Value Chain Management

The concept of value addition in

supply chains
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
What is common among these items?
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
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
Value creation
Maital’s cost-price-value + profit model
price

Profit
cost value
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?
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
Basic model of Porter’s value chain
 Support 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

Out
Marketi
Inbound bound
operations ng & Service
logistics logistic
sales
s

 Primary activities
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
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)
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
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
 Hines’ value chain model
Raw Supplier Inbound operations Outbound Customer consumer
materials chain logistics logistics chain
Marketing team
Materials team
Engineering team
Jointly define value at Defined product value
Quality team
each stage R&D team and volume
Design team

Activity-based costing (ABC)

HRM/training/education

Total quality management (TQM)

Electronic Data Interchange (EDI)

Profit
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
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
Contrast of Porter and Hines’ models
Porter
 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
Hines
 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
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
Day’s Marketing driven value chain

Human Resource
Integrative Technology Development
functions Control systems
Marketing

communicate Distribution install

Primary sourcing Design

value and
activities
service
Inbound persuade Physical
logistics logistics
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
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)
 The Enterprise Development and Supply
Chain
•Product architecture
Plan / design •Make/ buy
•Early supplier development

Development
•Strategic partnerships
chain
Source •Supplier selection
•Supply contracts

Supply Produce distribute Sell

Supply chain
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….