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Value Chains

COLLIER/EVANS

Explain the concept of value and how it can be increased

Describe a value chain and the two major perspectives that characterize it

Explain outsourcing and vertical integration in value chains

LEARNING OUTCOMES

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Explain offshoring and reshoring, and issues that managers must consider in making these decisions

Identify important issues associated with value chains in a global business environment

Describe how sustainability plays an important role in value chains

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LEARNING OUTCOMES (continued)

Value Chain

Network of facilities and processes that describes the flow of goods and services, from suppliers through the facilities and processes that:

Create goods and services and deliver them to customers

Views an organization from the customer’s perspective

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Supply Chain

Portion of the value chain that focuses on:

Physical movement of goods and materials

Supporting flows of information and financial transactions through the supply, production, and distribution processes

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The Concept of Value

Underlying purpose of every organization is to provide value to its customer and stakeholders

Value: Perception of the benefits associated with goods and services in relation to what buyers are willing to pay for them

Value proposition: Competitively dominant customer experience

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2.1 An Input-Output Perspective of a Value Chain

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Exhibit

2.3 The Value Chain at Buhrke Industries

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Exhibit

2.4 Pre- and Post-Service View of the Value Chain

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Exhibit

2.5 A Value Chain Model of Amazon

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Exhibit

Value Chain Decisions

Operational structure: Configuration of resources such as:

Suppliers

Factories

Warehouses

Distributors

Technical support centers

Engineering design and sales offices

Communication links

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Vertical Integration

Process of acquiring and consolidating elements of a value chain to achieve more control

Backward integration: Acquiring capabilities toward suppliers

Forward integration: Acquiring capabilities toward distribution or even customers

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Outsourcing

Process of having suppliers provide goods and services that were previously provided internally

The United States has experienced waves of outsourcing such as:

Goods-producing jobs

Simple service work

Skilled knowledge work

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The Economics of Outsourcing

VC1 = Variable cost/unit if produced

VC2 = Variable cost/unit if outsourced

FC = Fixed costs associated with producing the part

Q = Quantity produced (volume)

Total cost of production = (VC1)Q + FC

Total cost of outsourcing = (VC2)Q

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The Economics of Outsourcing

If the total cost of outsourcing is less than the total cost of in-house production, then outsourcing is a better decision

If not, the firm should produce in-house

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Value Chain Integration

Process of managing information, physical goods, and services to ensure their availability at the right:

Place

Time

Cost

Quantity

Quality

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Value Chain Integration

In manufacturing

Consolidating information systems among suppliers, factories, distributors, and customers

Managing the supply chain and scheduling factories

Studying new ways to use technology

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Value Chain Integration

In services

Third-party integrators for the leisure and travel industry

Information networks provided by third-party information technology integrators

Third-party integrators that manage patient billing and hospital inventories

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Offshoring and Reshoring

Offshoring: Building, acquiring, or moving of process capabilities from a domestic location to another country location while maintaining ownership and control

Involves determining what value creation, support, and general management processes should move to other countries

Reshoring: Process of moving operations back to company’s domestic location

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Things to Consider When Making Offshore Decisions

Low labor costs

Lower import duties and fees

Lower capital costs

Grow global market share

Avoid national currency fluctuations

Preempt competitors from entering global market

Hire worldwide skills and knowledge workers

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Things to Consider When Making Offshore Decisions

Build robust value chain networks for global markets

Build relationships with government officials

Negative impact and media attention on remaining employees

Potential loss of intellectual property

Loss control of key processes

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Things to Consider When Making Offshore Decisions

Develop secure sources of supply and reduce risks

Build relationships with suppliers

Avoid environmental regulations and laws

Possible political instability in offshore country

Lack of communication and/or technical skills

Learn foreign markets and cultures

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Value Chains in a Global Business Environment

Multinational enterprise: Organization that sources, markets, and produces its goods and services in several countries

To minimize costs

To maximize profit

Provide satisfaction to customers

Contribute to social welfare

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Challenges Facing Multinational Enterprises

Designing a value chain to meet the slower growth of:

Industrialized countries

Emerging economies

Locating manufacturing and distribution facilities around the globe to:

Capitalize on value chain efficiencies and improve customer value

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Challenges Facing Multinational Enterprises

Usage of performance metrics in making critical value chain decisions

Decision on whether partnerships should be developed with competitors

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2.8 Inditex’s Global Value Chain

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Exhibit

Issues for Managing Global Value Chains

Global value chains face higher levels of risk and uncertainty

Requiring more inventory

Day-to-day monitoring to prevent product shortages

Transportation is more complex in global value chains

Infrastructure vary in foreign countries

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Issues for Managing Global Value Chains

Global purchasing can be a difficult process to manage when:

Sources of supply, regional economies, and governments change

International purchasing can lead to disputes and legal challenges

Requires understanding of national cultures and practices before extending firm’s value chain to other nations

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Issues for Managing Global Value Chains

Privatizing companies and property is another form of major change in global trade and regulatory issues

Pre-planning, response, and recovery from natural or man-made disasters

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Sustainable Value Chains

Sustainability improves:

Organization’s perception among consumers

Sustainable practices can lead to increased revenues

Many customers favor products and services that are designed and produced in a sustainable way

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Sustainable Value Chains

Green operations and vocabulary

Certain terms are used to describe sustainability activities that involve operations and the value chain

Example - Green operations, green manufacturing, and green practices

OM practices can improve environmental sustainability in value chains

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OM Practices for Environmental Sustainability

Designing goods and services using recyclable and environmentally friendly materials

Remanufacturing

Designing facilities and using equipment that conserve energy

Using electronic media and technology to reduce paper and fuel

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OM Practices for Environmental Sustainability

Using transportation modes that minimize costs and carbon output

Cleaning and reusing water used for manufacturing

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Underlying purpose of every company is to deliver value to its customers and stakeholders

Pre- and post-production services are essential in a company

Decision to offshore or outsource involves a variety of economic and noneconomic issues

Sustainable practices can lead to increased revenues

SUMMARY

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Backward integration

Forward integration

Multinational enterprise

Offshoring

Operational structure

Outsourcing

Reshoring

Supply chain

KEY TERMS

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Value

Value chain

Value Chain Integration

Value proposition

Vertical integration

KEY TERMS

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