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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.

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References Armistead C, J-P Pritchard and S Machin (1999) "Strategic Business Process Management for Organisational Effectiveness," Long Range Planning, Vol. 32, No1 Ashkenas, R D.Ulrich, J.Todd and S.Kerr (1995) The Boundaryless Organisation, Jossey-Bass Publishers, San Francisco Bovet D and J Martha (2000) Value Nets, Wiley & Sons, New York Clark K B and T Fujimoto (1991) Product Development Performance, Harvard Business School Press, Boston Christopher M (1998) Logistics and Supply Chain Management, Financial Times/Prentice Hall, London Clark P and K Starkey (1998) Organisation Transitions and Innovation Design, Pinter, London Cooper M.C., D.M. Lambert and J.D.Pugh (1997) “Supply Chain Management: More Than a New Name for Logistics”, The International Journal of Logistics Management, Vol 8, No 1. Day, G. (1999) The Market Driven Organisation, The Free Press, New York Eisenstat R, N Foote, J Galbraith and D Miller (2001) "Beyond the Business Unit", The McKinsey Quarterly, Number 1 Glazer, R. (1991) “Marketing in an Information-Intensive Environment: Strategic Implications of Knowledge as an Asset,” Journal of Marketing, October Hagel, J. 2002, “Leveraged Growth: Expanding Sales without Sacrificing Profits” Harvard Business Review. October Hagel, J III and M.Singer (1999), "Unbundling the Corporation," Harvard Business Review, March/April Hammer M (2001) The Agenda, Crown, Publishing Group, New York Johansson H J, P McHugh, A J Pendlebury and W Wheeler lll (1993) Business Process Reengineering, Wiley, Chichester Keith O.R. and M.D. Webber (1982) “Supply Chain Management: Logistics Catches up with Strategy” Outlook cit. Christopher M (1992) Logistics, The Strategic Issues, Chapman and Hall. Magretta J (2002) "Why Business Models Matter", Harvard Business Review, May McHugh, P, G Merli and G Wheeler III (1995) Beyond Business Process Reengineering, Wiley, Chichester Normann R, (2001) Reframing Business, Wiley, Chichester Drucker P, "Will the corporation survive?" The Economist, 1 November, (2001) Pebler R P, (2000) "The Virtual Oil Company: Capstone of Integration," Oil & Gas Journal, March 6

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Waller A. (1998) “The Globalisation of Business: The Role of Supply Chain Management”, Management Focus, Issue 11, Cranfield School of Management. Walters D (2002) Operations Strategy, Palgrave, Basingstoke,

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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

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

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

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Demand Chain Management

Order receipt & entry

Order processing

Order transportation Customer

services management

Product & service features

"Value" proposition

"Value" profiling

Micro-market characteristics

Macro-market

definition

Supply Chain Management

THE VALUE CATALYST Value Chain Management

Order assembly

PROCESS FUSION

Figure 3: Using process fusion to develop the value chain

Manufacturing

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Customer Expectations

• "Value" Attributes •Customer Costs

Value Proposition

•Customer Offer •Production & Delivery roles and tasks

Resources Requirements

•Capabilities •Capacities • "Ownership & Location"

Options and Decisions

Value Delivery

•Production •Delivery • "Servicing"

Value Management

Figure 4: A Value Management Business Model

Demand Chain Management

Supply Chain Management

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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 Business Model

Organisational 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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Customer follow-up research

Customer service programs

Product modification and development

Prototype production and testing

Product/service specification

Customer research

Product/service delivery program• availability • frequency • reliability

Product recall programs

Customer/end-user communications

Reseller/ distributor communications

Product modification

Manufacturing/ processing management

Materials management

Identify value expectations

Create the value

Communicate the value

Deliver the value

Internal customer communications

Sourcing and procurement

Demand Chain Management

Demand Chain

Management

Supply Chain

Management

Supply Chain Management

Figure 6: Working the demand/supply chain as an integrated Value Chain

Value Chain

Management