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Conceptual Foundations of Demand Chain, Value Chain, and Supply Chain

Although supply chain management has been hailed as an innovative way to compete in today’s business world, its concept created a lot of confusion, as evidenced by the presence of more than 2,000 different definitions of supply chain management (see Gibson et al., 2005). Adding to the confusion, the term supply chain was often interchangeably used with demand chain and value chain. Therefore, it is important for us to synthesize these terms and differentiate among them when appropriate.

Because the ultimate goal of supply chain management is to serve the customer better, supply chain management begins with the understanding of customer values and requirements. Indeed, Poirier (1999) argued that the primary objective of supply chain improvements was to serve ultimate customers more effectively and therefore an analysis of the supply chain should focus on the “finish line” (demand), not the “starting point” (supply). To enhance the customer values and meet customer requirement, careful planning of demand-creation and -fulfillment activities is critical to the success of the whole organization. This planning cannot be articulated without understanding the dynamics of interrelated business activities and jointly developing ideas for business process improvement among the intra- and inter-organizational units. Therefore, any efforts geared toward the customer-centric and “pull” approach throughout the entire business processes are considered part of the demand chain.

In a context similar to the demand chain, a value chain is referred to as a series of interrelated business processes that create and add value for customers. Its intent is to disaggregate all of a firm’s business processes into discrete activities to evaluate their level of contributions to the firm’s value and then discern value-adding activities from non-value-adding activities. Herein, “value is the amount buyers are willing to pay for what a firm provides them and thus is measured by total revenue, a reflection of the price a firm’s product commands and the units it can sell” (Porter, 1985, p.38). Thus, the extent of value created and added by the firm often dictates its level of business success, because the higher the value, the greater the profit margin and competitive advantages.

As shown in Figure 1.3, the value chain focuses on the customer’s value by connecting the customer’s needs to every aspect of the value-adding business activities encompassing sourcing, manufacturing, logistics, and marketing across the organizational boundary. The value chain is often driven by four key imperatives (Bovet, 1999):

  • Reduced uncertainty, which minimizes asset intensity through the reduction and elimination of inventory
  • Increased speed, which minimizes the risk of obsolescence
  • Increased revenue resultant from the maximization of customization and the subsequent customer loyalty
  • Increased productivity through multiple asset productivity

Although Table 1.2 shows that the strategic focus and perspectives of the demand chain, the value chain, and the supply chain are somewhat different from one another as described by Sherman (1998, p 2), their fundamental concepts and ultimate goals are not distinctively different in that all these concepts are customer-centric and stress the importance of coordinated linkage between business activities to the firm’s competitiveness. Therefore, these three terms can be regarded as synonyms. To put it simply, the supply chain originates at the sources of supply and flows toward the customer, whereas the demand chain flows backward from the customer and ends up with the enterprise. The value chain is created when the supply chain is in sync with the demand chain. Regardless of the semantic differences, the supply chain benefit may be maximized by following the seven principles outlined by Copacino (1997):

  • Understand the customer values and requirements so that the firm can identify how to align its operations to meet its customers’ requirements and needs.
  • Manage logistics assets such as warehouses, terminals, transportation equipment, and pipeline inventory across the supply chain with the help of both the downstream and upstream supply chain partners.
  • Organize the customer management in such a way that the firm can provide a single point of contact to the customer for information and post-sales follow-ups.
  • Formulate joint sales and operations plans as the basis for a more responsive supply chain by sharing real-time demand and forecast information within and across the supply chain.
  • Leverage manufacturing and sourcing flexibility by utilizing postponement strategies.
  • Focus on the synergies of strategic alliances and relationship management by building the sense of mutual trust and the spirit of gain sharing.
  • Develop customer-driven performance measures to drive the behavior of all supply chain members across the supply chain.

Table 1.2. The Comparison of Demand Chain, Value Chain, and Supply Chain

Demand Chain

Value Chain

Supply Chain

The Role in Demand Planning

Demand creation

Demand performance

Demand fulfillment

Key Strategy

Product strategy

Financial strategy

Channel strategy

Primary Activities

New product development Market research Sales and promotion Forecasting

Cost accounting Pricing Revenue management Capital investment Value-added services

Procurement Manufacturing Logistics Payment

Key Stakeholders

End customers

Shareholders

Supply chain partners

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