Value Chain Analysis

Definition

Interlinked value-

adding activities that convert inputs

into outputs which, in turn, add to

the bottom line and help create

competitive advantage.

Linked set of activities all the way

from basic material sources for

components suppliers through the

ultimate end-use product or service

delivered to the customer.

• A value chain analysis allows firms to understand the parts of its operations that create value and those that do not.

• Primary activities are directly concerned with creating and delivering a product. It involved a product’s physical creation, sales and distribution to buyers and after sales service.

• Support activities provide the assistance necessary for the primary activities to take place. Even though it is not directly involved in production, it may increase the effectiveness or efficiency of the processes.

• Primary activities consist of

inbound distribution or logistics,

manufacturing operations,

outbound distribution or

logistics, marketing and selling

and after sales service.

• Primary activities are supported

by purchasing or procurement,

research and development,

human resource development

and corporate infrastructure.

• If primary and support activities

are not the source of core

competence therefore the

company can outsource these

activities.

All those activities concerned with receiving and

storing externally sourced materials.

The manufacture of products and services - the way in

which resource inputs (e.g. materials) are converted

to outputs (e.g. products)

All those activities associated with getting finished

goods and services to buyers.

Essentially an information activity - informing buyers

and consumers about products and services (benefits,

use, price etc.)

All those activities associated with maintaining

product performance after the product has been sold.

Primary Activities

Procurement

This concerns how resources are acquired for a

business (e.g. sourcing and negotiating with

materials suppliers)

Human

Resource

Management

Those activities concerned with recruiting,

developing, motivating and rewarding the

workforce of a business.

Technology

Development

Activities concerned with managing information

processing and the development and protection of

"knowledge" in a business.

Infrastructure

Concerned with a wide range of support systems

and functions such as finance, planning, quality

control and general senior management.

Support Activities

• A value chain analysis is used to

analyze, coordinate and optimize

linkages in the value chain.

• Coordinating the individual parts

of the value chain together

creates the conditions to improve

customer satisfaction particularly

in terms of cost efficiency,

quality and delivery.

• A firm which performs the value

chain activities more efficiently

and at lower cost than its

competitors will gain a

competitive advantage.

• It consists a system of

interdependent activities in which

the performance of one activity

affects the performance and cost

of other activities.

• A linkage occurs when

interdependence exists between

activities and the higher the

interdependence between activities

the greater is the required

coordination.

• Whatever activities that a business

undertakes are directly linked to

achieving competitive advantage. For

example, a business which wishes to

outperform its competitors

through differentiating itself through

higher quality will have to perform its

value chain activities better than the

opposition. By contrast, a strategy

based on seeking cost leadership will

require a reduction in the costs

associated with the value chain

activities, or a reduction in the total

amount of resources used.

1. Value chain is a very flexible

strategy tool for looking at the

company’s business, the

competitors and the respective

places in the industry’s value

system.

2. The value chain can be used to

diagnose and create competitive

advantages on both cost and

differentiation.

3. It helps to understand the

organization issues involved with

the promise of making customer

value commitments and promises

because it focuses attention on

the activities needed to deliver the

value proposition.

Advantages

4. Comparing the company’s

business model with the

competitors using the value chain

can give the company a much

deeper understanding of its

strengths and weaknesses to be

included in the SWOT analysis.

5. The value chain is well known and

has been a mainstay of strategy

teaching in business schools for

the last 20 to 25 years. The

book, competitive advantage was

published in 1985.

6. It can be adapted for any type of

business – manufacturing, retail

or service, big or small.

Advantages

1. The format of the value chain

laid out in Porter’s

book Competitive Advantage,

is heavily oriented to a

manufacturing business and

the language can be off-putting

for other types of business.

2. The scale and scope of a value

chain analysis can be

intimidating. It can take a lot of

work to finish a full value chain

analysis for the company and

for the main competitors so

that the company can identify

and understand the key

differences and strategy

drivers.

Disadvantages

3. Many people are familiar with

the value chain but few are

experts in its use.

4. The value chain idea has been

adopted by supply chain and

operations experts and

therefore its strategic impact

for understanding, analyzing

and creating competitive

advantage has been reduced.

5. Business information systems

are often not structured in a

way to make it easy to get

information for value chain

analysis.

Disadvantages

Electronic Commerce, MRP and ERP

E-commerce

• Electronic commerce or e-commerce is a term for any type of business, or commercial transaction, which involves the transfer of information across the Internet.

• E-commerce has provided the potential to develop new ways of doing things that have enabled considerable cost savings to be made from streamlining business processes and generating extra revenues from on-line sales facilities.

Impact

Consumers will be more sensitive in

buying products or services.

Development of electronic

marketplaces.

-supplies and demands

E-commerce ought to lead to intensified price

competition.

Larger firms have grown to the expense of

smaller ones.

Types of business

Pure Click

• Those businesses that have launched a website without any previous existence as a firm.

Brick and Click

• Those existing companies that have added an online site for e-commerce. They are more skeptical whether or not to add online e-commerce channel.

Linkages

Business to Business (B2B)

• Activities that take place between a business and its suppliers or customers.

Business to Customer (B2C)

• Exchanges between business and its non-business customers.

Materials Requirement Planning

• A computerized approach for coordinating the planning of materials acquisition and production.

• An MRP system is intended to simultaneously meet three objectives: – Ensure materials are available for production and products

are available for delivery to customers.

– Maintain the lowest possible material and product levels in store.

– Plan manufacturing activities, delivery schedules and purchasing activities.

Features

Estimation of the quantity and timing of

finished goods demanded

Determine the requirements for components/sub-

components at each of the prior stages of

production.

Basis for determining the quantity and

timing of purchased materials and any

bought-in components

Operation

Master Production

File

• It specifies both the timing, and quantity demanded of each of the finished goods items.

Bill of Materials

File

• Specifies the components/sub-components and materials required for each finished product.

Master Parts File

• Containing planned lead items of all items to be purchased and internally produced components.

Inventory File

• Each item of material and component/sub-component containing details of the current balance available, scheduled orders and items allocated to production but not yet drawn from stocks.

The major problem

• The integrity of data.

• Data integrity is also affected

by inaccurate cycle count

adjustments, mistakes in

receiving materials, scrap not

reported, production reporting

errors, and system issues.

Solutions

• Bill of material - The best

practice is to physically verify

the bill of material either at the

production site or by un-

assembling the product.

• Cycle count - The best practice

is to determine why a cycle

count that increases or

decreases inventory has

occurred. Find the root cause

and correct the problem from

occurring again.

Solutions

• Scrap reporting - Start with

isolating the scrap by providing

scrap bins at the production site

and then record the scrap from

the bins on a daily basis.

• Production reporting - The best

practice is to use bar code

scanning to enter production

into inventory. Product that is

rejected should be moved to an

MRB (Material Review Board)

location.

Benefits

Reduced Inventory

Levels

Reduced Component Shortages

Improved Shipping

Performance

Improved Productivity

Simplified and Accurate Scheduling

Improve Production Schedules

Reduced Lead Times

Less Scrap and Rework

Higher Production

Quality

Enterprise Resource Planning

• It comprises a set of integrated software application modules

that aim to control all information flows within a company.

• All the modules are fully integrated in a common database and

users can access real-time information on all aspects of

business.

• Its purpose is to facilitate the flow of information between all

business functions inside the boundaries of the organization

and manage the connections to outside stakeholders.

Benefits

• Integrate financial information.

• ERP creates a single version of the

truth that cannot be questioned

because everyone is using the same

system.

• Integrate customer order

information.

• ERP systems can become the place

where the customer order lives from

the time a customer service

representative receives it until the

loading dock ships the merchandise

and finance sends an invoice.

Benefits

• Standardize and speed up

manufacturing processes.

• ERP systems come with standard

methods for automating some of

the steps of a manufacturing

process. It can save time, increase

productivity and reduce head count.

• Standardize HR information.

• Especially in companies with

multiple business units, HR may not

have a unified, simple method for

tracking employees’ time and

communicating with them about

benefits and services.

Benefits

• Reduce inventory.

• ERP helps the manufacturing

process flow more smoothly, and it

improves visibility of the order

fulfillment process inside the

company.

• That can lead to reduced inventories

of the stuff used to make products

and it can help users better plan

deliveries to customers

Problems

You’ve got a bad

system. This category includes ERP

processes that don't match business

processes

You've got a good

system, but you set it

up incorrectly. These problems include incorrect

configuration settings and other

problems with how the

implementation was performed.

Problems

You've got a good

system, but you're

using it ineffectively.

In this category, I lump together all

kinds of problems with business

practices, such as data inaccuracy,

lack of user procedures, lack of

training, lack of discipline, and

organizational problems.

CAD/CAM Robotics

Computer Aided Design

• CAD is the use of computer technology for the

process of design and design-documentation.

• It is commonly used by engineers and architectures

because CAD has shortened time taken for the initial

design stage of a product.

• CAD software is used for nearly all three-dimensional

and 2D designing. Objects created with CAD software

can be moved, resized, and rotated instantly.

Computer Aided Manufacturing

• CAM is the use of computer software to control machine tools

and related machinery in the manufacturing of work pieces.

• Significant elements of CAM are Computer Numerical Control

(CNC) and robotics.

• CAM software converts 3D models generated in CAD into a set

of basic operating instructions written in G-Code.

– G-code is a programming language that can be understood by numerical

controlled machine tools and the G-code can instruct the machine tool to

manufacture a large number of items with perfect precision and faith to

the CAD design.

Benefits

• Enables manufacturers to

reduce the costs of producing

goods.

• CAM is not time consuming.

• CNC machines are able to

repeat the same operation

continuously in an absolutely

identical manner.

Problem

• The setting up of infrastructure

to begin with can be extremely

expensive.

• Numerical controlled machine

tools.

• CAD/CAM software and

hardware to develop the design

models.

• Training operatives or

employees to run the

machines.

Business Process Re-engineering vs Continuous Improvement

BPR CI

Radical redesign

of business

processes

Used with ABM

Constant effort to

improve methods

Used with TQM,

Benchmarking

BPR Steps…

e.g. process of filling a customer order

in a metal castings production company

Pattern design

Moulding

Metal melting

Finishing

Sales and

dispatch

Administration

ABC - ABM

Activities and Processes

Value analysis and Cost

driver analysis

Root cause cost driver

CI Steps…

Defined loosely: orders delivered within

20 minutes after

Defined more tightly: complete orders delivered

within 20 minutes after orders are made

More challenging target: a series of monthly targets

that gradually reduces targeted delivery time

e.g. pizza home

delivery services

of a pizza restaurant

Relevant

performance

measures:

• Delivery time (as e.g.)

• Cost of making a

delivery

• Quality of product as

it has been delivered

Defined loosely: orders delivered within

20 minutes after

Defined more tightly: complete orders delivered

within 20 minutes after orders are made

More challenging target: a series of monthly targets

that gradually reduces targeted delivery time

e.g. pizza home

delivery services

of a pizza restaurant

Relevant

performance

measures:

• Delivery time (as e.g.)

• Cost of making a

delivery

• Quality of product as

it has been delivered

CI with TQM

CI with Benchmarking