He adds a new dimension to supply chain management. For Stig Arne Mattsson, the 45-year-old CEO of the Swedish management consultancy company, Intentia International, the supply chain is not just a physical conduit of material- flows, but also a sensitive stream of competitive intelligence from the customer. As the production management expert points out, the supply chain is no longer only about cash and components; it is also about information and innovation. In India recently to champion his company's Enterprise Resource Planner, Mattsson spoke to BT's Nanda Majumdar about the concept of the demand chain, and how it creates an agile organisation that responds faster to the customer. Excerpts from an exclusive interview:

Mr Mattsson, in recent times, although so much brainpower and chip-power has been applied to manage the supply chain globally, the buyer-supplier relationship hasn't improved significantly. Is it because companies still don't perceive their suppliers as strategic partners?

Yes, a lot of the problems are of a strategic nature. It is not difficult to see why. There has been an expanded use of the supply chain in recent years. An increasing number of companies are focusing on material-flows: from the vendor to the end-customer. And the supplier now accounts for a large amount of value-addition. In fact, surveys of European industry estimate that the value added by a supplier will increase to 85 per cent by 2005. Which means that material-flows from suppliers will increase substantially. However, they are not all that easy to manage. After all, it is not enough to control flows within your own company; you have to involve your suppliers and your customers in your processes by opening up your systems. Such open systems reduce transaction costs.

A lot of companies employ pricing as a strategic tool even today. They could, instead, improve their competitiveness by decreasing lead-times, or by increasing service-quality. And this can be done more effectively if companies turn their suppliers into strategic partners. Mismanagement stems from the manner in which companies perceive customer-supplier relationships. You could categorise their relationships even today as somewhat adversarial.

I have, often, heard companies complain that if they did not have suppliers, life would be nice. That isn't the real world. Patricia Moody, the American management guru, once said: ''If you want to be a world-class company, you must have world-class suppliers. And you have to be a world-class customer yourself.'' To be that, you must co-operate and strategise with your suppliers. You have to find out what they want so that they can support you.

A lot of big companies solve their problems by transferring them upstream. For instance, companies trying to reduce their inventories to implement a Just-In-Time system end up increasing the inputs at their suppliers' warehouses. Such an approach simply transfers the problem; it does not solve it. If you transfer costs to your suppliers, sooner or later, they will be transferred back to you. After all, they can only survive by increasing their prices. Ultimately, there is only one critical player in the supply chain: the end-consumer. It is she who puts money into the system, and makes value flow.

Is that why you insist on differentiating the demand chain from the supply process in your work?

When you talk about supply-chain management, it indicates that suppliers are more important than customers. In reality, it is the customer who is king. So, you ought to talk about a demand chain, which spans your company and the end-customer-and includes your supply chain too. The demand chain moves material-flows downstream while the supply chain moves them upstream.

Traditionally, the customer has been viewed as an essential link in the supply chain, who must be taken into account when planning and executing operations. The new marketplace requires each company to regard the customer as a trading partner, and an important source of information. Simply put, the supply chain isn't entirely about materials and money; it is also about information, learning, and service-all of which companies must leverage.

It is also important to anticipate the customer's customer. Understanding the final customer will help a company foresee the changes in the marketplace, avoid delays, and reduce lead-times. As the role of the supplier becomes more significant, the issue of how the supply chain affects the demand chain becomes more crucial. The degree of a company's effectiveness in delivering and selling products is determined by the efficiency of the supply chain, which reflects the buyer's co-operation with the supplier.

In fact, a demand chain emphasis could lend a unique competitive advantage to a strategy even though it will manifest itself indirectly. A more efficient demand chain creates a more value-added supply chain. A successful supply chain strategy is one that synchronises the demand and supply chains through the greater exchange of information. A demand chain-supply chain focus also enables the better integration of companies into the system.

Mr Mattsson, isn't it also an issue that the intermediaries in the supply chain rarely look beyond their immediate customers?

To begin with, you must reduce the number of vendors. You can do that by using more systems suppliers-companies that supply complete assemblies instead of parts-instead of component vendors. That will help you integrate companies along the supply chain; it is a pre-requisite for creating partnerships between companies. Even mid-size companies have numerous suppliers, and you cannot integrate your activities and systems with several hundred suppliers. That is why systems suppliers have become so important in a world where cohabitation is becoming critical.

Isn't there an intrinsic conflict between cutting lead-times and fostering co-operation?

To avoid that, companies must stop turning price into a negotiating-tool. If price is the only differentiator, you can never establish a partnership. You will be compelled to use multiple sourcing-options. We are seeing the declining importance of price as a differentiator, and the advent of other differentiators-such as short lead-times, superior customer-service, and competitive intelligence. Most companies don't want to compete on price any more since it affects both profitability and relationships.

Instead, by competing on logistics, lead-times, and customer service, organisations can command higher prices than their competitors. It is important to ask customers what they really want. It isn't enough to satisfy customers; instead, you must strive to create customer delight. Only customer delight creates loyalty. Market research has proved that while there is no definitive relationship between customer satisfaction and profitability, there is one between customer loyalty and profitability.

One company that has leveraged this well is the Swedish furniture-maker, Ikea, which has transformed its other businesses of spares and car-accessories. Ikea's customer is tracked the moment she enters the shop. The moment she makes a purchase-decision and pays the cashier, all the details of the purchase, as well as other customer information, are transferred through Electronic Data Interchange (edi) to the supplier. So, demand requirements are captured instantaneously. The impact of efficient demand chain management has been substantial at Ikea.

True. But the mainstay of demand chain management is a total cost perspective. Yet, companies continue to employ the price per piece as a measure of profitability...

You are absolutely right. The objective of logistics has changed: from reducing the capital tied up in inventory to increasing revenue. The more logistics deals with increasing revenues, the more supply-chain management becomes industry-specific. Of course, lead-time management, which is what appropriate supply-chain management is all about, applies to every industry. Companies that have shorter lead-times enjoy a competitive advantage even when their prices are 50 per cent higher.

Global corporations are, gradually, realising that a profitable operation does not just rely on the cost per piece; total cost is of critical importance. If the vendor has short lead-times, inventories can be reduced, and products can be introduced more rapidly. Even if a supplier offers inputs at a low price, the total cost of using that supplier might not be low. Obviously, a whole heap of factors-such as lead-times, delivery-schedules, and product-quality-affects costs.

Companies have been focusing too much on the price per piece. At the heart of the problem is the measurement system that the purchase manager adopts. If you go by price-variance-the difference between the target price and the current price-the purchase manager will have to buy large quantities without caring about lead-times. There is no doubt that corporate measurement systems have forced purchase managers to buy on a price-per-piece basis instead of using a total cost perspective.

Would a dissociation between the commercial and the operational aspects of sourcing strengthen the supply chain?

Within the traditional purchase function, you can distinguish between commercial control (where you negotiate prices) and material control (where you manage the supply chain). As far as the former is concerned, I certainly believe in centralisation. As for the latter, I am all for decentralisation. The only person who knows what is needed, and when it is needed is the man on the shopfloor.

The Swedish consumer goods manufacturer, Electrolux, separates the 2 functions remarkably well. Its purchase managers are constantly trained to improve their negotiation- and procurement-skills. Orders are generated right on the shopfloor, making material-planning a quick, efficient, and accurate function.

If you differentiate between the commercial and operating aspects of procurement, you take a short-cut. There are two ways of managing the operational aspects. One, allowing the customer to enter orders directly into the supply system. Two, allowing the supplier to be responsible for the customer's inventory. Which is what new concepts, like Quick Response and Efficient Consumer Response, posit. Take Quick Response, which was adopted by the American apparel industry when it couldn't cope with the price-competition from low-cost Asian manufacturers. By shortening and streamlining processes, the industry was able to cut its lead-times. If you have lower lead-times than your competitors, you can command higher prices although you may still not be cost-competitive.

A Finnish client of ours, a major soft paper-manufacturer, used to distribute its products through a number of wholesalers, who were totally responsible for inventory management. These wholesalers had warehouses where they monitored the stocks-in-hand daily, forecast weekly, and managed inventories through their own systems. They transmitted reams of information to the paper-manufacturer through edi. It only made the company more agile while responding to sudden changes in the marketplace.

You seem to argue that agility is the driving force of demand-chain management. In fact, changing customer priorities demand more flexibility...

Agility is not merely a performance issue, but a key competitive strategy as well. Given the unpredictability of our business environment, the pressure to respond instantaneously to change is immense. Companies must create capabilities to master an uncertain environment so as to offer customers the products they value. Only by doing so can corporations become agile.

Agility is, actually, an extension of flexibility. Flexibility includes 4 dimensions: volume, product, mix, and delivery. In each of these, flexibility is the ability to rapidly respond and adapt to change. But agility goes beyond flexibility; it implies being flexible with low costs, high quality, superior service, and greater dependability. In effect, agility merges the 4 competencies of flexibility, cost, quality, and dependability. I believe that it will be the foundation for tomorrow's world-class enterprise.

To be agile, your company needs an efficient enabler, like an Enterprise Resources Planning (ERP) system. Typically, the response-time is the time it takes to close the gap between the occurrence of an event to the discovery of a solution. The shorter the reaction-time, the better the pre-requisites for making changes without compromising on quality or cost. Your system should also be capable of immediately identifying and tackling-or communicating to a planner responsible for taking action-imbalances in the flow of materials from the supplier to the customer. Early-warning features are the key facets of a good ERP system.

While forecasting is not a complete solution for becoming more flexible, it improves your ability to react quickly at a low cost. With the right forecasting tools, you can plan in advance, and be prepared for demand- and supply-fluctuations. Again, the ability to quickly predict future changes in demand can also be improved by accessing point-of-sales data from your customers and your customers' customers. You should also be able to access, process, and convert data into efficient decision-support information. Simulations and what-if analyses will enhance your ability to make swift and correct decisions.

Thank you, Mr Mattsson.

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