Value Chain and SCM Lecture 3

Value Chain and SCM Lecture 3 - Transcript

IMPLEMENTING STRATEGY COST MANAGEMENT THROUGH VALUE CHAIN APPROACH
Identify Critical Success Factor and measure them Financial Factor profitability liquidity sales market value Customer Focus customer satisfaction dealer an distribution marketing and selling timeliness of delivery quality Internal Business Processes quality productivity flexibility safety Learning and Innovation Product innovation skill development timeliness of the new product No of days over and above the announced ship date Other Factors Governmental relations

IBM in 1990 Determining CSF
Lou Gerstner CEO in 1990 of Problematic IBM Did not want to save the company through high vision instead Determined that company needed to focus on execution Meant determining CSF and putting in place the processes to develop achieve and regularly inspect these processes Focus on customers understanding their needs and then working on faster cycle times faster delivery time and higher quality of service

SCM and the Value Chain
The Value Chain for any firm in any business is the linked set of value creating activities from basic raw material to the ultimate product or services that is delivered to the customers Michael Porter

Develop a sustainable competitive advantage
A Low Cost strategy Economies of scale in production tight cost control cost minimisation on advertising R and D sales force service A Differentiation Strategy uniqueness Whether CL or differentiation depends on how firm manages its value chain to those of its competitors Better customer value for equivalent cost or equivalent value at lower cost How will you achieve it Consider design to distribution

VALUE CHAIN ANALYSIS
Mangers must implement CSF and strategy at each level of firm s operations VALUE CHAIN ANALYSIS is a means to reach this detailed level of analysis VCA is a strategic analysis tool used to better understand the firm s competitive advantage Identify where value to customer can be increased and cost is reduced To understand firm s linkages with the suppliers customers and other firms in the industry Each activity is intended to add value to the product or service for the customer

Value creating activity all the way from basic raw material sources for component suppliers through the ultimate end use product delivered into the final consumer s hands VC focuses on the total value chain from its design to manufacture to its service after sales Each individual firm occupies a selected part or parts of its entire value chain VCA has two steps 1 Identify the VC activities Manufacturing or service

2 Develop a competitive advantage by reducing cost or adding value Identify competitiveness advantages Identify opportunities for added value Identify opportunities for reduced cost go outsourcing A study of its value activities can help a firm determine those parts of a value chain that is not competitive speed quality and competitiveness Reduce total cost Exploit linkages among activities in the value chain

The Value Chain Framework
Method of breaking down the chain from basic raw material to end use customers into strategically relevant activities in order to understand behaviour of cost and sources of differentiation Suppliers and distribution channels have a significant impact on the firm s value activities

JIT technique and value addition Supplier s Linkage
Example Mfg cost is 30 of sales for the auto firm Of the automobile company s sales 50 was purchases from part suppliers Belief was that by applying JIT 20 of the cost will be eliminated Assembly cost came down but suppliers demanded price increase Value chain perspective revealed that 50 was purchases from part suppliers and 37 was purchases by part suppliers and 63 was value added Suppliers were adding value 63 50 31 5 vs 30 Auto company has reduced it need for buffer stock Master schedule was 25 wrong 95 of the time



Get rid of narrow value added perspective

Some ways to increase value without sacrifice increase the functionality or use of a product or service while holding costs constant reduce cost while not reducing functionality and increase functionality more than cost

Revolutionizing house paint packaging Consumer values
square container lightweight but sturdy hollow handle twist off lid Company Values space efficient easier to ship and stock additional shelf space

Typical questions to ask
Could a cheaper part or material be used Is the function necessary Can the function of two or more parts be performed by a single part for a lower cost Can a part be simplified Could product specifications be relaxed and would this result in a lower price Could standard parts be substituted for non standard parts

The Methodology
1 Identify the industry s Value Chain then assign costs revenues and assets to the value activities 2 Diagnose the cost drivers regulating each value activities 3 Develop sustainable competitive advantage either through controlling cost drivers better than the competitors or by reconfiguring the value chain

Identifying the Value Chain
Identify the industry s value chain Activities should be isolated and separated if they satisfy any or all of the following conditions 1 They represent a significant percentage of operating costs 2 They are performed by competitors in different ways 3 They are likely to create differentiation Assign assets revenues take care of transfer price Calculate ROA

Diagnosing Cost Drivers that explain variations in costs in each value activity
WHEREAS TRADITIONALLY COST HAS BEEN CONSIDERED AS A FUNCTION OF ONLY ONE COST DRIVER OUTPUT VOLUME THE SCM LITERATURE DEALS WITH OTHER COST DRIVERS SUCH AS STRUCTURAL DRIVERS SCALE OF OPERATIONS SCOPE OF ACTIVITIES INTEGRATION EXPERIENCE TECHNOLOGY AND COMPLEXITY EXECUTIONAL DRIVERS WORK FORCE PARTICIPATION TQM CAPACITY UTILIZATION PLANT LAYOUT EFFICIENCY PRODUCT CONFIGURATION EXPLOITING LINKAGES WITH VENDORS CUSTOMERS ETC



Focus on SCM
Process orientation Market orientation Cost management must extend beyond the factory walls this means that costs are assigned to suppliers and customers as well as products Cost managers must provide cost information that allows development teams to make informed decisions about design attributes and product features that have an impact on manufacturing performance and cost

Cost managers must also provide cost information about logistics to optimize cycle time and efficiency In sale marketing facts and information are needed about the competitors suppliers customer profitability analysis etc Cost management should focus on all stages of the product life cycle by using its instruments such as target costing activity based costing and management and life cycle costing in order to help the organization to achieve its strategic objectives

In the 21st century cost management focus will not only cost but also increase revenues improve productivity and customer satisfaction and at the same time improve the strategic position of the company