Recently I found myself in a group conversation about marketing ‘channels’, and almost had to scream.
Like most conversations of this nature, they were just about logistics. Pity the poor old customer, barely got a mention apart from being noted as being on the end of a supply chain.
The whole conversation sounded like the ones I had in the 70’s, prior to any of the development that has gone into the thinking about the nature of the chains delivering product to customers, or the systems that drive them that has occurred in the interim.
A chain does not kick into operation until someone decides to buy something, it is activated by demand, not supply. Therefore, we would be better served to think about it as a demand chain. This is more than a semantic difference, it acknowledges that the chain is a ‘Pull’ model, activated by demand, not a ‘Push’ model, activated by supply with no reference to how that available supply will be sold.
Everything that comes after the decision to buy something is just seeking ways to split up the revenue from that sale.
Looking at it from the customers view, the only things that are important are those that add value for them, the details of the shipping from A to B, and manufacturing processes are supremely irrelevant.
Everyone in the chain is competing for a slice of that dollar.
A chain is a complex system, or it can be. The simple definition of a complex system is that the whole is greater than the sum of its parts. You can view a chain as a number of sequential but essentially separate activities, or as a number of interdependent activities.
In the first, we are fighting for a slice of the pie, in the second, we are collaborating to make the pie bigger before slicing it up and sharing it around.
They are profoundly different.
The latter is way harder to build and maintain, but delivers significantly better financial and strategic outcomes in the long term, as the price on the day of a product becomes almost irrelevant.
Following are the descriptions I use to make the key distinctions.
Supply chain.
Supply chain arrangements are basically, grow/make it and chuck it over the fence and hope somebody buys it, and eventually pays you, something, which is most often not reflecting what the producer thinks it is worth. Most of agriculture works on this model, and it has failed us.
Characteristics: Short term price, adversarial negotiations, multiple supplier competition of undifferentiated product, buyers who hold the negotiation power deriving from scale, or the anonymity via auction.
Value Chains.
A value chain seeks to control at least some of the value-add that occurs between the production and customer, and thereby capture some of the added value by margin. Mostly however, the value add is calculated as the ‘cost add’ as the consumers view of value plays no role in the calculation. The classic case is bread, where millers have become bakers to capture the value added margin that results from bread being baked from their milled grain. You often see this type of vertical integration evolving as one link seeks to control what happens on either side. However, it is still an essentially sequential and disconnected process, of grower, miller, baker, and distributor.
Characteristics: price is important but not the only factor, specifications and specification maintenance become important, the amount and type of value added is taken into account, very aggressive negotiation occurs, but it is no longer ‘take it or leave it’ as it is in a supply chain. Calculation of the value add is usually the marginal cost of the manufactured goods sold, minus the input commodity price. As in a supply chain, this is usually just a calculation based on competitive pressures. Often in recent times, marketing has got hold of the end product, (as in bread) differentiated it a bit, added some advertising and benefit claims, and tried to sell the product for a premium.
Demand chains.
These are rare beasts indeed, and do not usually carry the name ‘demand chain’. It is activated by pressure applied to the chain from the end buyer, the opposite direction of both supply and value chain arrangements. It is pressure delivered to the chain by real demand, and has proven to be the key to success. For example, Toyota apply demand chain disciplines on their suppliers, by having the parts procurement process activated by a ‘Kanban’ card on the production line. This is the genesis of the TPS which has revolutionised modern manufacturing.
Characteristics: Driven by demand, collaborative relationships for mutual benefit drives activity, specifications and DIFOT performance are crucial, prices are negotiated on the basis of best outcome for the whole chain, as well as the individual, and there is information transparency throughout the chain which these days requires IT integration.
The spread of digital technology has given us the tools to make the transformation to demand chains easier, but they require power to be devolved, and the status quo in most cases to be altered, so rarely do they evolve to their full potential. Increasingly we will see an evolution towards demand chains as enterprises seek sources of differentiation, enhanced customer service, and cost reduction, all at the same time.
