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OM, Ch. 2 Value Chains

2009 South-Western, a part of Cengage Learning
VALUE CHAINS
CHAPTER 2
DAVID A. COLLIER
AND
JAMES R. EVANS
OM
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OM, Ch. 2 Value Chains
2009 South-Western, a part of Cengage Learning


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.
Chapter 2 Value Chains
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OM, Ch. 2 Value Chains
2009 South-Western, a part of Cengage Learning


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.
Chapter 2 Value Chains
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OM, Ch. 2 Value Chains
2009 South-Western, a part of Cengage Learning


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.

A value chain is a cradle-to-grave model of
the operations function (see Exhibit 2.1).
Chapter 2 Value Chains
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OM, Ch. 2 Value Chains
2009 South-Western, a part of Cengage Learning
Exhibit 2.1 The Value Chain
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OM, Ch. 2 Value Chains
2009 South-Western, a part of Cengage Learning


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.
Chapter 2 Value Chains
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OM, Ch. 2 Value Chains
2009 South-Western, a part of Cengage Learning


Chapter 2 Value Chains
A Service View of a Business
The results were greatly increased Nestle
coffee sales, new revenue opportunities, and
much stronger profits.

Nestle's service vision of their business
required a completely new service and
logistical value chain capability.
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OM, Ch. 2 Value Chains
2009 South-Western, a part of Cengage Learning


Chapter 2 Value Chains
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 in this book.
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OM, Ch. 2 Value Chains
2009 South-Western, a part of Cengage Learning


Chapter 2 Value Chains
Value and Supply Chains
A value chain is broader in scope than a supply
chain, and encompasses all pre- and post-
production services (see Exhibit 2.3, p. 25) to
create and deliver the entire customer benefit
package.

A value chain views an organization from the
customer's perspectivethe integration of goods
and services to create valuewhile a supply
chain is more internally-focused on the creation
of physical goods.
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OM, Ch. 2 Value Chains
2009 South-Western, a part of Cengage Learning
Exhibit 2.3 Pre- and Postservice View of the Value Chain
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OM, Ch. 2 Value Chains
2009 South-Western, a part of Cengage Learning


Procter & Gambles Supply Chain Structure
A model of a supply chain developed by Procter &
GambleP&Gs Ultimate Supply Systemis shown
in Exhibit 2.5.

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.
Chapter 2 Value Chains
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OM, Ch. 2 Value Chains
2009 South-Western, a part of Cengage Learning
Exhibit 2.5
Procter & Gambles Conceptual Model of a Supply Chain
for Paper Products
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OM, Ch. 2 Value Chains
2009 South-Western, a part of Cengage Learning


Value Chain Design and Management

Outsourcing is the opposite of vertical
integration in the sense that the
organization is shedding (not acquiring) a
part of its organization.

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OM, Ch. 2 Value Chains
2009 South-Western, a part of Cengage Learning


Value Chain Design and Management
Vertical integration refers to the process of
acquiring and consolidating elements of a value
chain to achieve more control.

Outsourcing is the process of having suppliers
provide goods and services that were
previously provided internally.
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OM, Ch. 2 Value Chains
2009 South-Western, a part of Cengage Learning


Value Chain Design and Management
Backward integration refers to acquiring
capabilities at the front-end of the supply
chain (for instance, suppliers), while forward
integration refers to acquiring capabilities
toward the back-end of the supply chain (for
instance, distribution or even customers).

Companies must decide whether to integrate
backward (acquiring suppliers) or forward
(acquiring distributors), or both.
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OM, Ch. 2 Value Chains
2009 South-Western, a part of Cengage Learning


Value Chain Design and Management

Offshoring is the building, acquiring, or moving of
process capabilities from a domestic location to
another country location while maintaining
ownership and control.
Chapter 2 Value Chains