VALUE CHAIN MANAGEMENT NOTES (DEGREE)

NOTE: I will be adding other reading material

INTRODUCTION

“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 in your business.

In competitive terms, value is defined as the amount buyers

are willing to pay for the goods or service that a firm
provides them. Value for a firm is measured by total revenue
derived from the price and the units of product sold. A firm is
profitable if the value, which it commands, exceeds the costs
involved in creating the goods or service.

Value is “what you get” vs. “what it costs”.

What you get;

 Product or service of a desired quality

 Reliability of processes (e.g., on-time delivery)
 A product or service that meets your needs

What it costs;
 Purchase price of components and services
 Lead time for; delivery, payment

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  Indirect cost (such as transaction costs for purchasing
and installation)
 Service requirements for operation maintenance, &
commissioning.

The goal of value chain management is to deliver maximum

value to the end user for the least possible total cost. And it
involves the activities within the organization (internal
supply chain).

Define Value chain.

A value chain is a linear map of the way in which value is
added through a process from Raw materials to finished
delivered products. It includes continuing service after
delivery.

In the value chain, value activities are the physically and

technologically distinct operations that a firm performs to
create a product valuable to its buyers

The ultimate goal of any business is to provide value to its

customers and earn a profit margin from its products or
services. A business will be profitable if the value that it
creates or adds is greater than the cost to produce goods or
services.

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Margin is the difference between total value and the
collective cost of performing value activities.

Define Value Chain Management.

This is the planning, controlling, coordination and monitoring
of the value chain (in which value is added through a process
from Raw materials to finished delivered products &
continuing service after delivery)

1.3 Differences between Value Chain & Supply Chain

Supply Chain Value Chain
1 Definition defers i.e. is that Definition defers i.e. linear
. network of organizations map of the way in which
that are involved through value is added through a
upstream & downstream process from Raw materials
linkages, in different to finished delivered
processes & activities that products. It includes
add value in the form of continuing service after
products /services in the delivery.
hands of the ultimate
customer.

2 Outside the organization Within the organization

. boundaries. boundaries
3 More members/players Few members/players
.

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Assignment:
Find out more differences between the value chain & supply
chain
And while supply chains focus primarily on reducing costs
and attaining operational excellence, value chains focus
more on innovation in product development and marketing.

Note that, A supply chain becomes a value chain when all

participants put exceptional care and effort into providing
value to their direct and indirect customers and in to
removing waste from the project delivery system.

The Value Chain System

In Porter's framework, a firm's value chain is a part of a

larger stream of activities, called a value system, performed
by its business partners and competitors. In this value
system, suppliers have value chains that create and deliver
the input to be used in a firm. Then firm's products or
services pass through the value chains of distributors
(channels) to the buyer. Distributors perform additional
activities that affect the buyer as well as influence the firm's
activities. At last, a firm's product becomes part of its
buyer's value chain determining buyer needs. In each part of

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the value system, the agents create added value as the
product and/or service flow through the stream to final
consumers.

A firm's value chain is part of a larger system that includes

the value chains of upstream suppliers and downstream
channels and customers. Porter calls this series of value
chains the value system, shown conceptually below:

The Value System

Supplier Firm Channel Buyer

... > Value > Value > Value > Value
Chain Chain Chain Chain

Value Systems
Linkages also exist between a firm's chain and the value
chains of suppliers and channels.
Suppliers produce a product or service that a firm uses in its
value chain, and suppliers' value chains also influence the
firms at other contact points (generally referred to as an
extended value chain). For instance, suppliers can reduce
firm's inventory, inspection, and handling cost. These
linkages can significantly affect a firm's cost and

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differentiation. It is possible to benefit both the firm and
suppliers by influencing the configuration of suppliers' value
chains to jointly optimize the performance of activities, or by
improving coordination between a firm's and suppliers'
chains.

Distribution channels have value chains through which a

firm's product flows to final consumers. Channel performs
activities such as sales, advertising, and display that may
substitute for or complement to the firm's activities. There
are multiple contact points between a firm's and channels
'value chains in activities such as sales force, order entry,
and outbound logistic. The channel mark-up over a firm's
selling price represents a large proportion of the final price
to the end users. Coordination and joint optimization with
channels can lower cost or enhance differentiation.

Buyers also have value chains, in which a firm's product

represents a purchased input.
Buyers could be industrial, commercial, institutional, or
individual. Individual buyers in households purchase many
products for a wide range of activities. The value created in
a buyer's chain is the perception of the buyer on the utility of
the purchased product or service. It is difficult to construct a
value chain that encompasses everything a household and
its members do.

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But one can always construct a representative chain for
household for analysis purpose.
A firm's differentiation stems from how its value chain
relates to its buyer's chain. It is a function of how a firm's
physical product is consumed in a particular buyer activity
and all other contact points between a firm's value chain and
buyer's chain. Value is created when a firm creates
competitive advantage for its buyers either by reducing the
buyers' cost or increasing buyers' performance and/or
satisfying their needs.

Value Chain Activities

The term ‘Value Chain’ was used by Michael Porter in his

book "Competitive Advantage: Creating and
Sustaining superior Performance" (1985). The value
chain analysis describes the activities the organization
performs and links them to the organizations competitive
position.

According to Porter’s 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’s competitive
advantage which may take the form of differentiation & cost
leadership approaches.

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(1) Primary Activities - those that are directly concerned
with creating and delivering a product (e.g. component
assembly, manufacture); and
(2) Support Activities- they are not directly involved in
production, they may increase effectiveness or efficiency
(e.g. human resource management). It is rare for a business
to undertake all primary and support activities.

Illustration.

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Primary Activities

A) Inbound Logistics:

All activities linked to receiving, Handling & storage of inputs

into the production system including warehousing,
transporting & stock control.

B) Operations;

All activities involved in the transformation of inputs to

outputs as the final product(s). In a manufacturing enterprise
these would include production, assembly, quality control &
packaging.

C) Outbound Logistics:

Activities involved in moving the output from operations to

end user including finished goods warehousing, order
processing, order picking & packaging, shipping transport,
maintenance of dealer distribution network.

D) Marketing & Sales: Activities involved in informing

potential customers about the product, persuading them to
buy and enabling them to do so including advertising,
promotion & market Research& dealer distribution support.

E) Service:

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Activities involved in the provision of services to buyers,
offered as part of the purchase agreement, including
installation, spare parts, delivery, maintenance & repair,
technical assistance, buyer enquiries & complaints.

Support Activities.

A) Firm Infrastructure & General Administration:

Including activities cost & asset relating to general

management safety & 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 processes & research utilization including
research & development, process design improvement,
computer software, computer aided design & engineering &
development of computer support systems.

D) Procurement.

All activities involved in acquiring resource inputs to primary

activities including purchase of fuel, energy, Raw materials,

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components, sub assemblies, merchandise & consumable
items form external vendors.

IMPORTANCE OF VALUE CHAIN MANAGEMENT

a) Increased sales resulting from increased market share.

b) Cost savings by making operations more efficient, faster,

more flexible and more responsive to market forces.

c) Higher Quality due to elimination on non value adding

activities.

d) Increased Market share due to increase in customer

service

e) Reduced Inventory thus less capital tied up and demand

pull supply.

f) Faster delivery times due to effective logistics

management.

g) Logistics management since the systems of operational

flows & plans will have been effectively improved

h) Customer service resulting from increased responsiveness

to customer orders, customer care

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i) 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…e.t.c

QUALITY MANAGEMENT IN VALUE CHAIN

Definitions

Quality is the assurance of adherence to the customer

specifications and it is a measure of excellence or a state of
being free from defects, deficiencies and significant
variation from standards. Customer specification of the
product can be met by strictly adhering to the quality
control measures in the production process and can be
ensured in a cost effective manner only if the quality of
each and every process in the organization is well defined
and ensured without any lapses

Costs of Quality

Cost of quality or quality costs in a broader sense are the

expenses incurred by an organization in achieving and

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maintaining good quality as well as in managing poor quality
throughout its line of operations with an aim to attain
highest level of customer satisfaction

Cost of quality analysis is considered as one of the most

effective management tool for gathering and analyzing the
expenses in maintaining quality in a manufacturing process
and also identifies the non-value added expenses

VALUE ANALYSIS AND VALUE ENGINEERING

The Origins of Value Engineering

Value engineering began at General Electric Co. during
World War II. Because of the war, there were shortages of
skilled labor, raw materials, and component parts. Lawrence
Miles and Harry Erlicher at G.E. looked for acceptable
substitutes. They noticed that these substitutions often
reduced costs, improved the product, or both. What started
out as an accident of necessity was turned into a systematic
process. They called their technique “value analysis”. As
others adopted the technique, the name gradually changed
to Value Engineering.

Value engineering is the application of the value analysis at

the pre – production or development stage. It is a

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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 VE 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

Value Engineering has many elements, such as, teamwork,
functional analysis, creativity, cost-worth, and the
systematic application of a recognized technique. Unless all
of these elements are used, it is not VE and it 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:

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  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 phase of the VE
study that we identify the elements that have the greatest
potential for value improvement.
The Investigation Phase 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 must it do? (Is its function basic?)
What is it worth?

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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 team 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 alike. It uses the generated ideas to
speculate on all possible solutions to the problem presented.
The team uses brainstorming to generate a 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
feasibility analysis.

4. Evaluation

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Evaluation of the best alternatives is next. The advantages
and disadvantages of each remaining alternative 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 savings until it has
been implemented. The decision makers must take the
appropriate action to insure that the suggestions are
accomplished.

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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.

SUPPLIER MANAGEMENT

Definition
'Supply Management' a broad term describing the various
acts of identifying, acquiring and managing the products
and/or resources needed to run a business or other
organization. These include physical goods as well as
information, services and any other resources needed.

Supplier Management Decisions

Supplier management concerns decisions about
 Supplier base
 Relationships with suppliers
 Supplier monitoring and evaluation
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Supplier Base
Supplier base relates to the number, range, location and
characteristics of the suppliers. A supplier base can be broad
or narrow, diversified or specialized, local or international.
In the case of supplier numbers, the options available are

a) Single sourcing - obtaining supplies from one supplier

b) Dual sourcing – obtaining supplies from two supplies

c) Second sourcing – obtaining supplies from two

suppliers, with one
Contributing 1% and the other 99%

d) Multiple sourcing – obtaining supplies from more than

two suppliers

e) Parallel sourcing – obtaining supplies for different plants

or branches from different suppliers.

f) Local sourcing – obtaining supplies from domestic

suppliers

g) International/global sourcing – obtaining supplies from

suppliers outside the country

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 h) Diversified suppliers carry a wide range of supplies
(wide assortment)
There are several reasons why firms choose a particular kind
of supplier. These reasons range from cost reduction to a
need to minimize risks.

Supplier management process:

1. Qualification: it involves the evaluation of suppliers to

determine if they are capable enough to provide
necessary goods or services to the standard set by the
buyer.
2. On boarding: the necessary information is collected as
part of the on boarding process and shared with
relevant stakeholders with in the company.
3. Segmentation: it’s the process of classifying suppliers
into specific supplier quadrants and based on a pre-
defined set of matrix such as the supplier risk(supply
criticality and the total spend)
4. Collaboration: close collaboration between suppliers
and vendors improves the relationship and commercial
value through process and performance advances and
product or services innovation.
5. Evaluation: this is the final step used to measure a
suppliers performance and ensures they meet the
terms laid by the contract.

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Relationships with Suppliers

CIPS defines SRM as ‘the process for managing these two

aspects in the interaction between two entities - one entity
is the supplier of goods or services and the other
entity is the customer/end-user organization’.

There are three types of relations between buyers and

suppliers

 Transactional Relationships/arm’s length

This is an arm’s length relationship where neither party is
concerned about the well being of the other party. This is the
most common type.
e.g, stationery

Characteristics of Transactional Relationships

i. Absence of concern by both parties about the well
being of the other party

ii. There is no sharing of costs, information and forecasts

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iii. Price is the focus of the relationship – the buyer wants
the lowest price while the seller wants to maximize
profits using a high price

iv. Market forces of demand and supply establish the price.

Advantages

i. Relatively less purchasing time and effort are required

to establish the price – price is determined by the
market forces of demand and supply

ii. Lower skill levels of procurement personnel are

required

Disadvantages

i. Communication and delivery problems

ii. High investments in monitoring incoming quality to

ensure right quality and timely delivery

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iii. They are inflexible when flexibility is required. Changing
technology and changing conditions can require
flexibility in buyer – supplier relationships.

iv. Quality will be only as good as required. There is little

incentive to improve quality

v. Transactional buyers are more subject to supply

disruptions than collaborative and alliance ones. Buyers
who maintain relations with their suppliers are less
subject to shortages.

 Collaborative Relationship/partnership
These are not usually formalized but involve the parties
working together, encouraging inter-dependence and
cooperation. Recognizing the need for interdependence and
cooperation, the customer’s firm enjoys the benefits of ESI.
Improvements in cost, quality and time to market result.

The likelihood of supply disruptions is greatly reduced.

Collaborative suppliers look out for friends, not opportunistic
customers.
Lower total costs are the common result of collaborative
relationships.

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The major disadvantage of collaborative and an alliance
relationship is the amount of time to establish this kind of
relationship. Human resources and energy required to
develop and manage the relationships.

 Alliance Relationship
These are formalized relationships between buyers and
suppliers. Special arrangements with suppliers that is
strategic in nature. The fundamental difference between
collaborative and an alliance relationship is the presence of
institutional trust.

With institutional trust, the parties have access to each

other’s strategic plans. Relevant cost information and
forecasts are shared. Risks and rewards are addressed
openly.

Attributes of Alliances

i. A high level of interdependence and commitment is

present

ii. An atmosphere of cooperation exists

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 iii. The alliance is controlled by formal and informal
interpersonal connections, information systems and
internal infrastructure

iv. Openness in all areas of the relationship

v. Alliance partners share a vision of the future

vi. The relationship is adaptable in the face of changing

environments

vii. Negotiations occur in a win – win manner

viii. Top management commitment

Benefits of Alliance Relationships

i. Lower total costs

ii. Reduced time to market

iii. Improved quality

iv. Improved technology flow from suppliers

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 v. Improved continuity of supply

Supplier and Purchasing Involvement in Specification

Development

Early supplier involvement (ESI) and early buyer involvement

(EBI) in product innovation and development is closely
related. ESI recognizes that supplier involvement can be
beneficial in terms of cost, quality and innovation, and
supplier selection. Increasing involvement of purchasing in
product/specification development will increase awareness
of purchasing function’s possible contribution to the
strategic position of an organization and also create
competitive advantage. (Lyson and Gillighan: 2003)
Supplier development: Means working collaboratively with
critical, strategic and high potential suppliers to improve
their capabilities and competitiveness in the areas of quality,
costs, time and technology for mutual benefits of the
customer and the supplier.
Objectives:
 Improve quality
 Reduce on costs
 Improve on the lead time
 To upgrade suppliers capability
 To out compete the competitors

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Reasons behind supplier development:
 Can be able to earn a competitive advantage, and this
can be through educating and

Early Supplier Involvement (ESI)

Many leading companies are forming 'supply networks' in
order to lock in the benefits of early supplier involvement
(Economist Intelligence Unit, 2005)

Vertical Coloration between supply chain partners, such that

the manufacturer tries to involve the supplier in the product
development process from a very early stage is referred to
as the Early Supplier Involvement. These suppliers act as an
important source of innovation for the product development.

ESI brings forth significant advantages due to the

involvement of suppliers in cross functional teams from the
very initial stages of product development. It helps in
improving and ensuring accountability and alignment
throughout the product development, innovation and launch
processes.

Additional significant benefits, of ESI include:

Short term benefits include

• Better production quality

• Lower production costs

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• Shorter development cycle

• Lower development costs

Long term benefits include

• Joint research programs

• Aligned technology strategies

• Risk sharing

Although beneficial, ESI also poses some challenges in its

implementation. Some of the significant ones are:

• Lack of cooperation

• Intellectual property conflicts

• Overestimation of the development skills of supplier

• Reward structure for suppliers

Involving suppliers in cross-functional teams at the early

stages of product development has strong roots in the
Japanese automotive industry (Johnsen, 2009). Today ESI
remains quite common in automotive and consumer
electronics industries (Leenders et al., 2002). Many
purchasing organisations view coordination with critical
suppliers via ESI as important enablers to product, process
and supply chain structure development and as a cost

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reduction exercise (Millson and Wilemon 2002). In addition,
adopting ESI practices may offer additional benefits to
organisations, including the management of supply risk in
new product development and the upstream supply chain
(Zsidisin and Smith, 2005). For a supplier, participation may
be embedded in the already existing partnership or alliance
with the manufacturer, or a way of securing the business
(Leenders et al., 2002).
General xtics of supplier relationship;
1. There should be trust
2. There should be commitment, the degree of
commitment reflects the willingness of each party to
exert the necessary efforts and make appropriate
investments that result into mutual benefits for both
parties
3. Frequency of communication,

Supplier lifecycle management

It’s the end to end approach that’s used to manage
strategically important suppliers from selection through a
completion of the relationship.

COMPETITIVENESS THROUGH VALUE CHAIN MGT

Achieving competitiveness through value chain

management

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The firm's margin or profit then depends on its effectiveness
in performing these activities efficiently, so that the amount
that the customer is willing to pay for the products exceeds
the cost of the activities in the value chain. It is in these
activities that a firm has the opportunity to generate
superior value. A competitive advantage may be achieved by
reconfiguring the value chain to provide lower cost or better
differentiation.

The value chain model is a useful analysis tool for defining a

firm's core competencies and the activities in which it can
pursue a competitive advantage as follows:

 Cost advantage: by better understanding costs and

squeezing them out of the value-adding activities.
 Differentiation: by focusing on those activities
associated with core competencies and capabilities in
order to perform them better than do competitors.

Cost Advantage and the Value Chain

A firm may create a cost advantage either by reducing the

cost of individual value chain activities or by reconfiguring
the value chain.

Once the value chain is defined, a cost analysis can be

performed by assigning costs to the value chain activities.
The costs obtained from the accounting report may need to

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be modified in order to allocate them properly to the value
creating activities.

Porter identified 10 cost drivers related to value chain

activities:

 Economies of scale
 Learning
 Capacity utilization
 Linkages among activities
 Interrelationships among business units
 Degree of vertical integration
 Timing of market entry
 Firm's policy of cost or differentiation
 Geographic location
 Institutional factors (regulation, union activity, taxes,
etc.)

A firm develops a cost advantage by controlling these

drivers better than do the competitors.

A cost advantage also can be pursued by reconfiguring the

value chain. Reconfiguration means structural changes such
a new production process, new distribution channels, or a
different sales approach. For example, FedEx structurally
redefined express freight service by acquiring its own planes
and implementing a hub and spoke system.

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Differentiation and the Value Chain

A differentiation advantage can arise from any part of the

value chain. For example, procurement of inputs that are
unique and not widely available to competitors can create
differentiation, as can distribution channels that offer high
service levels.

Differentiation stems from uniqueness. A differentiation

advantage may be achieved either by changing individual
value chain activities to increase uniqueness in the final
product or by reconfiguring the value chain.

Porter identified several drivers of uniqueness:

 Policies and decisions

 Linkages among activities
 Timing
 Location
 Interrelationships
 Learning
 Integration
 Scale (e.g. better service as a result of large scale)
 Institutional factors

Many of these also serve as cost drivers. Differentiation

often results in greater costs, resulting in tradeoffs between
cost and differentiation.

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There are several ways in which a firm can reconfigure its
value chain in order to create uniqueness. It can forward
integrate in order to perform functions that once were
performed by its customers. It can backward integrate in
order to have more control over its inputs. It may implement
new process technologies or utilize new distribution
channels. Ultimately, the firm may need to be creative in
order to develop a novel value chain configuration that
increases product differentiation.

Technology and the Value Chain

Because technology is employed to some degree in every

value creating activity, changes in technology can impact
competitive advantage by incrementally changing the
activities themselves or by making possible new
configurations of the value chain.

Various technologies are used in both primary value

activities and support activities:

 Inbound Logistics Technologies

o Transportation
o Material handling
o Material storage
o Communications

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 o Testing
o Information systems
 Operations Technologies
o Process
o Materials
o Machine tools
o Material handling
o Packaging
o Maintenance
o Testing
o Building design & operation
o Information systems
 Outbound Logistics Technologies
o Transportation
o Material handling
o Packaging
o Communications
o Information systems
 Marketing & Sales Technologies
o Media
o Audio/video
o Communications
o Information systems
 Service Technologies
o Testing
o Communications

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 o Information systems

Note that many of these technologies are used across the

value chain. For example, information systems are seen in
every activity. Similar technologies are used in support
activities. In addition, technologies related to training,
computer-aided design, and software development
frequently are employed in support activities.

To the extent that these technologies affect cost drivers or

uniqueness, they can lead to a competitive advantage.

Linkages between Value Chain Activities

Value chain activities are not isolated from one another.

Rather, one value chain activity often affects the cost or
performance of other ones. Linkages may exist between
primary activities and also between primary and support
activities.

Consider the case in which the design of a product is

changed in order to reduce manufacturing costs. Suppose
that inadvertently the new product design results in
increased service costs; the cost reduction could be less
than anticipated and even worse, there could be a net cost
increase.

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Sometimes however, the firm may be able to reduce cost in
one activity and consequently enjoy a cost reduction in
another, such as when a design change simultaneously
reduces manufacturing costs and improves reliability so that
the service costs also are reduced. Through such
improvements the firm has the potential to develop a
competitive advantage.

Analyzing Business Unit Interrelationships

Interrelationships among business units form the basis for a

horizontal strategy. Such business unit interrelationships can
be identified by a value chain analysis.

Tangible interrelationships offer direct opportunities to

create a synergy among business units. For example, if
multiple business units require a particular raw material, the
procurement of that material can be shared among the
business units. This sharing of the procurement activity can
result in cost reduction. Such interrelationships may exist
simultaneously in multiple value chain activities.

Unfortunately, attempts to achieve synergy from the

interrelationships among different business units often fall
short of expectations due to unanticipated drawbacks. The
cost of coordination, the cost of reduced flexibility, and
organizational practicalities should be analyzed when
devising a strategy to reap the benefits of the synergies.

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Outsourcing Value Chain Activities

A firm may specialize in one or more value chain activities

and outsource the rest. The extent to which a firm performs
upstream and downstream activities is described by its
degree of vertical integration.

A thorough value chain analysis can illuminate the business

system to facilitate outsourcing decisions. To decide which
activities to outsource, managers must understand the firm's
strengths and weaknesses in each activity, both in terms of
cost and ability to differentiate. Managers may consider the
following when selecting activities to outsource:

 Whether the activity can be performed cheaper or

better by suppliers.
 Whether the activity is one of the firm's core
competencies from which stems a cost advantage or
product differentiation
 The risk of performing the activity in-house. If the
activity relies on fast-changing technology or the
product is sold in a rapidly-changing market, it may be
advantageous to outsource the activity in order to
maintain flexibility and avoid the risk of investing in
specialized assets.
 Whether the outsourcing of an activity can result in
business process improvements such as reduced lead
time, higher flexibility, reduced inventory, etc.
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Challenges of Value Chain Management

Linkages exist not only in a firm's value chain, but also

between value chains. While a firm exhibiting a high degree
of vertical integration is poised to better coordinate
upstream and downstream activities, a firm having a lesser
degree of vertical integration nonetheless can forge
agreements with suppliers and channel partners to achieve
better coordination. For example, an auto manufacturer may
have its suppliers set up facilities in close proximity in order
to minimize transport costs and reduce parts inventories.
Clearly, a firm's success in developing and sustaining a
competitive advantage depends not only on its own value
chain, but on its ability to manage the value system of which
it is a part.

Visibility: Value chain has become extremely complex.

Achieving visibility for Tier 1, 2, 3 and beyond suppliers is
very important. Supply chain disruptions in the past five
years have shown how critical these sub-tier suppliers can
be.

Traceability: Recent events, like food safety with China's

chicken suppliers and compliance with conflict minerals

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legislation, highlight the difficulty in tracing materials from
origin to finished product. Similar to supply chain visibility,
global and complex value chain make it very difficult to
quickly and efficiently trace materials back through the
supply chain.

Complexity: In the drive to reduce costs value chain can

become very complex, creating an intricate web of global
third parties. Attempting to track and control value chain in
the face of complexity is challenging, contributing to many
of the other issues listed herein.

Costs: Competition is fierce and cutting costs is often a

necessity to maintain an edge. Lean concepts, procurement
strategies and squeezing suppliers all contribute to improved
efficiencies and reduced costs. Yet these techniques also
introduce risks to supply chain disruptions and supplier
performance issues.

Sustainability: Consumers are demanding sustainable

operations from companies, and this is no more apparent
than in value chain. The challenge is to balance the need to
demonstrate sustainable sourcing while maintaining cost
competitiveness.

Supplier performance: As suppliers are squeezed on

costs and tight delivery schedules, they may be enticed to

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cut corners. This can result in quality problems which can
have significant knock-on effects throughout the supply
chain.

Natural disasters (e.g. extreme weather,

earthquakes, and floods): There is little doubt that global
weather patterns are changing and the incidence of extreme
weather events seems to be on the rise. Extreme weather
events such as typhoons, floods and extended deep freezes,
coupled with earthquakes and volcanoes, can have a
significant impact on value chain depending on location and
duration.

Technology: Technological innovations can markedly

improve supply chain visibility and performance. It can also
create significant difficulties if it doesn’t perform as
expected, cannot be managed appropriately, or cannot
adapt to dynamic changes in value chain.

Cyber risks / IT issues: Value chain is highly dependent on

the flow of information up and down the value chain, and the
integrity of that information. Cyber attacks are a constant
threat and can result in loss of commercial information,
exposure to stolen confidential information and an inability
to conduct business for some period of time.

EMERGING ISSUES IN VALUE CHAIN MANAGEMENT

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 Information Technology and the Value Chain

There is distinction between Information Technology and

Information Communication Technology as the later
emphasizes networks e.g. VAN (Value Added Network), WAN
etc. While ICT looks at the transfer of information or data
electronically with the aid of computers and any other
hardware devices the tools involved include the EDI –
Electronic Data Interchange, EPOS – Electronic Point of Sale
among others. Through the Value Chain, these tools are
used in the transfer of data through the different functional
areas in organizations implementing Value Chain
Management.

EDI – this is a technique based on agreed standards e.g.

ASC*12 or EDIFACT which facilitates business transactions
through standardized electronic form in an automated
manner directly from a computer application in one
organization to an application in another.
EDI (Electronic Data Interchange) is the transfer of data
from one computer system to another by standardized
message formatting, without the need for human
intervention. EDI permits multiple companies -- possibly in
different countries -- to exchange documents electronically .

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Advantages of applying EDI

 Reduction in administrative costs e.g. replacing the

paper documents such as invoices, purchase orders
among others with standard electronic messages
conveyed between computers.
 Reduction in lead times as buyers and consumers work
together in a real time environment.
 Reduction in the cost of inventory and release of
working capital.
 Promotes strategies like the JIT due to fast information
transfer.
 Better customer service as orders are easily met with
the help of up to date information as regards the
available products.
 Facilitates global purchasing through use of
international standards and in-co terms.
 Integration of functions e.g. the marketing, purchasing,
production and finance functions through real time
information sharing.
 It also promotes long term buyer - supplier
relationships and increase of mutual trust.

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Benefits of I.T in value chain management.
 24 hours service to customers e.g. procuring on line.
 Aggregation of information from several sources as
there is integration of all the functional departments in
an organization.
 Accurate audits as and when required of the
transactions – interim audits are possible as the
information is kept up to date.
 Personalization and customization of information e.g.
deciding who accesses what and how it should be
viewed.
 Purchase of materials both directly and indirectly at
lower costs due to price transparency and competition
on the e – markets.
 Greater efficiency when purchasing goods and
services. Time is saved when finding goods over the
internet as compared to manual searching.
 Improved relations between suppliers and purchasers
due to integrated I.T systems. This allows them to plan,
forecast and schedule production together.

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Challenges of implementing I.T in organizations

 Costs associated with the initial acquisition, repair,

maintenance and implementation of I.T software and
hardware are quite high and may not be afforded by
small firms.
 Inflexibility – it’s only applicable to straight forward
transactions like placement of purchase orders and
may not apply where there is need to negotiate for
transactions.
 Organizational and process changes involved can be
costly to the organization as users take long to adjust.
It will require a lot of training and practice for staff to
cope with the systems.
 Controlling the flow of information can also be very
difficult e.g. when a document is sent onto a network
with errors, it cannot be retrieved for editing.
 Accessibility of information – both users and non users
can receive information that they don’t require and this
can be dangerous if it lands in the hands of
competitors.
 Protection of information from infection by both the
harmful viruses and warms. This could lead to a lot of
data loss where the computer system crashes.

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Ethical Issues in Value Chain Management

Ethics is concerned with the moral principles and values

which govern our beliefs, actions and decisions. The way
that a business conducts itself in its ordinary, everyday
activities, the way it designs and supports its products, the
way it awards contracts and apportions blame etc, are some
of the key determinants of whether the business is ethical.

A general field; values are principles of conduct governing an

individual or group and concern for what is right and wrong,
good or bad.

Professional ethics are guidelines or best practice that

embody ideals and responsibilities that inform practitioners
as to the principles and conduct they should adopt in certain
situations.

Scope of ethics
Ethics does not only concern bribes and confidentiality, it is
however much broader than this. Ethics is concerned with
‘values’. Value is a general term relating to those things
which people regard as principle on which we make ethical
decisions.

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Principles of ethics
 Impartiality or objectivity.
 Openness and full disclosure.
 Confidentiality.
 Due diligence, competency and a duty of care.
 Fidelity or loyalty to professional responsibilities.
 Avoiding potential or apparent conflicts of interest.

Importance of Ethics in organizations

Ethics are important for the following reasons;

 Organizational staffs (purchasing officers) are the
representatives of their organizations in its dealings
with the supplier and must be able to act accordingly
by following the organization’s ethics.
 Sound ethical conduct in dealing with suppliers is
essential to the creation of long term relationships and
the establishment of supplier goodwill.
 Purchasing staff are probably more exposed to the
temptation to act unethically than most other
employees; it’s more of a reminder to act accordingly.
 It’s impossible to claim professional status of an
organization (all functions i.e. primary and secondary)
without a consideration of its ethical aspects.

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Ethical codes
One of the essentials of a profession is adherence to a code
of conduct. Professions such as medicine, law, accountancy
and architecture have issued codes of conduct that are
national and international. These codes cover areas like
human rights, labor and the environment.

Importance of ethical codes

 They provide guidance and instill the company’s
values, cultural substance and style in managers and
employees.
 They signal expectations of proper conduct from
suppliers and customers.
 They pre – empt legal proceedings, i.e. unethical acts
like taking bribes will be avoided and therefore prevent
legal investigation.
 Codes of ethical practice nurture an environment of
open communication through the management
structures of any organization.
 Ethical codes provide a basis for working together;
most codes require that people treat each other with
respect.

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  Ethical codes set boundaries as to constitute ethical
behavior as determined by organizational and
professional values e.g. boundaries of confidentiality,
disclosure of information, competition, business gifts,
hospitality, declaration of interest, etc.
 Ethical codes provide a commonly held set of
guidelines, enabling what is right and wrong in a given
situation to be judged on a consistent basis.

Criticism of ethical codes

The cited obstacle to ethical codes is the conflict between
employees own profession’s ethical code and the ethics of
their organization. Employees are forced to either remain
silent or speak and face the wrath of the organization e.g.
loosing ones job.
 High unemployment affects organizational ethics.
 What people say and do is different.
 People suppress their own ethical values to be
generally accepted and to get on in business.
 The more senior one gets or you are, the easier it is to
maintain an ethical stance.

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