Value Chain Management The concept of value addition in supply chains

Value Addition/Creation Every organisation, whether profit making or not exists to create value Individuals/ businesses make judgments about value Value is the capacity of a good, work or service to meet a particular want Value created/ added on a particular product is targeted at the consumer in every supply chain

What is common among these items?

Value addition/ creation How do businesses know if their organisations are creating value? Business profits are a good measure of value addition/ creation Assumption: business organisations are assumed to have profit maximisation as the primary goal for existing

Value creation Maital (1994) in Lysons…… Profit is based on three (not two) pillars of business – cost, price and value Firms will earn profits and continue in operation provided they offer value at an acceptable price to the consumer and cost to itself

Value creation Profit Maital’s cost-price-value + profit model cost

Activity View your organisation through the lens of a cost-price-value value triangle. What value does your organisation deliver to its customers? Does the price offer consumers an attractive exchange value? Can the resource cost be justified?

Porter’s value chain The term value chain was used by Michael Porter (1985) Organisations are more than the random compilation of resources but an arrangement of the resources into systems and activities that result in products which customers are willing to pay for Management of these activities and their linkages give an organisation competitive advantage

Basic model of Porter’s value chain Support activities Primary activities Firm infrastructure (General management, IT systems) Human Resource (Recruiting, training development) Technology development (R&D, product and process improvement Procurement (purchasing of raw materials, machines, suppliers profit margin Inbound logistics operations Out bound logistics Marketing & sales Service

Primary activities Distinguishes between primary and support activities Primary activities are directly concerned with the creation or delivery of the product or service Can be grouped into five main areas: Inbound logistics Operations Outbound logistics Marketing and sales service

Support activities Each of the primary activities is linked to support activities which help to improve their effectiveness or efficiency The four support activities are: Procurement technology development (including R&D) Human resource management Infrastructure ( systems for planning, finance, quality, information management etc)

Margin Implies that organizations realize profits margins that depend on their ability to manage linkages between all activities in a value chain An organisation is able to deliver a product or service for which the customer is willing to pay more than the sum of the costs of all activities Linkages: flows of information, goods and services, as well as systems and processes for adjusting activities

Hines value chain Important features: Critique of Porter’s value chain Points to the opposite of Porter’s model emphasizing differences in objectives and processes Demand a function of collective customer-defined price levels Emphasis on collaboration in the value chain

Hines’ value chain model Raw materials Supplier chain Inbound logistics operations Outbound logistics Customer chain consumer Jointly define value at each stage Marketing team Materials team Engineering team Quality team R&D team Design team Defined product value and volume primary activity Activity-based costing (ABC) HRM/training/education Total quality management (TQM) secondary activity Electronic Data Interchange (EDI) Profit

Hines’ Value chain Primary activities are teams (marketing, materials, engineering, quality, R&D and design teams) Secondary activities are ABC, HRM/training/ education, TQM, EDI, profit The importance of these secondary activities is as follows: ABC: enables the exact cost of products and benefits of activities such as kaizen, value analysis to be ascertained

Hines’ Value chain HRM, especially employee training and education facilitates effectiveness, efficiency and proactive thinking TQM provides a culture for all network members EDI together with intranets, extranets and so on facilitate quick response to customer’s requirements and draw network members together Profit should be roughly equalized between network members and should result from cost reductions and acceptable price for customers

Contrast of Porter and Hines’ models Profitability Push system Series of chains linking firms pointing from raw materials source to customer Inbound logistics, operations, outbound logistics, marketing & sales, service Firm structure, HRM, technology development, procurement Consumer satisfaction Pull system One large flow pointing from consumer to raw material source Teams concerned with marketing, materials, engineering quality, R&D and design Activity based costing, HRM/ training/ education, TQM, EDI, profit

Day’s value chain Day (1990): value chain requires a comparison of all the skills and resources the firm uses to perform each activity Useful for comparing relative cost position Based on Porter’s framework but differs in that it highlights marketing as a general management function that ensures an external orientation to all value creating activities

Day’s Marketing driven value chain Human Resource Technology Development Control systems Marketing Integrative functions Distribution communicate install sourcing Design Primary value activities and service Inbound logistics Physical logistics persuade

The Development Chain Set of activities and processes associated with new product introduction Includes: new product design phase; associated capabilities and internal knowledge; Sourcing decisions (make or buy, supplier selection/ early supplier involvement; strategic partnerships); Production plans The development and supply chains intersect at the production point Decisions made in the development chain will have an impact in the supply chain and vice versa

Hewlett Packard (HP) Inkjet printer introduction… Decisions about product architecture were made by taking into account not only labour and material cost but total supply chain cost throughout the PLC. Recently looking at what design activities to outsource and corresponding organisational structure by considering both design and supply chain Simchi-Levi, Kaminsky & Simchi-Levi (2009)

The Enterprise Development and Supply Chain Product architecture Make/ buy Early supplier development Plan / design Development chain Source Strategic partnerships Supplier selection Supply contracts Supply Produce distribute Sell Supply chain

Recap…. Businesses exist to create value, and value created is often seen by the profits that a supply chain makes The concept of value creation is discussed by Porter, Hines and Day. The development chain shows that product chain decisions do have an effect on supply chains and vice versa….