VALUE CHAIN MANAGEMENT &COORDINATION

 Value chain models - Porter’s

 Value chain analysis
 Value engineering
 Method for Coping with Bullwhip Effect
Definition of value
“Value” is defined as “any activity that increases the market form or function of the product or
service”. And in today’s business climate you need to maximize the value of every process or
product in your business.
Definition of a chain
A chain can be defined as an interconnection between different components. In business it can be
defined as connection between different set of activities where by one set of activities feed into
another set of activities. Another concept related to a chain is supply chain which can be
described as a network of facilities and distribution options that performs the functions of
procurement of materials, transformation of these materials into intermediate and finished
products and the distribution of these finished products to customers.

Third party logistics supplier

Ultimate Supplier supplier organisation customer ultimate

customer

Financial provider market research firm

Definition of value chain
Value chain can be defined a connection of activities through which a firm develops a
competitive advantage and creates shareholder value. A value chain is a linear map of the
way in which value is added to a product through a process from raw materials to finished
delivered products. It includes continuing service after delivery. A value chain is a chain of
activities for a firm operating in a specific industry, products pass through all activities of the
chain in order and at each activity the product gains some value.

The chain of activities gives the product more added value than the sum of the independent
activity’s value. It is important not to mix the concept of the value chain with the costs occurring
throughout the activities. For example a diamond cutter as a profession can be used to illustrate
the difference of cost and the value chain. The cutting activity may have a low cost, but the
activity adds much of the value to the end product. Since a rough diamond is significantly less
valuable than a cut diamond.

Value chain management

This is the planning, controlling, coordination and monitoring of the process through which
value is added to a product from when they are in raw material form to when they are delivered
to customers

Value chain activities

To analyze the specific activities through which firms can create a competitive advantage, it is
useful to model the firm as a chain of value-creating activities. An industry value chain is a
physical representation of the various processes that are involved in producing goods ( and
services) starting with raw materials and ending with the delivered product ( also known as the
supply chain).

Michael porter identified a set of interrelated generic activities common to a wide range of firms.
The resulting model is known as the value chain. According to Michael Porters model the
activities of a business unit can be classified into five primary and four support activities each of
which will contribute to the business competitive advantage which may take form of
differentiation and cost leadership approaches. And the model is depicted as bellow;

Primary Activities
Primary activities these are activities that are directly concerned with creating and delivering a
product (e.g component assembly, manufacture) .the goal of these activities is to create value
that exceeds cost of providing the product or service thus generating a profit margin. These
primary activities include;

a) In bound logistics. All activities linked to receiving, handling and storage of inputs into
the production system including warehousing, transporting & stock control,material
handling, material storage, transportation.

b) Operations. All activities involved in the transformation of inputs to out puts as the final
product(s). in a manufacturing enterprise these would include production, assembly,
quality control & packaging, building designing & operation, maintenance, testing,
process.
 c) Outbound logistics. Activities involved in moving the output from operations to end
user including finished goods warehousing, order processing, order picking and
packaging, shipping transport, maintenance of dealer distribution network.
Transportation, material handling, packaging. communications etc

d) Marketing and sales. Activities involved in informing potential about the product,
persuading them to buy and enabling them to do so including advertising, promotion,
market research and dealer distribution support.

e) Service. Activities involved in the provision of services to buyers, offered as part of the
purchase agreement, including installation, spare parts, delivery, maintenance and repair,
technical assistance, buyer enquires and complaints. testing, communications
Support activities
These are activities which are not directly involved in the production. they may increase
effectiveness or efficiency ( e.g human resource management . its rare for a business to under
take all primary and support activities.
They support activities include;
(a) Firm infrastructure and general administration.
Including activities cost & asset relating to general management safety and security,
management of information systems & formation of strategic alliances.

(b) Human resources. All activities involved in recruiting, hiring training developing &
sanctioning the people in an organization.

(c) Technological Development. Activities relating to product design & improvement of

production process and research utilization including research and development, process
design improvement, computer software, computer aided design and engineering and
development of computer support systems.
 (d) Procurement. All activities involved in acquiring resource inputs to primary activities
including purchase of fuel, energy, raw materials, components, subcomponents, sub
assemblies, merchandise and consumable items form external vendors
Contribution of porter includes;
 Firstly it placed a major emphasis on the material management
 value adding mechanism, raising the subject to strategic level in the minds of the senior
executives.
 Secondly it placed the customer in an important position in the supply chain.
A critique of porter
Hines also identified three major problems with porters’ model
1) Neither potters nor the firms discussed concede that customer satisfaction-not company
profit should be their primary objective. The focus of porters model is on profit margins
of each enterprise not the customer satisfaction.
2) Although porters acknowledge the importance of integration, his model shows a rather
divided network both within the company and between different organizations in the
supply chain.
3) Hines believes that the wrong functions are highlighted as being important in porters
primary and support activities.

Importance of value chain management

 Increased market share resulting from increased sales
 Cost savings by making operations more efficient, faster, more flexible and more
responsive to market forces.
 Higher quality due to elimination of non value adding activities
 Increased market share due to increase in customer service
 Reduced inventory thus less capital tied up and demand pull supply
 Faster delivery times due to effective logistics management
 Better logistics management since the systems of operational flows and plans will have
been effectively improved.
 Better customer service resulting from increased responsiveness to customer orders,
customer care.
  Reduced cycle times as a result of elimination of those activities that do not add value i.e
waiting supplies, rework in cases of error.

Value chain analysis

In order to better understand the activities leading to a competitive advantage, one can begin with
the generic value chain and then identify the relevant firm-specific activities.
Once the discrete activities are defined, linkages between activities should be identified. A
linkage exists if the performance or cost of one activity affects that of another.
Competitive advantage may be obtained by optimizing and coordinating linked activities.
The value chain also is useful in outsourcing decisions. Understanding the linkages between
activities can lead to more optimal make or buy decisions that can result in either a cost
advantage or a differentiation advantage.

Value chain analysis – is a detailed examination of each function in a supply chain & every
activity within these function; with a view of delivering maximum value hence enhancing value
and synergy throughout the entire chain

Value Chain Analysis is used to identify potential sources of a company’s economic advantage
in its industry. The analysis separates a firm into its major activities in order to understand the
behaviour of costs, the associated value added, and the existing and potential sources of
differentiation. It depends on an understanding of how the firms own value chain relates to, and
interacts with, the value chains of suppliers, customers and competitors. Companies gain
competitive advantage by performing some or all of these activities at lower cost or with
greater differentiation than competitors.
Implementation
Value Chain Analysis involves understanding the linkages between activities and how the
performance of one activity impacts the cost and performance of other activities. To perform
value chain analysis:
a) Divide a firm into its key activities and assign costs to those activities
 b) For each activity, understand the cost drivers, the linkages between activities and the
company’s cost position relative to competitors
c) Identify linkages to the buyers value chain and assess potential sources of
differentiation
d) Develop a differentiation strategy that maximises value to the buyer and minimises
increases in cost.
Purpose
Value Chain Analysis identifies opportunities to gain cost advantages and increase
differentiation.

a) Cost advantages
Firms gain cost advantage by controlling key cost drivers, finding ways to
reconfigure the value chain and optimising the linkages between activities.
Understanding the linkages between value chains for different industries, market
segments and geographic regions allows companies to optimise their business scope
through acquisitions, divestitures and alliances

b) Differentiation
Firms increase differentiation by understanding and selectively integrating their
linkages with their customers value chains, thereby creating competitive advantage
for their customers
Value chain analysis process
 Identify the appropriate value chain and assign costs and assets to it
 Diagnose/establish the cost drivers of each activity and how they interact.
 Identify competitors’ value chain and determine the relative cost to competitors
and source of cost difference
 Develop a strategy to lower your relative cost position by controlling cost drivers
 Ensure that cost reduction effort do not erode differentiation
 Test the cost reduction strategy for sustainability
VALUE ENGINEERING
Value engineering is the application of the value analysis at the pre-production or development
stage. It is a systematic method to improve the value of goods and services by using an
examination of FUNCTION. Value can therefore be increased by either improving the
function or reducing the cost. An example of value engineering can be traced in vehicle
manufacturers that have active programs to reduce the numbers and types of fasteners in their
product, to reduce inventory, tooling and assembly costs.
The value Engineering (VE) Process
The value engineering has many elements such as;
 teamwork,
 functional analysis,
 Creativity
 cost worth
 Systematic application of a recognized technique. Unless all these elements are used, it is
not VE and will not yield the results that a VE should.

Value engineering studies are guided by a specific job plan. This is a blueprint, if you will, of
how the study will proceed. The VE job plan has the following eight phases

1. Selection
Project selection is outside the control of the value study team. In general, the criteria used to
select projects include;
 High cost projects which are just not worth the expenditure necessary to
complete them.
 Important ,but low priority projects that fail to meet the budget cut-off
 Problem projects
 Etc
2. Investigation
The investigation phase is where the value study team first becomes involved. In this phase the
team determines what they know about the project from readily available information and what
they must know in order to really define or solve the problem. It is in this stage of the VE study
that we identify the elements that have the greatest potential for value improvement.
The investigation stage immediately brings the three fundamental concepts of VE (Function,
cost, and worth) to bear on the problem. It is these concepts that make the VE process different
from all other management and cost control techniques.
This phase requires the team to ask and answer the following basic questions:
What is it?
What does it do? (What is the function?)
What is the worth?
What does it cost?
Most of the information required in this phase is readily available. The length of the project, its
cost estimate, traffic projections, design speeds and the major elements designed into the project
can be easily identified from a review of the plans and other documentation.

3. Speculation
The speculation or creativity phase is next. The term applies brainstorming techniques to develop
good alternatives to the way the project is currently designed. Brainstorming forces people to be
creative. The mechanism that produces these phenomena is called synergism-which means that
one idea triggers other ideas or thoughts through similarities or like ideas; contiguous or
adjoining ideas, contrasting or opposite ideas, and sound a like. it uses the generated ideas to
speculate on all possible solutions to the problem presented. The term uses brainstorming to
generate large list of potential solutions to the problem described by the two-word function and
then in the next phase are able to rapidly pare the universe down to a manageable few ideas
through the feasible analysis.

4. Evaluation
Evaluation of the best alternatives is the next. The advantages and disadvantages of each
remaining alternatives are listed. Of course if the disadvantages far outweigh the advantages of
any alternative it is dropped at this point.

5. Development
Once the team selects the best alternative, it is fully developed through sketches, cost estimates,
validation of test data and other technical work to determine if any assumptions made during the
study are in fact valid. The final step before presenting the team’s recommendations to
management is to formulate an implementation plan, which describes the process that the agency
must follow to implement any recommendations.

6. Presentation
In this phase the VE Team must present their findings to the decision makers and convince them
that their ideas should be implemented.

7. Implementation
No recommendation for a savings is a saving until it has been implemented, the decision makers
must take the appropriate action to ensure that the suggestions are accomplished.

8. Audits
This phase determines the amount of savings generated by the value engineering study based on
the amount of recommendations implemented in the construction project.
Value engineering can be applied at any point in the highway development process, but to obtain
maximum effectiveness, VE studies should be undertaken as early as possible when the impact
of decisions (on life-cycle costs) is the greatest.

What is the Bullwhip Effect? Understanding the concept & definition

Through the numerous stages of a supply chain; key factors such as time and supply of order
decisions, demand for the supply, lack of communication and disorganization can result in one of
the most common problems in supply chain management. This common problem is known as
the bullwhip effect; also sometimes the whiplash effect.
What is the bullwhip effect? (These are variations that bring distortions in the supply
chain)
The bullwhip effect can be explained as an occurrence detected by the supply chain where orders
sent to the manufacturer and supplier create larger variance than the sales to the end customer.
These irregular orders in the lower part of the supply chain develop to be more distinct higher up
in the supply chain. This variance can interrupt the smoothness of the supply chain process as
each link in the supply chain will over or underestimate the product demand resulting in
exaggerated fluctuations.
What contributes to the bullwhip effect?/ causes
There are many factors said to cause or contribute to the bullwhip effect in supply chains; the
following list names a few:
 Disorganization between each supply chain link; with ordering larger or smaller
amounts of a product than is needed due to an over or under reaction to the supply chain
beforehand.
 Lack of communication (No communication up and down the supply chain)
between each link in the supply chain makes it difficult for processes to run smoothly. Managers
can perceive a product demand quite differently within different links of the supply chain and
therefore order different quantities.
  Free return policies; customers may intentionally overstate demands due to shortages
and then cancel when the supply becomes adequate again, without return forfeit retailers
will continue to exaggerate their needs and cancel orders; resulting in excess material.
 Order batching; companies may not immediately place an order with their supplier;
often accumulating the demand first. Companies may order weekly or even monthly.
This creates variability in the demand as there may for instance be a surge in demand at
some stage followed by no demand after. (larger orders results in more variance)
 Price variations – special discounts and other cost changes can upset regular buying
patterns; buyers want to take advantage on discounts offered during a short time period,
this can cause uneven production and distorted demand information.
 Demand information – relying on past demand information to estimate current demand
information of a product does not take into account any fluctuations that may occur in
demand over a period of time.
 No coordination up and down the supply chain
 Demand forecasting inaccuracies
 Lead time variability (forecast error during replenishment lead time)
 Establish a demand-driven supply chain which reacts to actual customer orders. In
manufacturing, this concept is called kanban. This model has been successfully
implemented in Wal-Mart's distribution system. Individual Wal-Mart stores transmit
point-of-sale (POS) data from the cash register back to corporate headquarters several
times a day.
Example of the bullwhip effect
Let’s look at an example; the actual demand for a product and its materials start at the customer,
however often the actual demand for a product gets distorted going down the supply chain. Let’s
say that an actual demand from a customer is 8 units, the retailer may then order 10 units from
the distributor; an extra 2 units are to ensure they don’t run out of floor stock.

The supplier then orders 20 units from the manufacturer; allowing them to buy in bulk so they
have enough stock to guarantee timely shipment of goods to the retailer. The manufacturer then
receives the order and then orders from their supplier in bulk; ordering 40 units to ensure
economy of scale in production to meet demand. Now 40 units have been produced for a
demand of only 8 units; meaning the retailer will have to increase demand by dropping prices or
finding more customers by marketing and advertising.
Although the bullwhip effect is a common problem for supply chain management understanding
the causes of the bullwhip effect can help managers find strategies to alleviate the effect.

Methods for coping with Bullwhip effect

Simply deal with the causes
 Focus on the customer
Optimal network design centered around your customer. Segment your supply chain based on
your value proposition.
 Define the right push-pull boundaries and strategy
Optimize your inventory allocation based on demand certainty. Stable demand = push strategy.
Demand uncertainty = pull strategy. Often you will be somewhere in the middle with a push-pull
strategy.
 Share Information
Lack of visibility = rise in costs. Encourage information sharing among your partners. Be a
catalyst and good example of information sharing. Work with suppliers on releasing lead times
and improving on time delivery.
 Manage Your Product Portfolio
Complexity management = thorough evaluation of the products in your portfolio. Make a joint
agreement with product development, product management, marketing and finance on the
criteria and guidelines for a New Product Introduction (NPI).
 Break order batches
Use EDI Exchange to reduce the cost of placing orders. Place orders more frequently. Ship
assortments of products in a shipload to counter high transportation costs or use a third party
Logistics Company to handle shipping.
 Stabilize prices
Manufacturers reduce the frequency and level of wholesale price discounting to keep customers
from stockpiling.
 Eliminate gaming in shortage situations
Suppliers should allocate products based on past sales numbers. Eliminate return policies so
retailers can't cancel orders.
 Reduce Lead Times
- EDI
- Cross Docking
 Alliance Arrangement of Vendor managed inventory, On-site vendor representatives
 Counter measures to order batching like use of EDIs, computer aided ordering, random or
correlated ordering ( to counter regular delivery appointments)
 Counter measures to short gaming by allocating unit based on past sales, sharing capacity
and supply chain information, reducing order size flexibility and implementing capacity
reservation.
 Counter measures to fluctuating prices for example high-low prices can be replaced with
every low price, special purchase contract
 Counter m ensure to demand forecasts inaccuracies you can use VMI, reduce lead time,
provide access to point of sale(POS) data
 Free return policies-such policies could be eliminated.
 Vendor Managed Inventory (VMI)
 Just In Time replenishment (JIT)
 Demand Driven Material Requirements Planning (DDMRP)
 Strategic partnership
 Information sharing
 smooth the flow of products
o coordinate with retailers to spread deliveries evenly
o reduce minimum batch sizes
o smaller and more frequent replenishments
 eliminate pathological incentives
o every day low price policy
o restrict returns and order cancellations
o order allocation based on past sales instead of current size in case of shortage