Manufacturers are familiar with the term supply chain. They understand that it encompasses the acquiring of materials through production to delivery to the customer. Supply chains focus on the cost of materials and effective product delivery. A well-integrated supply chain reduces costs and increases profits.
The value chain is a business model that looks at the discrete activities of an entire organization from design through delivery. Its focus is on increasing efficiency while delivering maximum value at the least possible cost. It identifies what gives an organization a competitive advantage.
Harvard Business School's Michael E. Porter first introduced the concept of a value chain in 1998. For Porter, competitive advantage comes from discrete activities such as designing, producing, marketing, delivering, and supporting an organization’s products or services. These activities determine a basis for differentiation.
Porter separated the discrete activities into primary and secondary. Primary activities align with the activities of the supply chain, such as inbound and outbound logistics, operations, sales and marketing, and service and support. Secondary activities provide the infrastructure that the primary activities depend on. These include infrastructure, technological development, human resources, and procurement. A careful analysis of the value chain reveals what impacts a company’s costs and identifies its competencies.
As part of the analysis, the value chain can and should be mapped. Mapping not only visualizes the processes and how they intersect, but it also highlights areas for innovation. It provides context for individuals to communicate at each stage of the process and makes managing the process easier.
According to McKinsey, changing trends in customer expectations are driving changes in supply chain management. Customers are expecting supply chains to be:
- Faster - Although Amazon holds the patent on “predictive shipping," more companies will need to use weekly, if not daily, forecasting to predict what inventory needs to be where to meet customers’ expectations of fast delivery.
- Flexible - Planning cycles become a continuous process where changing requirements or constraints are addressed in real-time.
- Customized - Customers want more individualized products, which requires micro-segmentation of the market. It also requires continuous information flow in both directions to deliver customized products.
- Accurate - Data accuracy is a given for the value chain model to work. The information must reach all levels of an organization. In-the-moment decisions should be based on accurate data from the most reliable sources.
Appealing to these requirements ensures you'll create a seamless customer experience from design to delivery.
As part of their analysis, companies should identify what drives the cost for each activity. Is it work hours or wages? Machine use or setup? What about materials and shipping? Whatever the activity, look at the links between activities to see where cost reductions can take place. Porter listed factors that he felt drove costs. Learning, interconnected activities, and collaborative communication are a few of the activities that can impact costs.
Looking at the connections between activities can identify ways to reduce overall costs by lowering costs in one or more activities. In many instances, reducing costs in one activity impacts the costs in another activity, which often leads to even more cost savings. For example, integrating learning and knowledge sharing into the value chain reduces the possibility of duplicating effort.
Differentiation can come from offering a unique or highly specialized product or service. It can also come from an organization’s core competencies that outperform competitors. Starbucks and Apple are two companies that chose to differentiate themselves through unique and highly specialized products. This strategy allows companies to devote more time and resources to innovation, research, and development because they set a premium price that customers are willing to pay.
Possible core activities that can lead to differentiation include interconnectedness, learning, or interrelationships. A company can leverage its effective communication and strong relationships with its supply chain to deliver products faster than its competitors. However, differentiation can result in increased spending. It is essential to find a balance that creates the most value.
Value Chain Experiences
Whether it’s a seamless customer experience or a more customized product, manufacturers must look for ways to reduce costs and improve sales. Two companies that have made changes as a result of the value chain model are Deere & Company and Shell.
Deere & Company
Using value chain analysis, Deere & Company discovered that it had outsourced a significant percentage of its production work. While outsourcing can be beneficial, it can also result in a loss of control, making it difficult to introduce change. Deere needed to improve its inventory distribution, but most of its information came from suppliers rather than sellers. Deere recognized that it was necessary to find ways to manage its extended enterprise if it was going to change its production model.
Deere’s production model had to change from inventory heavy to just in time. That change required communication. Stores had to communicate their inventory needs up the supply chain, so suppliers knew what to produce. Deere created warehousing facilities that held a minimum inventory of what stores required. As the stock was sold, suppliers were notified so that replacements could be provided. To make that happen, Deere built collaborative relationships to improve the flow of materials and information and to create a better customer experience.
Shell Chemical Co. needed a better method of inventory control. It developed software that enables its vendors to share information on inventory. Before the software was implemented, Shell and its suppliers were passing data back and forth without controls, resulting in duplication of effort. With a centralized system, all the information resides in one location, making it easier to manage its supply chain.
Now, the extended enterprise can share information on inventory and consumption levels. Information flows in both directions, so everyone has a better understanding of the customer. The value chain process created value for the customer by using information technology. Within the first year after deployment, revenues increased by a reported $20 million.
Knowledge Supports Thriving Value Chains
Access to real-time information plays a significant role in creating a value chain network. Shell needed the information to flow in both directions to create customer value. Deere needed to improve collaboration with its supply chain to optimize its delivery methods. Without the ability to share up-to-date information, neither of these improvements could have been made.
This is why proper knowledge management is essential for successfully implementing the value chain model. If you need advice on how to get started, or how to optimize existing knowledge management processes within your organization, we're here to help.