1. Value Chain Management
The concept of value addition in supply chains

2. 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

3. What is common among these items?

4. 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

5. 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

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

7. 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?

8. 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

9. 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

10. 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

11. 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)

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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)

22. 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

23. 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….