VALUE CHAINS

Value Chains The underlying purpose of every organization is to provide value to its customer and stakeholders. Value is the perception of the benefits associated with a good, service, or bundle of goods and services (i.e., the customer benefit package) in relation to what buyers are willing to pay for them.

One of the simplest functional forms of value is: Value = Perceived benefits/Price (cost) to the customer If the value ratio is high, the good or service is perceived favorably by customers, and the organization providing it is more likely to be successful. To increase value, an organization must: (a) increase perceived benefits while holding price or cost constant, (b) increase perceived benefits while reducing price or cost, or (c) decrease price or cost while holding perceived benefits constant.

Value Chains A value chain is a network of facilities and processes that describes the flow of goods, services, information, and financial transactions from suppliers through the facilities and processes that create goods and services and deliver them to customer.

Origin of the Value Chain The term ‘Value Chain’ was used by Michael Porter in his book "Competitive Advantage: Creating and Sustaining superior Performance" (1985). The value chain analysis describes the activities the organization performs and links them to the organizations competitive position. The term ‘Value Chain’ was used by Michael Porter in his book "Competitive Advantage: Creating and Sustaining superior Performance" (1985). The value chain analysis describes the activities the organization performs and links them to the organizations competitive position. Value chain analysis describes the activities within and around an organization, and relates them to an analysis of the competitive strength of the organization.

A Service View of a Business Nestle once defined its business from a physical good viewpoint as "selling coffee machines." Using service management thinking, they redefined their business from a service perspective where the coffee machine is more of a peripheral good. They decided to lease coffee machines and provide daily replenishment of the coffee and maintenance of the machine for a contracted service fee. This "primary leasing service" was offered to organizations that sold more than 50 cups of coffee per day.

A Service View of a Business The results greatly increased Nestle coffee sales, new revenue opportunities, and much stronger profits. Nestlé's service vision of their business required a completely new service and logistical value chain capability.

Value and Supply Chains A supply chain is the portion of the value chain that focuses primarily on the physical movement of goods and materials, and supporting flows of information and financial transactions through the supply, production, and distribution processes. Many organizations use the terms “value chain” and “supply chain” interchangeably; however, we differentiate these two terms here.

Value and Supply Chains A value chain is broader in scope than a supply chain, and encompasses all pre- and post- production services to create and deliver the entire customer benefit package. A value chain views an organization from the customer's perspective—the integration of goods and services to create value—while a supply chain is more internally-focused on the creation of physical goods.

Procter & Gamble’s Supply Chain Structure Chapter 2 Value Chains Procter & Gamble’s Supply Chain Structure A model of a supply chain developed by Procter & Gamble—P&G’s “Ultimate Supply System. The supply chain focus is on understanding the impact of tightly coupling supply chain partners to integrate information, physical material, product flow, and financial activities to increase sales, reduce costs, increase cash flow, and provide the right product at the right time at the right price to customers.

Procter & Gamble’s Conceptual Model of a Supply Chain for Paper Products Exhibit 2.5