Principles of Business Operations

Topic 2:
Value Chains and Global Operations © NCC Education Limited
 Title of Topic Topic 1 - 1.2

Learning Objectives for this Unit

On completion of this unit, students will be able to:

• Understand value chains

• Understand vertical integration and outsourcing

 Title of Topic Topic 1 - 1.3

Introduction

• All organisations operate to “add value”, passing

this on to its customers and stakeholders

• This involves creating and maintaining value chains

 Title of Topic Topic 1 - 1.4

Value 1

• Today’s customers demand:

– High quality products
– Quick response times
– Excellent service
– Low prices

• Combined – these create VALUE

 Title of Topic Topic 1 - 1.5

Value 2

• Value is a perception by customers – for a good,

service or combination of both (customer benefit
package) in relation to what buyers are willing to
pay for them

• Customers make decisions to buy based on

perceived benefit against price
 Title of Topic Topic 1 - 1.6

Value 3

• To increase value, an organisation must do one or

more of the following:

– Increase benefits without increasing price

– Increase perceived benefits whilst reducing price
– Decrease price without decreasing perceived benefits
 Title of Topic Topic 1 - 1.7

Value Chains 1

• A value chain describes the flow of:

– Goods
– Services
– Information
– Financial transactions
• From suppliers, through processing, and ultimately
to the final customer
 Title of Topic Topic 1 - 1.8

Value Chain - Pictorially

Management

Inputs:
Outputs:
People Network of
Processes Goods and
Information After-Sales
Suppliers (Transformation) Services &
Service
Physical Information
goods

Land, Labour, Capital & Information Resources

Chain of Information & Feedback

Based on: Evans & Collier (2007) “Operations Management: An
Integrated Goods & Services Approach”, Thomson
 Title of Topic Topic 1 - 1.9

Class Activity

• Work in groups of about 5

• Think about the manufacturing of a bicycle that you

may have purchased. Produce a value chain for
this product, based on the model on the previous
slide
• 15 minutes
• Feedback to the class
• 5 minutes
 Title of Topic Topic 1 - 1.10

Value Chains 2

• Gaining customers involves:

– Designing goods and services

– Suppliers and purchasing services
– Contracts and finance
– Guarantees and warranties
– Education and training
– Sales and marketing
 Title of Topic Topic 1 - 1.11

Value Chains 3

• Value creation involves:

– Creating goods and/or services

– Determining process type and capability
– Determining prices, quality, learning, markets, etc.
– Building value through productivity
 Title of Topic Topic 1 - 1.12

Value Chains 4

• Keeping customers involves:

– Servicing loans and financing

– Installation, maintenance and repair
– Transportation services
– Warranty and claims services
– Training services
– Recycling
– Warehouse inventory management
 Title of Topic Topic 1 - 1.13

Supply Chains

• Part of the value chain that focuses on the physical

movement of goods and materials

• Also includes movement of information and

financial transactions through supply, production
and distribution processes
 Title of Topic Topic 1 - 1.14

Value Chain Design

• Organisations need to build an operational

structure to enable their value chains
• They need to configure resources such as
suppliers, factories, warehouses, technical support,
design and sales offices, etc.
• Technology plays an increasingly important role,
particularly in global supply chain efficiency
 Title of Topic Topic 1 - 1.15

Vertical Integration

• This is a key consideration for organisations –

whether to acquire another part of the value chain
to gain more control – but on the downside it
increases complexity

• Involves either acquiring a supplier or a customer,

or bringing a process in-house
 Title of Topic Topic 1 - 1.16

Outsourcing

• The process of having suppliers provide goods and

services that were previously provided internally
• The opposite of vertical integration
• It is not “all or nothing” – it can range from entire
functions (e.g. IT) to specific elements (e.g. a
Marketing Department outsourcing telemarketing)
 Title of Topic Topic 1 - 1.17

Advantages of Outsourcing

• Utilise an organisation that is better at building a

product/delivering a service than you are
• Improved return on investment through lower investment
in plant and equipment
• Lower labour costs
• Transfer of fixed costs to variable costs
 Title of Topic Topic 1 - 1.18

Disadvantages of Outsourcing

• Is there a danger of creating a competitor?

• Losing customers – is the supplier the new face of your
company?
• Information leakage to competitors – does the supplier
work for other companies (including the competition)?
• Outdated knowledge – are you becoming too dependent
on the supplier?
 Title of Topic Topic 1 - 1.19

Virtual Integration

• New form of value chain management where use of the

Internet and EDI increases online collaboration between
business partners
• Popular way of working when business partners are
located remotely
• Barriers between suppliers and distributors are less rigid
and costs are lower
 Title of Topic Topic 1 - 1.20

Value Chain Integration

• Involves managing:
– Information
– Physical goods
– Services
• Aim is to ensure their availability, ensuring:
– Right time
– Right place
– Right cost
– Right quantity
– Correct level of quality
 Title of Topic Topic 1 - 1.21

Value Chains and Globalisation

• Many organisations now operate in value chains

that span international boundaries

• Multinational organisations source, market and

produce goods and services in several countries to
reduce costs and maximise profit, customer
satisfaction and social welfare
 Title of Topic Topic 1 - 1.22

Offshoring 1

• This involves the building, acquiring or moving of

one or more processes to another location in a
different country whilst still maintaining ownership
and control

• Generally this is undertaken to reduce costs

 Title of Topic Topic 1 - 1.23

Offshoring 2

• Sometimes offshoring is used to gain specific local

skills or knowledge

• Also used to establish supply specific markets

• Sometimes created to gain a foothold in a particular

overseas market
 Title of Topic Topic 1 - 1.24

Advantages of Offshoring

• Lower total cost of goods and services

• Organisational survival in the face of global competition
• New business from markets where jobs reside
• Opportunities for more interesting work by moving more
boring jobs
• Lower global inflation
• 24/7 customer care and services
• Tap into expertise of workers around the world
Source: Evans & Collier (2007) “Operations Management: An Integrated Goods & Services Approach”, Thomson, p. 61
 Title of Topic Topic 1 - 1.25

Disadvantages of Offshoring
• Higher local unemployment; costs of
unemployment benefits
• High retraining costs
• More uncertainty & less future job security
• Difficulty of co-ordinating a global workforce
• Less control of core offshored capabilities
• Transfer of knowledge to other firms
• Political issues & restrictive laws
Source: Evans & Collier (2007) “Operations Management: An Integrated Goods & Services Approach”, Thomson, p. 61
Management Issues in Global
Title of Topic Topic 1 - 1.26

Value Chains 1

• Global supply chains face higher levels of risk and

uncertainty (including regulatory risk)
• Transportation is more complex in global value
chains
• Quality of transportation infrastructure (road and
rail, etc.) varies enormously from country to country
Management Issues in Global
Title of Topic Topic 1 - 1.27

Value Chains 2

• Global purchasing can be difficult to manage, e.g.

fluctuations in currencies
• International purchases can lead to disputes and
legal issues
• Increase in privatisation globally improves
efficiencies and effectiveness in global supply
chains
Management Issues in Global
Title of Topic Topic 1 - 1.28

Value Chains 3

• Important to understand local cultures when

developing global value chains
• Local cultures vary enormously – operations
managers must be sensitive to these
• Be aware of security threats from criminals, social
unrest and terrorism
 Title of Topic Topic 1 - 1.29

Class Activity

• Work in groups of about 5

• Using the bicycle manufacturer that you considered for

Activity One – what might this organisation do to “add value”
to its products & services in the future?
• 10 minutes

• Feedback to the class

• 5 minutes
 Title of Topic Topic 1 - 1.30

Conclusions
• Organisations seek to build value into their products and
services

• All organisations operate within a value chain – sometimes

using vertical integration or outsourcing to increase value in
the supply chain

• Globalisation has created many new opportunities (and

risks) for organisations to consider with respect to their
value and supply chains
 Title of Topic Topic 1 - 1.31

References

• Evans & Collier (2007) “Operations Management:

An Integrated Goods & Services Approach”,
Thomson
• Jones & Robinson (2012) “Operations
Management”, Oxford University Press
Topic 2 – Value Chains and Global
Operations

Any Questions?