LECTURE 2.

THE CONCEPT OF VALUE ADDITION

The concept of value addition
 The creation of goods and services involves transforming or converting
inputs into desired outputs.
 A transformation process uses resources to convert inputs into some desired
outputs.
 The inputs go through one or more transformation processes.
 Operations are processes that take in a state of inputs resources which are
used to transform something or are transformed themselves into outputs of
products and services which the customer prefer and is willing to pay for.
 To ensure that the desired output is obtained, measurements are taken at
various points of transformation process and then compared to previously
established standards to determine whether corrective action is needed.
 The essence of the operations function is to add value during the
transformation process.

Value added ; The difference between the cost of inputs and the value or price of
outputs.

VALUE ADDED
Inputs Outputs
Transformation/
Land Goods
Conversion process
Labor Services
Capital
Feedback

Control

Feedback Feedback
WHAT IS A TRANSFORMATION PROCESS.

 A transformation process is defined as a user of resources to transform

inputs into some desired outputs.
 OM should ensure that the transformation process is performed efficiently
and that output is of greater value than the sum of the inputs
 The transformation process is viewed as a series of activities along value
chain/supplier chain extending from the supplier to customer.

Transformations
In general, transformation process can be:
 Physical – manufacturing
 Location – transportation
 Exchange – retailing
 Storage – warehousing
 Physiological – health care
 Informational – telecommunication.
 Psychological - entertainment
*These transformations are not mutually exclusive. They can occur jointly.

Eg a supermarket can allow shoppers to compare prices and quality. That is

informational
Sell goods – exchange
EXAMPLE
University, Automobile factory, Hospital, Restaurant, Airline, Supermarket,
Distribution centre.
system Primary inputs/ Resources/ Transformation Desired
transformed transforming function and output
inputs inputs transformation form
University High school Lecturers, library, *Impacting Knowledged
graduates, lecture halls, knowledge and skills. individual
diploma computers and ict (informational)
graduates labs, furniture *Counselling &
projectors, mobile guidance(psychologic
phones al)
*Payment of fee
(exchange)
A car Tires, engine, Human resource, *Fabrication & High quality
assembly firm body, wind factory, assembly of cars. cars
screen and equipment, the (physical)
other parts yard *storage of finished
vehicle(storage)
A hospital Patients Medical personnel *health care- Healthy
and other human examination, individual
resource, medical monitoring, therapy,
equipments, surgery
laboratories, drugs etc(physiological)
*medical advice
(informational)
*payment for health
care service and
medicine (exchange)
* Counselling &
guidance(psychologic
al)

Restaurant Customers *Waiters. Cashier *serving food

(physical)
*payment for food
(exchange)
Airline Passengers Air hostess, pilots,
aeroplane
Supermarket Clients

Distribution Customers
centre
Operations as a service.
Every organization is in a service industry. This is true whether the org is
primarily service or goods. In manufacturing, such services can be divided into
core and value added services that are provided to internal and external customers
of the firm.
a) Core services
Are basic things that customers want from products they purchase. EG
customers want products that are made correctly, customized to their
needs, delivered on time and priced competitively. These are commonly
summarized as the classic performance objectives of the operations
functions ie quality, flexibility, speed and price (cost of production)
Achieving these services is the focus of operations management.

b) Value – added services

It simply makes the external customers life easier or in case of internal
customer help them to better carry out their particular function. These
services differentiate the organization from competitors and build
relationships that bind customers to the firm in a positive way.
They fall into 4 broad categories.
1. Information – is the ability to furnish critical data on product
performance, process parameters and cost to internal groups and to
external customers who then use the data to improve their own operations
or products.
2. Problem solving – Is the ability to help internal and external groups
solve problems especially in quality.
3. Sales support – Is the ability to enhance sales and marketing efforts by
demonstrating the technology, equipment or production systems the
company is trying to sale.
4. Field support – It is the ability to replace defective parts quickly or to
replenish stock quickly to avoid down time or stock outs.