Four value chain management strategies
Value chains are comprised of interconnected systems between producers, manufacturers, and their market—typically managed in isolation. Even though each stakeholder manages a smaller and thus simpler subsystem, this natural decentralization of the siloed decision-making structure comes at a price—numerous disruptions and conflicts between production units, frequent reprocessing, and excessive inventory costs, and overall project completion delays are a just a few typical symptoms.
A basic principle in any value chain is that the more we increase the capacity utilization throughout the value chain, the more production issues and challenges will arise either within a system or between multiple systems. The ideal trade-off is to maximize capacity utilization with minimal system disruptions.
Centralized approach
If we centralize the necessary data, have perfect forecasts, and orchestrate everything under a single point of control, we would have maximum capacity utilization with minimal production issues. However, while centralization might be mathematically ideal in theory, it’s not realistic—it lacks key aspects to sustainable long-term solutions for companies, such as ease of knowledge transfer, maintainability of the models and IT infrastructure, and individual stakeholder ownership and support.
Competitive approach
At the other end of the spectrum is where every subsystem is managed independently and where each team works to maximize their individual metrics which sometimes conflict with each other. Optimization efforts in a subsystem can unknowingly be detrimental to other areas of the value chain because there’s no coordination—which could have serious safety or financial consequences.
Collaborative approach
Like a competitive approach, stakeholders in a collaborative setting will act independently, driven by their own performance indicators, but will interact to reach a consensus. This interaction allows for a dynamic readjustment of actual operation levels between stakeholders, yet it retains a narrow view of the value chain process.
Coordinated approach
The adoption of a coordinated decision-making strategy enables stakeholders to maintain subsystem ownership while capturing key complexities of the integrated system when decisions are made. For this approach to be successful, stakeholders from different areas are guided by a central entity that sets global and comprehensive key performance indicators for the entire value chain. This will allow the system to dynamically adjust targets as requirements evolve or obstacles arise anywhere along the value chain—minimizing the occurrence and impact of disruptions. Because the system doesn’t consider every detail, it makes decisions more quickly and efficiently. It will also:
- increase the ability to respond to changing market conditions;
- maximize overall value chain capacity;
- boost customer satisfaction;
- reduce time-consuming communication iterations between stakeholders; and
- increase employee morale and engagement.
By combining state-of-the-art Process Systems Engineering with Operations Research technology, the path to business growth is both accessible and achievable. The company, as a whole, will benefit from more consistent decision-making that captures optimization benefits on an ongoing basis.
About the author
Danielle Zyngier
Global practice lead, Data science and optimization
Danielle has over 17 years of experience in consulting and creating Operations Research and Advanced Analytics solutions. She leads the data science and optimization team at Hatch, is an Adjunct Professor at McMaster University, and has over thirty peer-reviewed academic publications and patents in the field of optimization.