Dening value chain architectures: Linking strategic value creation

to operational supply chain design

Matthias Holweg
a
, Petri Helo
b,n
a
Judge Business School, University of Cambridge, UK
b
Department of Production, Faculty of Technology, University of Vaasa, Finland
a r t i c l e i n f o
Article history:
Received 31 May 2012
Accepted 13 June 2013
Available online 28 June 2013
Keywords:
Value chain
Supply chain management
Operations strategy
a b s t r a c t
Over the past three decades scholars have developed comprehensive insights into the operational and
strategic aspect of designing and managing the supply chain. Reviewing this ample body of knowledge
however one cannot help but notice a persistent disunion between the value chain view that considers
aspects of value creation and appropriation, and the operational supply chain view that considers
strategies and tools for designing and operating efcient inter-rm networks. Commonly these views do
not interact: value creation has the aim of capturing the maximum value-added in nancial terms, the
supply chain view aims for designing operationally efcient supply chains. In contrast to their treatise
within the academic literature, from a practical point of view these two aspects are both necessary (and
thus in their own right insufcient) components to a rm's supply chain strategy. In this paper we thus
turn to an exploratory case study to identify what such a combined view of the value and supply chain
would entail. We refer to this purposeful creation as the value chain architecture and propose ve
fundamental decisions that dene the latter: (1) the nature of value provision (driven by the core
competence of the rm), (2) the operational footprint decisions for manufacturing, sourcing and
distribution, (3) the approach to risk management, (4) the order fulllment strategy (and implicit in
that, the type of product customization), and (5) the buffering strategy. We conclude with an exploration
of the application and utility of the value chain architecture concept in both academia and practice.
& 2013 Elsevier B.V. All rights reserved.
1. Introduction
The rapid evolution of Supply Chain Management (SCM) as a
sub-discipline within Operations Management (OM) provides
strong evidence that, as Martin Christopher put it, companies
no longer compete but entire value chains (Christopher, 1998).
A wealth of studies and reviews, too numerous to cite here, coupled
with the remarkable successes of companies such as Wal-Mart,
Amazon, Dell, Toyota, Zara and the like, provide an unequivocal
case that a company's ability to design and manage its value chain
has become a cornerstone of contemporaneous management. The
management literature covers these cases well, as for example in
the cases of Dell's build-to-order value chain strategy (cf. Fugate
and Mentzer, 2004; Holweg and Pil, 2001; Kapuscinki et al., 2004)
or Zara's quick response manufacturing (Ferdows et al., 2004).
While the overall language is well developed, and there is insur-
mountable evidence that value chains differ substantially in their
morphology according the type of product being supplied
(Lamming et al., 2000), a general classication of value chain
architecturesat the rm levelis sill amiss. In fact three decades
into SCMresearch there remains an interesting dichotomy between
the value chain view that considers aspects of value creating,
appropriation and nancial aspects of the supply chain, and the
operational supply chain view that largely considers strategies
and tools for designing and operating efcient supply chains.
Commonly these views do not interact. We argue that this is a
fundamental gap in bridging the strategy and OM literatures where
we lack conceptual understanding of the structural aspects of
why these supply chain structures work for certain rms, but may
not for others.
In this paper we are using an exploratory, longitudinal case
study to investigate the analogy of an architecture, i.e. the
purposeful design of a value chain. Conceptually we see the value
chain as an equivalent to product and process architectures,
where such purposeful design has been proposed before
(Baldwin and Clark, 1997; Hayes and Wheelwright, 1979; Ulrich,
1995). In proposing a value chain architecture we seek to build a
bridge between the research on value creation strategies in the
supply chain context (Normann and Ramirez, 1993; Pil and
Holweg, 2006), and the work on supply chain design (Beamon,
1998; Meixell and Gargeya, 2005). Our paper builds on earlier
work seeking to link product and process architectures with
Contents lists available at ScienceDirect
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Int. J. Production Economics
0925-5273/$ - see front matter & 2013 Elsevier B.V. All rights reserved.
http://dx.doi.org/10.1016/j.ijpe.2013.06.015
n
Corresponding author. Tel.: +358 505 562668.
E-mail address: phelo@uva. (P. Helo).
Int. J. Production Economics 147 (2014) 230238
supply chain design (Fixson, 2005a; Rungtusanatham and Forza,
2005). We also draw upon the initial quantitative descriptions of
supply networks (Harland et al., 2004; Harland, 1996; Lamming
et al., 2000), and build on this prior work along three dimensions:
rstly, we extend the often restricted focus of supply (chain)
management beyond the immediate supplier tiers, to encompass
the entire value chain, in other words, the system that includes all
value-adding steps, from raw materials to the distribution system
that delivers the product or service to the end customer. Secondly,
in addition to the mostly qualitative description of value chain
architectures, a combination of qualitative and quantitative mea-
surements and descriptors of a value chain conguration is
presented. Thirdly, we argue that a key tenet of dening value
chain architectures is to consider the alignment between process,
product and supply network conguration.
The paper is organized as follows: in Section 2 we will
introduce the distinction between a value chain and a supply
chain view in more detail, before introducing the method used in
this case study in Section 3. The case ndings are presented in
Section 4, followed by the discussion of key ndings and implica-
tions in Section 5.
2. Literature review
2.1. A need for more denitions?
As Gibson et al. (2005) argue, SCM has evolved over time in the
same way as all academic elds evolve as the eld evolves, so do
the related key concepts under investigation. In this sense one
might rightfully argue that yet another paper on the (natural)
evolution and of the supply chain concepts adds little value to the
advancement of the eldgiven that a set of comprehensive
reviews on all aspects of supply chain management is available
(Barney, 2012; Beamon, 1998; Bertrand, 2003; Burgess et al., 2006;
Christopher and Ryals, 1999; Cooper et al., 1997; Holweg and Pil,
2008; Lambert et al., 1998). We sympathize with this argument,
however would argue that a key gap remains in the disunion of
bridging the operations-strategy gap in SCM. This review will thus
rst and foremost focus on this aspect.
2.2. Supply chain or value chain?
The original term supply chain management had a very
operational connotation when Booz & Allen consultants Oliver
and Webber rst proposed it in 1982 by telling rms to manage
total supply chain inventories (cited in Christopher, 1992). To this
date this operation's focus has remained, aiming for a design and
operating stable and efcient supply chains. On the other hand
there is the value chain concept originally proposed by Porter,
which takes a nancial view of the sequential value creation
process in a network of rms (Porter, 1985). Hence, even though
often used synonymously, there is a specic difference in perspec-
tive on the same phenomenon: value is created in sequential steps
by a set of distinct rms.
The aspect of value creation and appropriation has been
introduced as value constellation and value grid (Normann
and Ramirez, 1993; Pil and Holweg, 2006), suggesting that rms
are well advised by going beyond the linear view of managing
dyadic supplier relations. In fact, as the cases cited by these two
aforementioned studies show, considerable additional value can
be captured by thinking across value streams, as well as by
thinking how managing or inuencing other tiers than the
immediately adjacent ones can yield considerable benet to
the rm.
The key assumption in this value view of the supply chain is
that rms can enhance their competitive position by considering
the value streams they are operating in, as well as other parallel
ones that use the same supply and distribution and retail chains as
a grid in which they operate. This assumption is fundamentally
different from the supply view, which argues that the most value
can be added by ensuring the linear ows of information and
material occur with as little disruption as possible. Avoiding excess
inventory, the bullwhip effect and long lead-times are key objec-
tives here. As such these assumptions, as we will argue here, are
not contradictory but in fact complimentary. They have, however,
so far not been merged into one conceptual framework. This paper
marks a rst attempt in doing so.
2.3. Strategy or architecture?
A central question one might ask is: do we need another term
or denition? Is not all of this part of supply chain strategy?
In our view it is only partly so. An architecture is dened as a
unifying or coherent form or structure in the English language,
and we apply exactly this notion of a purposeful structure to the
design of supply chains at rm level. We hereby consider two
objectives: to capture maximum value, with the least operational
inefciencies in providing the former.
The value chain architecture thus is essentially a function of the
operations strategy. The decisions of the location of manufacturing
operations, the sourcing patterns, and the conguration and
customization of the products are all questions that reside within
the realm of the wider business or operations strategy. The
differential benet of determining the value chain architecture
that can be seen here is the ability to systematically describe
the design of large network structures of value chain partners, and
set overall objectives for the whole network or specic processes.
In general, architecture describes the concept of creating an actual
or apparent plan of a complex system, where it basically descri-
bes a subjective mapping of the elements or components of
the system, which considers the relationships among these
components.
We hence propose the term architecture as an analogy to the
way in which the term product architecture has been used to
distinguish between modular and integral, as well as open and
closed product architectures (Ulrich, 1995), or process architec-
tures to determine the appropriate manufacturing process in
relation to volume and variety (Hayes and Wheelwright, 1979).
While both product and process architectures have been widely
discussed, the complexity inherent in value chains (multiple
levels, network structure, dynamic and static complexity) have
so far meant that value chain architectures have not been
classied in the same way. In many ways it is simply not possible
to talk about binary classications such as modular versus
integral value chain structures. Another factor is the fact that
the structure of a value chain determines its dynamic behavior, as
for example in the bullwhip effect shows, where removing an
echelon has strong benets for the dynamics behavior (Forrester,
1958; Lee et al., 1997; Metters, 1997).
The purpose dening a value chain architecture is to provide a
common language and structure for this mapping process by
proposing ways in which to classify them. Such a denition is
needed for strategic planning and alignment of the elements, and
thus should not only be of academic interest, but also have
important managerial implications.
It is implicitly known that the alignment of architectures is a
necessary, but not sufcient condition for success. We only make
this explicit in product-process (Hayes and Wheelwright, 1979),
and product-value chain (for example modularity). The 3D model
M. Holweg, P. Helo / Int. J. Production Economics 147 (2014) 230238 231
makes this more explicit; however, there is a lack of a concise
denition of value-chain architecture.
This is important when considering rms and their success in
supply chain management: Dell, Zara, Toyota all have engineered
supply chains based on strategic choice. The key justication for
dening value chain architectures is the need to acknowledge
strategic decisions that connect the structure and performance of
the value chains. Strategic choices start from requirements, such as
a competitive lead-time or cost-efcient delivery. These require-
ments are then implemented by modifying the value-chain struc-
ture. Implementing a build-to-order strategy, quantity exibility
contracts, early-supplier involvement or hub-and-spoke distribu-
tion logistics are examples of such actions. The actions change the
performance and these results can be compared to original
requirements.
In this paper we thus dene the value chain architecture as a
conscious design of the network structure consisting of suppliers,
manufacturers, distributors and customers in order to maximum
the value creation for the focal rm. This denition takes into
account the material ow aspect such as location issues and
transport decisions, information ow and control part as well as
the dynamic nature of the chain. In this respect it is different from
previous concepts such as strategic network design, which only
covers long-term strategic issues such as sourcing and outsour-
cing, and supply chain management in general, which often has
the connotation of being limited to the operational execution only.
The management literature implicitly already classies value chain
architectures by discussing specic aspects in isolation, such as order
fulllment and product customization strategies (Gilmore and Pine,
1997; Pil and Holweg, 2004), sourcing congurations and supplier
relations (Dyer, 1998; Hines, 1997), global sourcing and outsourcing
(Handeld, 1994; Monczka and Trent, 1991), and the like. Furthermore,
as outlined above, the need to align product, process and value chain
layout has been proposed. Thus the question arises as to whether a
more comprehensive classication would contribute to either the
academic debate or industrial practice.
The contributions to both areas can be made by providing a
more rigid denition than available at present, as it would allow
for a more focused interpretation of the root causes for the success
or failure of certain value chain strategies, and with respect to
industrial practice, provide a much stronger guideline as how to
achieve this rather elusive three-dimensional alignment. Very
basic yet strategically important questions such as why no one has
yet managed to replicate either Dell's or Zara's value chain model,
are currently not being addressed to any satisfactory detail. Also,
the advise that practitioner's can derive from the value chain
research to date often is very detailed (e.g. with regards to
establishing long-term collaborative relationships), and lacks the
high-level overview that should guide any company's value chain
strategy.
2.4. The 3D alignment model
In the context of architectures in management it is interesting
to note that value chains architectures are far less well dened as
either product or process architectures. Still, a recurring model is
the so-called 3D model, which argues that all three architectures
need to be aligned for maximum competitiveness of the rm.
Lamming et al. (2000) provide an initial impetus towards linking
value chain architectures and product architecture by developing a
classication of supply networks based on Fisher's (1997) distinc-
tion of functional versus innovative products. A more explicit and
recent link is the discussion of the so-called 3D model, which
argues that the value chain, product and process dimensions need
to be aligned for the organization to work at an optimal level (Fine,
2000a; Fine et al., 2005), see Fig. 1.
The model argues that the nexus of competitiveness lies at
the point of alignment value chain, product and process dimen-
sions, and that there are multiple workable strategies within the
3D space in terms of process architecture, technology architecture
and business systems / value chain architecture. The operational
and nancial performance of the value chain is depending on all of
these internal parameters. We will return to this point later.
2.5. Summary
To date, the concept of value chain architecture has been used
in a limited context of structural decision making in the logistics
and distribution subsystems (Gow et al., 2002; Walker, 2005), and
in conjunction with product and process architectures (Fine,
2000b; Fixson, 2005b). And while value chain architectures may
not have been formally described, there nonetheless is an existing
typology that is often used to describe it. Some key decisions
related with the value chain architecture include the location
decision, i.e. whether factories are classied into regional factories
supplying local markets and those feeder factories supplying key
components for a large geographical area. This decision is con-
nected to product structurehow product is decomposed into
parts, as for example the well-documented HewlettPackard InkJet
printer design case illustrates, where a separation of the electrical
transformer enabled use of high-volume feeder factory for the
printer part (Feitzinger and Lee, 1997). Furthermore, the transpor-
tation related decisions, such as applying a hub-and-spoke model
versus point-to-point connections can lead to different perfor-
mances because of structural changes. Also the systems applying
merge-in-transit type of logistics designs can be perceived as
structural changes in network. Some sourcing models have a
structural aspect, too. For example the purchasing decision to
use policy of single supplier versus using multiple suppliers has a
reliability aspect in addition to costs. However, in our review of the
respective literatures we found that these terms are isolated
descriptors only and do not match the need for a full description.
For this reason we will propose a ve-factor model based on the
sourcing strategy, the product and manufacturing strategy, the
distribution and customer interface, the customization and order
fulllment strategy, and the buffering mechanism used.
The material ow part of the proposed classication includes
sourcing, product type and customer aspects by varying local and
global aspects. The key attributes are local and global which are
perceived from the factory point of view. For example, local
sourcing stands for suppliers located nearby manufacturing. An
example of this could be the Zara clothes manufacturing in Spain,
or Dell computers partnership with SCI Solectron. On the other
Fig. 1. 3D model of aligning architectures within the rm.
M. Holweg, P. Helo / Int. J. Production Economics 147 (2014) 230238 232
hand global suppliers are used in electronics business, where
components are generic or there are only few manufacturers of
key components available. The product design/manufacturing part
describes how products are tailored to regional markets from the
factory perspective. For example many electrical appliances need
to be designed for various voltages to comply with local safety
regulations. Global products are in many cases highly standardized
or very exible generic products that can be used in multiple
regions. The downstream or distribution aspect of the chain
describes the location of customers from the factory. Local man-
ufacturing may lead to improved time-to-customer whereas global
export type of supply from a limited number of factories may
increase the volume and improve the cost effectiveness.
Yet the material ow aspect does not give a complete picture of
the network architecture. The information ow part is equally
important since it is dening the focal point of carrying inven-
tories. The order fulllment strategy and point of customization
are related with the operational policy, whether the chain is
operated by make-to-stock, assembly-to-order, make-to-order or
fully customized by engineering-to-order. The point of customiza-
tion and product range is dened by this important product
decision. Make-to-stock type of operations where the inventory
is located closer to customer may present problems in case of high
variation or drastic demand changes. According to Holweg and Pil
(2001), this issue might be the key reason behind the problems in
the automotive industry. The other part of control is the predo-
minant buffering mechanism. In addition to stock, a company may
hedge against supply unreliability and market unpredictability by
applying time buffers or slack capacity. The exibility to adjust
operations to cope in uncertainty of volume, product mix changes
and new product ramp-ups help in maintaining protability also
in changing environments.
Another obvious approach to describe a value chain architec-
ture would be to employ well-established value stream mapping
tools (Gardner and Cooper, 2003; Hines and Rich, 1997; Rother and
Shook, 1999). This approach clearly is capable of identifying very
important aspects of a value chain architecture (where value is
created, where it is destroyed), however, these approaches are
generally concerned with operational improvement, rather than
the strategic design of a value chain, and hence will not be
considered in this paper.
3. Method
3.1. Research design
An exploratory case study approach was used to capture the
complex contextual issues of value chain architecture and to demon-
strate a proposed framework as a longitude descriptive case study.
Case-based research is widely used in the eld of operations
management studies related to theory building (Eisenhardt, 1989;
Flynn et al., 1990; Meredith, 1998; Voss et al., 2002). For the purpose
of this paper we combine qualitative data based on interviews with
key stakeholders of the SCM Department in the focal case rm, with
supporting quantitative secondary data based on internal rm data
on supply network structures and performance. We report on a
longitudinal case study which allows us to comment on the evolu-
tion of the value chain architecture at ABB from 2004 to 2009.
3.2. Case selection
In order to capture value chain architectural decisions in a large
scale company and its network, a global manufacturer of energy
appliances was selected, the ABB Company. ABB presents an interest-
ing context of a global manufacturing company that is built
non-organically from mergers and systematic acquisitions. As such,
the value chain architecture did not grow out of a coherent set of
decisions over time, but grew with the acquisitions. This context
provides for a rich background for our research question. The case of
ABB is also well suited to show the connection between strategic
decision making and formulation process of value chain architecture,
as we have worked with the rm from 2004 to 2009.
ABB is a global company supplying a wide range of products in
the power and automation technologies sector. Power products are
used to distribute electricity with transformers, switchgear, circuit
breakers, cables and associated equipment. These components are
used in building large systems consisting of power grids, substations,
and generation. The automation side of the company is producing
components such as electric motors, frequency converters, power
electronics and other low voltage products. In addition to these, ABB
supplies specic industries, such as oil and gas, marine, pulp and
paper, in the eld of automation solutions. ABB can be considered as
a large multi-national company with revenues of US$ 31billion
(2011) and more than 130,000 employees. The company operates
in more than 100 countries and has more than 150 factories in ve
continents. The global presence of the company has resulted from
several mergers and frequent structural changes. Initially ABB was
formed at merger of Swedish ASEA and Swiss BBC Brown Boveri
companies in 1988. Both the companies hold 50% of the shares.
At that time ABB employed 170,000 employees.
3.3. Data collection
The data collection included several types of interaction: semi-
structured interviews, data collection on-site at the global fac-
tories, and participant observation in development projects within
the ABB Corporate Research Center between a six-year period
between 2004 and 2009. This work includes interviews with
12 factory managers, 3 development managers, and 4 internal
consultants. The interviewees have been selected because of their
direct involvement in structural changes of ABB's network in terms
of designing and updating the feasible network structure related
to distribution, supply, inventory location and buffering methods.
3.4. Validity and limitations
Validity of exploratory case study results depends on construct
validity, face validity (external business executive review), internal
validity (number of informants within the company), external
validity (replication of company interviews), and reliability (pro-
tocols and triangulation) (Eisenhardt 1989). The internal validity
has been taken into account by interviewing both factory man-
agers as well external consultants working within ABB at the time,
providing a non-internal point of view to guard against biased
reporting. However, it must be acknowledged that the perspective
may still be biased towards an operations development consultant
point of view not taking into account business unit specic issues
such as competition in products and technology. Supporting
descriptive quantitative data has been collected to demonstrate
some behavior in development. Overall we argue that the limita-
tions our research design incurs are those any case study would
have. The ndings below should be considered in this context.
4. Case ndings
4.1. Value chain design phases
During the past decades ABB has gone through several phases
in terms of value chain structure over the six year period of this
case study. This does allow us to study and compare multiple
M. Holweg, P. Helo / Int. J. Production Economics 147 (2014) 230238 233
decision making instances over time: which criteria have been
used, how these criteria have been weighted in the decision, and
what data is being consulted. We have observed considerable
change in the way that ABB has approached value chain architec-
tural decisions, and will outline these chronologically.
Historically ABB has made about 15 major acquisitions mainly
in Europe and then continuing aggressively with 40 more compa-
nies in 1989, including the purchase of Westinghouse Electric
Corporation power transmission and distribution operations in
the US. In the early 1990's the company faced problems in
Northern-Europe because of economic recession. The focus of
expansion moved to building new companies in Eastern-Europe
and restructuring the overall corporate structure. The rate of
acquisition slowed down signicantly.
In the mid 1990s, ABB started to build new networks in
emerging markets of Asia. The operations in western world
Europe and USconcentrated on service and retrot businesses.
The corporate objective was to increase prots and consolidate for
new volume. These operations included new joint-ventures.
Towards the late 1990's the Asian markets started to grow as
well as business areas in the oil and gas industries. At the same
time ABB started a major cost cut in the Western operations. More
than 12,000 jobs were cut and investments were focused on Asia.
At the beginning of new millennium ABB continued with acquisi-
tions. A 5050 joint venture with French Alstom Group was
formed to create worlds largest power generation company. At
this stage ABB discontinued its nuclear power business and sold
standard copper cable manufacturing. In the 2000s ABB was
focusing on growing markets of Asia: new factories are built in
China and India, but also in South-America. Local presence of
operations is required to ensure global growth.
The products, market areas, and supply chains have changed
very much during the formation of ABB. The design process for
supply chain architecture has varied focus from 1990's cost cutting
and inventory reduction to 2000s time-based objectives. The value
chain architecture has always been close to the strategy process
and its objectives. From a historical perspective the development
of the architecture can be described in four stages as described in
Table 1 below.
4.2. The case of the electrical machine division
In order to capture what is happening on more detailed level
we will focus on one division of ABB that we will refer to as
Electrical Machines. This business area consisting of several
factories is producing systems for electricity transmission. The
annual revenue of the business area is approximately 1 billion
USD. The products are classied in three categories: low voltage,
medium voltage and high voltage products. Over the years, the
structure of this business area has changed from localized pro-
ducts and local manufacturing towards truly global supply chain
networks. As seen in upper part of Fig. 2, initially, the manufactur-
ing units have been sharing the same brand names and supplying
the local customers with their own products. This architecture
worked well in a situation where a new market-player aimed to
reach new customers and distribution partners for products.
However, many operations have required the same work to be
done for each local product and the cost-efciency suffered.
Products were stored in many cases as nished goods inventory
and the distribution side cannot use the risk pooling advantage.
The main reasons for changing network structures were market
conditions. In the early stages, the market presence was important
because the electrical utility market was very much national and
in hands of monopolistic companies. When the legislation chan-
ged during the early 1990s in Europe, a new type of organization
model was suited better to the situation. The big change in
electrical machines took place in the late 1990s when the focused
factory concept drove network design. The objective was to
introduce a common product portfolio, reduce production costs
and apply common processes. The roadmap for this was
sequenced accordingly. A common product portfolio is a prerequi-
site for all improvements. This stage needs key decisions from
marketing and product design. Once common products are intro-
duced, the manufacturing units can achieve the envisaged cost
reductions. Common process organization models follow these
and offer a similar type of interface for all customers globally. Each
part of this transition period took about two years and the whole
transition took four years.
The consulting arm of the ABB Corporate Research Center (part
of the Operations Development Group) received a request to
suggest a new and improved architecture and justify its new value
chain architecture with customer and nancial benets. The
suggested new structure included several changes in product
design to support global products and use of common focused
suppliers. The new suggested structure as shown in lower part of
Fig. 2. Here the customers, which are regional sales companies and
ABB project units are on the right hand side of the gure. These
companies are purchasing products from regional factories, which
are producing in most of the cases the whole range of products for
the customers. The regional factories are assembling the products
from components provided by feeder factories, which supply
globally. The manufacturing of low variety key components is
focused on key manufacturers within the ABB. From a value
perspective, the changes aim to centralized global product respon-
sibilities and improved efciency by using global sourcing.
In the revised architecture, from the inventory point of view,
most of the inventory is stored at the components level. The
regional factories are mostly assembly plants operating based on
customer orders. The feeder factories are operating based on
make-to-order for larger project orders and assembly-to-order
for the other demand. The key components in the network
upstream are made-to-stock due to a smaller number of variations.
Fig. 2 illustrates the created structure. The new improved structure
resulted lower inventory in value adding products and risk pooling
effect for standardized key components. The overall effect on prot
and costs was as expected. However, the structural changes
Table 1
The four phases of the value chain architecture at ABB.
Phase Objectives Actions
The beginning 19891990. Forming a giant multi-national company in power and
automation businesses.Access on local markets
The merger.Acquisitions to get access on local markets.
Matrix organization.
Restructuring. 19911996 Simplify the product/process structure. Focused factories.Stop overlapping products.
Dispersed worlds 19971999 Cost cutting in EuropeAdding presence
on emerging markets.
Centralized distribution warehouses.New factories in
East-Europe and Asia.
Global supply chains. 2000present Simplication of network structure and
product offerings for different markets.
Global product responsibilities for factories.Focus on
lead-time.
M. Holweg, P. Helo / Int. J. Production Economics 147 (2014) 230238 234
affected some other performance parameters in the supply net-
work as well: rstly, the risk managing aspect was changed due to
some key components now being made in a single factory.
Secondly, in this type of network structure, the capacity uctua-
tion changes the bottleneck location. In some cases, the regional
factories may end up competing from the same time-slots of com-
ponent suppliers. Additionally, lead-time improvements require
high reliability from the suppliers due to make-to-order principles.
In order to design the new supply network architecture and to
justify the nancial investment, ABB Corporate Research Center
built a simulation model of each alternative. The customers,
distribution warehouses, factories and suppliers were modeled
by using a rapid modeling tool, and the internal consulting team
together with business managers developed structures which
could be evaluated against the current network performance and
against several future alternatives. As suggested by one of the lead
consultants the process of creating the next stage of network is not
about nding an optimized network structure based on a single
criterion, but a feasible improved model, which can be phased into
smaller development steps. Simulations can suggest good input for
decision-making, but the actions need to be evaluated case by case.
Another aspect of the VCA process was pointed out by a factory
manager the business objectives may change and the new proposed
structure needs to be robust for changes.
The experiences from ABB network architects suggest that this
transition period may be connected to the ability to change over
product generations. This factor describes the clockspeed for
each business area (Fine, 2000a). In case of long life-cycle
products, such as heavy machinery, this cycle could take much
more time than in faster-paced electronics and related industries
where product changes and updates are expected more frequently.
Also product complexity and system wide interactions to other
products might hinder the speed of transition. In order to describe
the impact of the architecture change at Electrical Machines, we
summarize the product and manufacturing data series from
Table 2 below which shows one product line and its developments
during a period of ve years.
At the same time the volume of this family went up and the
productivity steadily increased. The concept of the transition
seems to follow a sand-cone model type of pattern. The rst
priority is to x product line, then introducing platforms and
reduce costs, and nally it will be followed by process improve-
ments. Each of these elds are well known in industrial engineer-
ing literature, but the suggested sequential connection has not
been proven. The last stagene-tuning the common processes
was referred in one interview as copypaste manufacturing
footprint, which describes the process interestingly in a global
multi-factory scope.
4.3. Synthesis
The description of our case rm ABB highlights many impor-
tant aspects of decision-making related to value chain architec-
tures, and their respective performance. First and foremost we
Fig. 2. Improved supply chain architecture with local market presence and concentrated focused factories.
Table 2
Product development projects in the Electrical machines business unit.
Year Product families Parts Product lines Comment
1 18 80,000 47 Local markets
2 10 45,000 22 Platform development
3 1 5000 12 Product design
4 1 5000 12 Sourcing global
5 1 5000 9 Global markets
M. Holweg, P. Helo / Int. J. Production Economics 147 (2014) 230238 235
note that the decisions taken have considered predominantly
operational issues, such as manufacturing and sourcing footprints,
control principles within the supply chain, as well as product
variety related matters. These decisions fall largely into the
fundamental choices in strategy: make or buy (or outsourcing),
the footprint decisions (where to manufacture), the sourcing
footprint, the way products are customized, and how risk is
managed. We combine these ve factors into a 5-point model of
a value chain architecture, highlighted in the case of ABB's three
stages, as shown in Table 3.
We can see how this global enterprise has shaped its value
chain architecture. The three stages of electrical machines business
area may be described in three major stages. The fully local
business, with large geographical presence, has been transformed
to locally present regional factories, while the cost effectiveness is
maintained at the focused key component factories. According to
interviews the roadmap seems to lead towards truly global
factories, where modularized products are supporting postpone-
ment of variety.
More generally, from the ABB case we can identify ve domains
of a value chain architecture:
1. Value provisionseparation of product centric feeder factories
and regional assembly plants changed the value creation
location and specializes the roles with the chain. Centralization
of suppliers towards global vendors affected the value position-
ing along the value chain.
2. Operations footprint is driven by market focus areas com-
bined with cost-efciency, lead-time and other operational
performance metrics.
3. Risk management aspects relate to local/global sourcing in
terms of having reliable capacity and capability to supply
certain components within the ABB network. Global supply
increases the risk but improves cost efciency under stable
conditions.
4. Order fulllment strategy and customizationchanging the
location of order-penetration point affects the number of product
variants offered to customer as well as internal efciency. Change
Table 3
Three stages of the value chain architecture development at ABB.
Initial Revised Current
1. Value provision Strong local presence Cost efcient Towards global optimality
2. Operations footprint Local suppliers
Localized products for each country
Global key components
Regional products
Global key components
Global products
3. Risk management Local customers Local customers
Lower inventories.
Global product responsibilities
Faster lead-time
4. Order fulllment strategy and
point of customization
Make-to-stock Make-to-order in regional factories Automated engineer-to-order
5. Buffering mechanism Finished goods inventory Key-components Capacity buffering
Table 4
The ve determinants of a value chain architecture (VCA).
Factor Key decisions
1. Value provision What does the company want to focus on in terms of value creation?
The essential question here relates back to the core competence of the rm, which drives what it makes in-house, versus what is
outsources.
2. Operational Footprint Where does the company operate and source from?
Footprint decisions including manufacturing, sourcing, and distribution The aspects of global, regional or local operations may be
used in classication of distribution channels as well. In addition to manufacturing location issues the distribution channel
element adds possibilities to treat different customer groups in different ways. Some logistics models, such as merge-in-transit
and vendor-managed inventories, adds also structural parameters that allow reduction of inventory. From an architectural point
of view the key decisions are and number of sources for each component and the location of sourcing. In practice, the decisions
are made between single sourcing and multiple suppliers policy as well as between use of local and global suppliers.
3. Risk management What mechanisms does the rm use to limit exposure?
Risk management in a SCM context uses many of the standard approaches in risk management, such as diversication, pooling
and the like. Dual versus single sourcing may be one consideration, as is having multiple factories in key markets.
4. Order fulllment and product
customization
How does the rm respond to customer orders?
The point and type of conguration connects the product architecture with process structure. This decision drives the order
decoupling point and thus the focal inventory location within the network or as sometimes referred as pivot point. The
operations models ranging between pure make-to-stock and highly customizable engineer-to-order dene lead-time as well as
the product variety offered to the markets (Mather, 1988).
5. Buffering mechanism How does the rm deal with uncertainty?
Uncertainty is an omnipresent feature of modern business, a central question thus concerns the question what resources are
used as buffer: inventory, capacity, or time, or a combination of these.
M. Holweg, P. Helo / Int. J. Production Economics 147 (2014) 230238 236
of product design responsibilities and product design can improve
how postponement can be implemented.
5. Buffering mechanism, which can be changed by dening the
strategic location of safety stocks and improving the efciency
of delivery performance within the factories close to customers.
5. Conclusion
As we have shown in our longitudinal case of ABB, value chain
architectural decisions change over time. They adapt to external or
contextual changes in light with the evolving business strategy.
From the case we have derived ve dimensions of a value chain
architecture, shown in Table 4. It needs to be recognized that a
wide range of other variables could have been considered, yet we
argue that these variables stand out as the most important ones to
be considered. Also, there seems to not be any logical conict
between qualitative and quantitative descriptors, as neither one in
isolation provides a comprehensive description of the system, and
in fact both can be used in a very complimentary fashion. For
example, when discussing the risks of a sourcing strategy of a rm,
providing system redundancy and risk pooling measures can
provide the empirical evidence that underpins the qualitative
description.
Performance measures and metrics continue to be a crucial
part of supply chain management (Gunasekaran et al., 2001). The
proposed classication however does not state that one architec-
ture type outperforms any others. Instead it addresses one of the
most interesting questions: which architecture should be used in
which case? This alignment question is of crucial interest to both
academia and practice, and we propose the above model for
further testing and expansion, towards a search for clusters of
common practice across supply chains. In other words, we
propose for future research that there may be similarities within
certain industries or settings is likely to show similar features,
which in turn allows for the identication of best practices
congurations that can be directly translated into hands-on advice
to industry.
In conclusion, we have proposed a ve-point framework for
dening a value chain architecture at the rm levelwhich
merges the nancial value chain view with the operational
supply chain considerations. First and foremost this can serve
as a guideline in supply chain management research answering
the question "Which supply chain conguration is right for me?".
As the ABB case has shown, value chain architectures are evolving
during the time, as competitive priorities change. Hence the purely
operational or efciency drive in SCM is clearly an unnecessarily
limiting view. The systematic and strategic processes behind value
chain decisions need to combine both value creation and opera-
tional points of view, and in our view can only be described
through a combination of qualitative and quantitative metrics. We
have proposed a ve-point conceptual model that attempts to
bridge this very gap.
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