Value Chain Management Avoiding Waste (muda)

Overview How to achieve superior quality, efficiency and responsiveness to customers by managing your value chain properly How to implement Total Quality Management (TQM)

Overview Why innovation and effective product development are crucial components of competitive advantage How to avoid smothering innovation with Value Chain Management (VCM) and Total Quality Management (TQM) Discipline versus creativity

Premium Wine over the Internet One 12-bottle Case Package: 3 pounds (5%) Wine: 22 pounds (39%) Bottles: 33 pounds (56%) Total: 58 pounds

Wine Example FedEx ground: $36 About 62 cents per pound or… Box: $1.80 Glass: $20.00

Waste $20 to make thiss marketing statement: “I’m heavy so I must be good.”

Beaujolais Plastique Boisset Family Estates in France using plastic bottles for its Beaujolais (BusinessWeek 9/29/08, p. 19).

Value Chain Coordinated activities that transform four inputs (manpower, money, material, information) into goods or services customers want to buy Design/engineering Purchasing Production Materials management Information systems Marketing, sales and service

Value Chain Product Development Research customer needs and desires then design and manufacture a new product or improve an existing one to meet them Production Produce the goods or service Marketing and Sales Create the perception of product value and motivate customers to buy Service function Provide loyalty-building after-sales service and support to the customer; get them to come back

Value Chain Materials management function Information systems function Controls the movement of physical materials through the value chain – avoid waste and make money (JIT) – “pulling on a rope” Information systems function Electronic system to minimize inventory, track sales, price products and – most important – managing the customer relationship to build market share and loyalty; quick, lean and accurate

Value Chain Management Improve the process of turning inputs into outputs by removing waste to increase value; requires that all company activities be defined in terms of customer needs (commoditize input and differentiate output)

Strategies to Build Competitive Advantage Superior efficiency, quality, flexibility, speed, innovation and responsiveness to customers Simultaneously generate cost savings and build product reputation so you can charge more Re-invest in product and process, further increasing competitive advantage Do it over and over, better and better to gain and sustain competitive advantage

Improving Responsiveness to Customers What do customers want? Everything: Low price High quality Many features Products customized to their needs Excellent after-sale support EVERYTHING! You do not want to be at their mercy 5

Price versus Attributes Strike a balance between cost and features Firms offering high quality, fast service and other attributes customers desire may have to raise prices to cover additional costs Operations management focuses on lowering production costs or producing more features at the same cost A firm can enhance its competitiveness by increasing the price/feature relationship; example -- Toyota and Hyundai 7

Improving Quality The concept of quality applies to the products of both manufacturing and service firms A firm that provides higher quality than competitors at the same or a lesser price will please customers and gain market share Higher quality also can increase efficiency by decreasing waste and operating costs (quality as a cost-saving technique). 9

Impact of Increased Quality “High” and “Low” Road Figure 9.4

Total Quality Management Total Quality Management (TQM) A company-wide management philosophy that focuses all activities on improving the quality of a firm’s goods or services Primary principle: customer defines quality Developed by Deming, Juran, and Feigenbaum. 11

Steps to Successful TQM Implementation Build organizational commitment to quality Focus on the customer Find ways to measure quality (KPIs) Solicit input from employees Set goals and create incentives Identify defects and trace to root cause Introduce just-in-time (JIT) inventory systems Work closely with suppliers Design for ease of production Break down barriers between functions 12

Improving Efficiency Improved efficiency leads to lower costs and better performance. TQM and Efficiency > TQM can lead to much higher labor productivity > When quality rises, less is wasted on scrap and rework. > Example: Ford’s “dinosaur pen” 16

Warning TQM and VCM (left-brain) can smother creativity (right-brain) by defining false starts and exploration as “waste.” Solution: > protect R&D from the value-chain disciplinarians. > celebrate/learn from mistakes instead of punishing them

Flexible Manufacturing Gigs instead of Jigs Most firms face major expenses when setting up to produce a product. These costs must be paid before production begins (Example: $1.8-billion TMMT). The more often products to be built change, the higher setup costs become. Flexible manufacturing reduces setup costs by reducing the time required to reset the production line for a different product. Using easily replaced or reprogrammable manufacturing equipment Redesigning the production system itself to be more productive. 19

Just-in-Time Inventory and Efficiency Just-in-Time (JIT) Inventory system Originally developed by Toyota; also adds to efficient production. JIT reduces inventory holding costs for warehousing, storage, tracking, and the cost of capital tied up in inventory (beware of supplier transfer); also reveals problems A drawback to JIT is that a firm does not maintain a large buffer stock of parts which makes the firm vulnerable to strikes or supply problems that can quickly deplete on-hand inventories and shut down production. 19

Efficient Manufacturing Self-managed teams boost efficiency by allowing a flatter organization. The team takes on the role of the supervisor. Teams working together often become very skilled at enhancing productivity

Process Reengineering and Efficiency The fundamental rethinking and redesign of the business process in order to dramatically improve performance. > Boosts efficiency with activities that add value to the product and deletes those that don’t > Example: Toyota’s TQM “black belts”

Product Innovation Quantum innovation: developing a radically different product or service that meets new, emerging customer needs, provides first-mover advantage and makes existing products or services obsolete Incremental innovation: gradual improvement and refinement of existing products and services to keep them at the leading edge of existing customer needs

Effective Product-development Strategies Involve both suppliers and customers in order to enhance quality/value and improve “fit.” Force choice among competing projects to avoid spreading product-development support too thinly. Use cross-functional teams.

Effective Product-development Strategies Study the environment, including future intentions of competitors Identify potential new customers Identify suppliers with the best emerging technology and get them on your side