users are to achieve their goals.

Value in the business model
As any company should, we at MAG45 have continually to ask ourselves “what does our customer value?”, and since our customers are equipment manufacturers rather than end product users, that means also asking what the value is that they in turn are selling – what is ‘value’ in their business model?

What we find when we ask these questions is that there is a significant shift in how our OEM (Original Equipment Manufacturer) clients and their customers view their transactions. It used to be that the buyer was essentially acquiring goods and materials, with certain technical capabilities, at an acceptable price. Nowadays that is pretty much a given, and if that was all that was involved, even sophisticated machines and pieces of equipment would be commodities (as indeed is true in, for example, the lower specification end of the machine tool market). But increasingly, OEMs are offering, and their customers procuring, not hardware but capabilities, potentialities, enablers, competitive advantage in its broadest sense. (Increasingly and importantly, post-Covid, they are also looking to buy resilience).

The considerations are not of sale price, but of total cost of ownership, not of production rates but of uptime and availability, and the deal itself is less of a one-time transaction, and more of a long-term relationship, with some characteristics more akin to a lease than a sale. In some sectors this shift is quite explicit: in the aero-engines field for example, remuneration is in part based on ‘power by the hour’ – there are long term arrangements with bonuses or penalties based on the time the engine is available for service.

This of course has implications for value engineering, for preventative maintenance, and this feeds back up the supply chain. For suppliers “right product, right quality, right price” are just the table stakes – “right place, right time” are where the game is.

In parallel with this change in emphasis around physical products and parts, there are comparable shifts in the way business is done. One of the claims that we and other service providers often make is that we can relieve our customers of the burden (financial or otherwise) of ‘non value added’ activities, performing tasks, in our case in sourcing, procurement and inventory, better, or cheaper, or both. That is certainly true, but on its own it is not enough – it is in a sense not creating value, but merely preventing value from being destroyed.

As Professor Koen Vandenbempt put it at our Round Table, “Customers now see value not just as a matter of meeting their technical needs and price points, but in finding a good fit with their business processes and strategies”.

Innovation is the key
The key to truly creating value lies as it has always done in innovation. From a technical point of view that is obvious – a machine that uses new and improved technologies to be faster, or more accurate, or easier to operate and maintain, or waste less material, creates additional value. We make an active contribution to our clients’ quest for this sort of additional value – for example, where we have our engineers ‘embedded’ in a client’s organisation, we can bring knowledge of trends, developments and innovations; we can challenge assumptions and apply value engineering across not just price but performance.

We integrate with our customers’ planning systems, so that the production plan is shared, and MAG45 ensures the parts are at the right place at the right time. Instead of the traditional Purchase/Sales order relationship, the entire process is outsourced by the OEM to the supply chain integrator.

This suggests a path for a wider area of innovation, not just in technical specifications but in business processes and arrangements, in partnerships and collaborations. Whole new ways of working are becoming possible, enabled in part by advances in IT, such as the most recent ERP systems and business process automation. New commercial arrangements and provisions for gain-sharing can be devised to incentivise yet further value-generating innovation.

Cultural change
These transformations won’t come easily. Even leaving aside the real challenges of upgrading ERP systems and the like, there are significant cultural barriers: too many engineers with ‘not invented here’ syndrome, too many buyers who measure success purely in cost savings per item. This new way of working requires an enormous culture change in the way of thinking, acting and doing business successfully.

But the world is changing, new forms of integration are coming to the fore. I believe the MAG45 vision of Integrated Supply is an important part of this.

Dirk van den Hengel is CCO at MAG45

Dirk van den Hengel