Value_Chains

Introduction Over time, researchers and academics have developed numerous definitions to describe supply chain and supply chain management. A question that often arises and one that has no definite answer involves the difference between a value chain and a supply chain. The following few pages will attempt to point out these key differences through an analysis that will firstly define the term “Value”. This will then be followed by identifying the differences between the supply chain and value chain. The project will end off by explaining the increasing need for the introduction of “Value Chains” in companies. What Is Value' The first objective before going into detail about value is to define the term value. Value is considered as to what buyers would pay for what a firm offers be it a service or product. (Porter, M, 1985) Another definition is considered to be the least possible cost in which a product/service achieves its primary function while also meeting the quality standards laid out by customers. (Hugo, W.M.J et al, 2006: 58). On the other hand the value chain of a business is thought to be nine activities that take place within the business that adds value to a product. The main aim of any value chain is to add maximum value to the product before customer purchase. One can safely say that an effective value chain generates profits for a business by keeping customers satisfied with the firm’s product/service. value means different things to different people, for a restaurant waitress, a half empty plate of food wouldn’t mean much to her (no value) but to a person who hasn't had food in a while and is starving it would provide nourishment (has value). Value has two faces: when it occurs and the experience. Value occurs once a product meets the needs of the customer. The experience part of value is when it flows from the manufacturer to the customer. (Porter, M,1985) There are two factors that must be taken into account when devising a strategy concerning value: 1) Who is the customer' 2) What do they value' Many companies and firms have realised that the only way to please customers and increase the value of their product in the customer’s eyes is to meet the customer’s needs and services in an efficient, precise manner with the achieving the least expense. Hence value is said to occur when the needs of a customer are met with a product or service in exchange of payment. Value is measured when a person’s benefit from the product/service exceeds the cost of the product/service. (Womak et al, 2003) There is a distinction when defining value whether the value that is created is between firms or a firm and customer. In a business to business situation there are 3 forms of value. Technical (resource value) - it is a fundamental resource that customers would purchase regardless of the price exchange. An example would be water people can’t live without water therefore they would continue to pay for it regardless of price. The value of water would not change to people due to the price. Organisational value – is considered to be the reputation of the company or the brand that they have built along the years. It may be due to their service, quality, status or even reliability. Personal value – this form of value is derived from the personal experiences of a person with the relation to the benefit derived from the product. This form of value only accrues to the individual on a personal level whereas the other two forms the value accrues to the organisation/business. Success of a business also depends on other factors such as trust, comfort and preference. It is important for business’s to fulfil all criteria in order to be successful. An influential force/factor would be market value. This occurs when there are competitors that are trying to win the customer for their own business. Many factors can damage value, especially when a competitor offers the same or similar product at a lower price, price in certain cases then be a deciding factor when it comes value. (Ramsay, 2005: 549) When value is looked at from a customer point of view it is broken up into 3 layers namely: The product value being the core. What technical value is derived' The inner ring is the service value. This deals with the services surrounding the product such as warranties, general service, and guidance about the product and so on. The outer ring being the wow factor which deals with enhanced service to give the customer greater satisfaction. An example in certain fast food restaurants a toy is given with a children’s meal (Clemmer, 1990:12-15). For a business by creating increased services causes increased costs which attract more customers thus increasing sales which leads to an increase in shareholders’ value. Customer value is created from their needs any access services provided are non value added and are considered to be a waste.( Womak et al, 2003) by cutting down on these services that are not beneficial the firm would be able to reduce costs as well as improve on areas of the business that are not at their peak thus increasing the margin between delivery costs and perceived value is the foundation for improves business formation.( Cooper et al,1997: 1-14). Differences between a supply chain and a value chain A Supply Chain consists of series of activities in which a product or a material is transferred from one point to the final point (Clemmer, Jim, 1990). The primary focus on supply chains is on the costs and efficiencies of supply (Ramsay, 2005: 549). There is no value added to the product as it passes through its various points from the factory to the customer. In a value chain, instead of just transferring products, certain values are added to it at various stages in order to provide maximum satisfaction to customers. The primary focus is on creating value in the eyes of the customer. Another characteristic of a value chain is that it focuses on innovation in product development and marketing (Antidote, 1997). Figure 1: A Typical Value Chain PRIMARY ACTIVITIES • Inbound Logistics- include the receiving, warehousing, and inventory control of input materials. • Operations- are the value creating activities that transform the inputs into the final product. • Outbound logistics- are the activities required to get the finished product to the customer. • Marketing and sales- are those activities associated with getting buyers purchase the product, channel selection, advertising and pricing. • Service- are activities that maintain or enhance the products value, customer support as well as repairs. SUPPORT ACTIVITIES • Procurement- The function of buying raw materials and other inputs in value creating activities. • Technology Development- includes research and development, process automation and other technology development used to support the value chain activities. • Human Resource Management- Activities associated with recruiting, development and compensation of employees. • Firm Infrastructure- Includes activities such as finance, legal, and quality management. (M,Porter, 1985* ) An example may help clarify these explanations: A Car Company manufactures its cars in certain countries; these cars are then distributed throughout the world. Let’s assume the car is manufactured in Germany. The cars may need to be shipped to South Africa, sent by train to England or delivered by truck to Poland. In A Supply Chain: The process of getting the car from the production floor to the showroom floor in these countries is known as the supply chain. Decisions need to be made in terms of the most efficient way to send these cars across the globe timeously and without damaging the product in anyway whilst also maintaining cost efficiencies. The company may decide to store the cars in a nearby location for easy supply. The main point to gather is that the product is finished on the production floor and then transported to the customer. In a Value Chain: As the name suggests, value is added to the car in this process. For example, The body of the car may be manufactured in Italy. It will then be transferred to a factory in Germany to get its engine fitted. The car may then get transported to Japan for tyre fittings and interior design before it ends up getting transported to the customers around the globe. At each point in the chain, something of value was added, hence the name “Value Chain”. Why Value Chains Now' The growing interest in value chains in companies is because it helps provide the company’s with a distinct competitive advantage over its rivals (Porter, 1985). There are a number of trends that are now driving the need for operations orientated analysis from a value chain perspective. These trends are as follows: 1. Increasing competition and the primacy of strategy The value chain is a strategic concept, companies struggle to compete in an environment of globalization and intense competition. This is when companies look to their value chain to formulate strategies to remain competitive in their respective industries. 2. Evolving governance models for the extended enterprise The information era led by the recent focus of capital investment on internet technologies has increased the research of businesses to look for alternative value chains and business models to better there own benchmarks as well as create a better competitive advantage. This new growth of business models has created significant interest in value chains and has made it a primary use to create new models of products. 3. Globalization of supply and production The huge growth in global sourcing and supply has begun the process of adding value worldwide (Gereffi et al, 2005). This leads to the need to model global value chains as the main mode of business in many industries. 4. Many benefits already wrung out of manufacturing and the supply chain The Industrial Engineering and Operations Management together with management and operations improvement such as lean manufacturing and TQM have been improving the efficiency of manufacturing and supply chain operations for a long time. However, there is still a lot Of work to be done, therefore many firms are turning to look at a broader view of the enterprise to continue improving its competitive advantage (Smith, 1937). Improving the operational and production capability of value added activities in the manufacturing process require the firm to shift its perspective outlook from supply chain to value chain. 5. Trends in management discourse A final reason for the growing interest in value chains is the nature of management fashion trends in academic and management discourse. Management trends have a life cycle and right now the fashion has shifted to value chains as this has become one of the best methods for a company to operate with to create a better competitive advantage as compared to any other. Value chains have ultimately led to a lack of interest in supply chain management, this is also due to the fact that we are in the information era that has given the value chain an upper hand in finding better alternatives for better production. Value chains have started since the 1980’s this has given it a long time to grow and it has certainly been adopted as more important than supply chain and operations by management. Value chains are set to rise in popularity as it has been labeled as a dynamic differentiator (Fine et al, 2002). Value Chains also make it easier for companies to improve their products to suit the demand of customers. Elaborating on the example of the car manufacturer mentioned above, let’s assume that the South African Government has imposed a regulation that all cars had to have a speed limiter installed. In the value chain, only the base that handles engineering would be required to install these speed limiters. This would save costs and time as that specific branch specializes in this department. In the absence of a Value Chain, the factory that makes these cars identically will have to impose these add-ons that would result in more costs and time. Conclusion Based on the above it can be seen that Value Chains are an integral part of the development and distribution of goods from supplier to customer and companies need to ensure that they implement these key changes in there Supply Chain Management models in order to stay competent in an ever-changing economic climate. Value chains help maintain structure in the company and it is quite evident that this strategy is increasing in popularity due to its successful implementations in major companies such as Toyota. Reference numbers used: 1 16 19 22 for M H chooze the relevant ones….. might wanna take out 16, jus double check that reference Supply chain Supply Chain Management is a cross functional approach to managing the movement of raw materials into an organization and movement of the finished goods out of the organization toward the end consumer. Strategic activities : • Strategic network optimization, including the number, location, and size of warehouses, distribution centers and facilities. • Strategic partnership with suppliers, distributors, and customers, creating communication channels for critical information and operational improvements such as cross docking, direct shipping, and third-party logistics. • Product design coordination, so that new and existing products can be optimally integrated into the supply chain, load management • Information Technology infrastructure, to support supply chain operations. • Where to make and what to make or buy decisions • Align overall organizational strategy with supply strategy Tactical activities • Sourcing contracts and other purchasing decisions. • Production decisions, including contracting, locations, scheduling, and planning process definition. • Inventory decisions, including quantity, location, and quality of inventory. • Transportation strategy, including frequency, routes, and contracting. • Benchmarking of all operations against competitors and implementation of best practices throughout the enterprise. • Milestone payments Operational activities : • Daily production and distribution planning, including all nodes in the supply chain. • Production scheduling for each manufacturing facility in the supply chain (minute by minute) • Demand planning and forecasting, coordinating the demand forecast of all customers and sharing the forecast with all suppliers. • Sourcing planning, including current inventory and forecast demand, in collaboration with all suppliers. • Inbound operations, including transportation from suppliers and receiving inventory. • Production operations, including the consumption of materials and flow of finished goods. • Outbound operations, including all fulfillment activities and transportation to customers. • Order promising, accounting for all constraints in the supply chain, including all suppliers, manufacturing facilities. distribution centers, and other customers. • Performance tracking of all activities Info obtained from http://www.supplychainmanagement.in/scm/supplychainactivities.htm Supply chain management (SCM) is the oversight of materials, information, and finances as they move in a process from supplier to manufacturer to wholesaler to retailer to consumer. Supply chain management involves coordinating and integrating these flows both within and among companies. Supply chain management flows can be divided into three main flows: • The product flow • The information flow • The finances flow The product flow includes the movement of goods from a supplier to a customer, as well as any customer returns or service needs. The information flow involves transmitting orders and updating the status of delivery. The financial flow consists of credit terms, payment schedules, and consignment and title ownership arrangements. http://searchmanufacturingerp.techtarget.com/definition/supply-chain-management