Transforming resources: the value chain

• The value chain describes the categories of activities within an

organisation which, together, create a product or service.
• The value chain invites the strategist to think of an organisation in
terms of sets of activities – sources of competitive advantage can be
analysed in any or all of these activities.
• Porter's value chain encourages management to perceive of the
business as a sequence of activities that add value to inputs in order
that the final good or service shall command a profitable price on the
market.
• The linkages between the activities in the chain, for example how
marketing and sales support operations or procurement practices
support inbound logistics are common opportunities to reduce non-
value adding costs, such as inventory, or enhance value to the
customer.
 Transforming resources: the value chain
In overview, value chain analysis sees the firm as an input/output device.

The value chain consists of the organisation's resources, activities and processes that link the
business together, and the profit margin. Together these create the total value of output produced
by the business, quantified by the price paid by the customer.
Value Chain Analysis
 Value activities
Primary activities relate to production, sales, marketing, delivery and service, in other words anything
directly relating to the process of converting resource inputs into outputs.
Activity Comment
Inbound logistics Receiving, handling and storing inputs to the production system (i.e. warehousing,
transport, stock control etc).
Operations Convert resource inputs into a final product or service. Resource inputs are not only
materials. 'People' are a 'resource', especially in service industries.
Outbound logistics Storing the product and its distribution to customers: packaging, warehousing etc.
Marketing and sales Informing customers about the product, persuading them to buy it, and enabling them
to do so: advertising, promotion etc.
After sales service Installing products, repairing them, upgrading them, providing spare parts, advice (e.g.
helplines for software support).
Support activities provide purchased inputs, human resources, technology and infrastructural functions
to support the primary activities. Each provides support to all stages in the primary activities. For instance
procurement where at each stage items are acquired to aid the primary functions. At the inbound logistics
stage it may well be raw materials, but at the production stage capital equipment will be acquired, and so on.

Support Activity Comment

Procurement Acquire the resource inputs to the primary activities (e.g. purchase of materials,
subcomponents, equipment).
Technology development Product design, improving processes and/or resource utilisation.
Human resource management Recruiting, training, developing and rewarding people.
Management planning and firm infrastructure Planning, finance, and quality control: these are crucially
important to an organisation's strategic capability in all primary activities.
 Linkage
Activities in the value chain affect one another. Linkages connect the activities in
the value chain. They have two roles.
 They optimise activities by enabling trade offs. For example, more costly product
design or better quality production might reduce the need for after sales service.
 Linkages reflect the need to co-ordinate activities. For example, Just In Time (JIT)
requires smooth functioning of operations, outbound logistics and service activities such
as installation.
Linkage examples
Common source material or components (e.g. many different marques of car share similar components,
as is shown by VW and Audi).

Common services (e.g. HRM).

• The cost/performance of direct activities can be improved by indirect activities. Take the links between
technology development and production. It is possible to speed a new product to market if the
manufacturing technology is considered at the same time as when the product is being designed.
• The same function can be performed in different ways. (For example, conformance to quality
specifications can be assured by high quality inputs, TQM techniques, 100% inspection and so on).
• Activities performed within one form reduce the need for service costs. (100% inspection or TQM can
• reduce maintenance visit.)
• Inter-company linkages, in support of strategic alliances, such as airline reservation systems.
 Outsourcing value activities
Outsourcing: The use of external suppliers as a source of finished products, components or services
previously provided in-house.

Research by PwC (a major provider of outsourced services) has found that when most business processes are stripped
down to their basics, about 70% of business processes are common to all firms. This suggests that they could be
outsourced without loss of competitive advantage. With the help of technology and telecommunications it is now
possible for one service provider to devise a common process to deal with many different local processes in a single
location.

The issues to be considered in deciding whether to outsource include:

• The firm's competence in carrying out the activity itself. Low competence implies high cost and risk of poor
performance.
• Whether risk can be managed better by outsourcing, e.g. shift legal liability to the provider and possibly also levy
charges for breakdowns in performance that will mitigate losses.
• Whether the activity can be assured and controlled by the framework of a contract and performance measures, e.g.
outsourcing payroll can normally be done relatively easily but systems development is more open-ended.
• Whether organisational learning and intellectual property is being transferred. The in-house operation may be a
source of significant learning leading to product and process improvement. This is one reason that in the early stages
of the international production life cycle firms keep manufacturing in-house rather than outsource to cheaper
contract manufacturers.

The issues to consider in deciding whom to outsource to include:

• The track record of the provider and its experience of similar partnerships.
• The quality of relationship on offer, e.g. will they place staff at your premises, hold regular meetings, provide open-
book accounts?
• The strategic goals of the provider, e.g. is this their core business, will they operate globally alongside the firm?
• The economic cost of using them (including whether they will take staff over and pay for transferred assets).
• Their financial stability.
 Supply chain management
The management of all supply activities from the suppliers to a business through to delivery to customers. This may also
be called demand chain management (reflecting the idea that the customers‘ requirements and downstream orders
should drive activity) or end-to-end business (e2e). In essence it refers to managing the value system.
The main themes in SCM are:
• Responsiveness – the ability to supply customers quickly. This has led to the development of Just in Time (JIT)
systems to keep raw materials acquisition, production and distribution as flexible as possible.
• Reliability – the ability to supply customers reliably.
• Relationships – the use of single sourcing and long-term contracts better to integrate the buyer and supplier.
 Supply chain networks
Supply chain management involves optimising the activities of companies working together to produce goods and
services. It can involve the following:
Reduction in customers served: For the sake of focus, companies might concentrate resources on customers of high
potential value.
Price and stock co-ordination: Firms co-ordinate their price and stock policies to avoid problems and bottlenecks caused
by short-term surges in demand, such as promotions.
Linked computer systems: Electronic data interchange and use of intranets saves on paperwork and warehousing
expense.
Early supplier involvement in product development and component design.
Logistics design: Hewlett-Packard restructured its distribution system by enabling certain product components to be
added at the distribution warehouse rather than at the central factory, for example user-manuals which are specific to
the market (i.e. user manuals in French would be added at the French distribution centre).
Joint problem solving among supply chain partner
Supplier representative on site

The aim is to co-ordinate the whole chain, from raw material suppliers to end customers. The chain should be
considered as a network rather than a pipeline – a network of vendors support a network of customers, with third
parties such as transport firms helping to link the companies.

Focusing on the Distribution Problem:

• The Goal is to reduce total transportation costs throughout the supply chain
• Usually solved with some approach to the “Transportation Problem”
• Our approach will be the Balanced Matrix model
 Growing Interest in SCM – Why?
 As manufacturing becomes more efficient (or is outsourced), companies look for
ways to reduce costs
 Several significant success stories:
 Efficient SCM at Walmart, HP, Dell Computer
 SCM considers the broad, integrated, view of materials management from
purchasing through distribution
 The huge growth of interest in the web has spawned web-based models for supply
chains: from “dot com” retailers to B-2-B business models
 Several companies have been able to cut costs and improve service by postponing the final
configuration of the product until the latest possible point in the supply chain. Examples:
 Hewlett Packard printer configuration
 Postponement of final programming of semiconductor devices – all routines loaded, only certain
ones activated
 Assemble to order rather than assemble to stock (Dell Computer)
 Part of streamlining the supply chain is reducing the number and variety of suppliers
 The Japanese have been very successful in this arena
(they’re an Island – so getting materials there has always
been a problem)
 In the mid 1980’s Xerox trimmed its number of suppliers
from 5,000 to 400.
 Overseas suppliers were chosen based on cost
 Local suppliers were chosen based on delivery speed
 In 1996, Ford Motor reduced their supplier count by more than 60%
 Dell Designs the Ultimate Supply Chain!

 Dell Computer has been one of the

most successful PC retailers. Why?
To solve the problem of inventory
becoming obsolete, Dell’s solution:
 Don’t keep any inventory! - All PC’s are
made to order and parts shipped
directly from manufacturers when
possible.
 Compare to the experience of Compaq
Corporation – initial success selling
through low cost retail warehouses but
they did not garner web-based sales
 Data Transfer in Supply Chains: Vendor Managed Inventory (the real solution?)

 Walmart and P & G

 Target and Pepsi/Coke
 But … Barilla SpA. An Italian pasta producer
pioneered the use of VMI (Vendor Managed
Inventory)
 They obtained sales data directly from distributors
and decide on delivery sizes based on that
information
 This is in opposition to allowing distributors (or
even retailers) to independently decide on order
sizes!
 Trends in Supply Chain Management

 Outsourcing of the logistics function (example:

Saturn outsourced their logistics to Ryder Trucks.
Outsourcing of manufacturing is a major trend these
days)
 Moving towards more web based transactions
systems
 Improving the information flows along the entire
chain
 Global Concerns in SCM

 Moving manufacturing offshore to save direct

costs complicates and adds expense to supply
chain operations, due to:
 increased inventory in the pipeline
 Infrastructure problems
 Political problems
 Dealing with fluctuating exchange rates
 Obtaining skilled labor