Value Chain Management
Value chain management or value chain analysis is a concept that is used in business management and was first given description and popularization by Michael Porter in his book “Competitive Advantage: Creating and Sustaining Superior Performance published in 1985 p. 67-78”. Value chains are successions of activities that are involved in every firm in the production of products so that they will be ready to satisfy clients' needs. Each specific industry has a chain of activities that are involved in the production process. Each product goes through a chain of activities in the described order of events such that at each level or stage the product will receive additional value till it gets to the end of the chain where it can satisfy the consumer's needs. So every product that a consumer receives is a summation of all the activities of the value chain process (Porter 1985, p. 67-78).
The value chain is used to categorize the generic-value adding activities of an organization in question. There are primary and secondary activities that are involved in the chain of activities. The primary activities may include the following: The inbound logistics, production or operations, the outbound logistics, the sales and marketing of the products, and finally the service maintenance. The secondary activities also called as the ‘support activities' include: the human resource management, the administrative infrastructure management, support technology (R & D), and the procurement process. For each of the value-activity the value drivers and the cost are identified. The value chain management has been used over time as a powerful tool in the analysis of the strategic planning. The success of value chain was first felt in the early 1990's (Horizontal Corporation 1993, p.12-20).
Managing supply and demand: Quality, and performance management:
The provision of more capacity in a production system or a service delivery system has always been an alternative. Nevertheless one must never forget that one of the options that exist is to manage demand and supply so as to better make use of capacity. When we are tackling the concept, managing supply the focus is in optimizing the supply capacity present in the business. In the management of demand the endeavor is to attempt to influence the demand blueprint that is interacting over the business in question. The challenge that one may face in the production planning is to effectively match supply and demand to suitably fit the situation to the utmost extent possible (Production strategy process 2010, p. 5).
The demand and supply can be influenced by a business manager.
Management of supply: a manager may employ chase strategy or level strategy.
In many large corporations there are a number of levels of strategies, the highest of them being strategic management in the sense that it is the broadest. It applies all the parts of a firm and gives the directions to corporate culture, corporate values, corporate mission and corporate goals. Under the strategic management there exists business unit or functional strategies (Business PME 2008, Para. 1)
Under the functional strategies there are new product development strategies, marketing strategies, financial strategies, human resource strategies, information and technology strategies, and strategies for management of information and technology and legal strategies. Every functional department makes an attempt to meet the overall corporate objective of the organization which makes every department to some extent derive its strategies from the broader corporate strategies (Business PME 2008, Para. 2).
Under the strategic business unit many corporations have a feeling that functional organization structure does not serve as an efficient way in the organization of activities hence they have been reengineered in accordance with strategies of business units known as SBUs. Strategic Business Unit (SBU) can be perceived as a semi-autonomous unit in an organization which is responsible for its decisions regarding its new product, its own budgeting, price setting and hiring decisions. SBU does the role of developing the business strategies and for that matter strategy suitable and tuned to the broader corporate strategies (Business PME 2008, Para. 3).
Operational level strategy:
An operational level strategy is the lowest level of strategy in the hierarchy. It is quite narrow in its focus and deals with the day to day operational activities of an organization such as the scheduling criteria. Operational level strategy is required to operate within a budget whereby it is not mandated to create or adjust the budget. Peter Ducker is the key figure renown for his role in encouraging operational level strategy the theory that he had developed: theory of Management by objective (MBO). The corporate business strategies play the role of informing the business level strategies who in turn informs the operational level strategies. Business strategy, referring to aggregated operational strategies of a SBU in a diversified corporation or a single business firm refers to the technique in which a firm contend in its chosen arenas. Therefore a corporate strategy refers to an overreaching strategy of diversified firms. Corporation strategy hence answers the question of the most appropriate business that a corporation should compete with. Or in what ways is being in a given business add to the competitive advantage of another selection firm and the competitive advantage of the entire corporation (Business PME 2008, Para. 4).
Chase strategy is mostly employed in a situation where there is a fluctuation of demand up and down due to the recurring nature of the business in question. The recurrences could be in a month of a year, a week of a month, a day of a week or a time of a day. In the chase strategy the manager should adjust the capacity up and down so as to match the demand to be as close as possible. For instant, in a bar or in a restaurant in the start of or during a weekend the management should hire more casual worker to meet the clients demand since the clients are most during this period. In case the number of clients is beyond what one had guessed he may send some back home after some few hours; hence the concept of chasing demand whereby the management adjust the capacity to the demand present dynamically as well as quickly as one can (Production strategy process 2010, p. 5).
Level strategy involves the maintenance of the capacity at a constant level without putting the demand into consideration. For instant if we consider a law firm the number of hours that an employee spends serving a client is predetermined, thus there is a set number of billable hours. In case there are some more accounting that are given on a given day the management do not go out to source for part-time accountants to do the job for some few hours as a restaurant or a bar manager would hire some quick part time waiters. The skills that is in demand, the training that is necessitated, the cost of hiring workers as well as terminating of their contracts varies with the kind of service that an accountant would require than a bar attendant would. Ability to adjust the capacity to oscillation is constrained (Production strategy process, 2010, p 5).
In the evaluation of the role and the importance of value strategies Monczka, Handfield, and Giunipero, have argued that the delivery of finished product is dependent on supplies as well as the ability to secure the critical raw materials. The challenge that may come in is if there is a shortage in the supply of the raw materials. One of the greatest importances of value chain strategies is that the management gains ability of understanding the total values chain's material needs as well as the capability of publishing and coordinating schedules for sub-tier suppliers. This ability enables one to have control over the materials and part-source decisions. One is also able to do management of cost exposure to the materials prices vivacity (Monczka, Handfield, & Giunipero 2008, p. 666).
Lutz-Priefert argues that the more the management understands about how a product or a service interacts with the clients or the needs of consumers, the more they can manage to match the company's strength with a consumers need. This is the most appropriate approach to winning the market (Lutz-Priefert 2007, Para. 2).
Any company ought to see value chain analysis as an integral part of its strategy. Those in the senior management should direct the managers in the sales, customer service, and operational departments to map out the various contact points existing in between the customer's value chain and the company's value chain in order to ferret what mostly matters to the customers. The company will then forge ahead to engineer the product or the service so as to profitably provide an end product that is fitting to the customer's need and satisfaction and at the same time for the company's strength (Lutz-Priefert, 2007 Para 3).
The people with this responsibility should approach the customers and ask them what kind of product they want. This involves the creation of a customer survey tool where you will get their feedback use it in the production process after an analysis. One should get to understand how the customer uses the products as well as what they like about the product (Lutz-Priefert 2007, Para. 4).
Through value chain strategies, an organization is enabled to secure an improved procurement as well as improved logistics. Any planning that the management of organization doe is guided by the information obtained in the chain of value chain management. It's through this process that a company will attain an enhanced customer's order management as will as improved product development. The producers in a company will learn the most appropriate feature of a product that a customer wants and use that knowledge to engineer that product. The demand for the product is bound to increase leading the company to increase the production and the supply for the strengthening of the company (Robbins2007 19-50).
Critical success factor
Critical success factors (CSF) can be defined as the critical activities or factors that are required for ensuring the success of a given business. The term has been in use in business analysis and in world data analysis. They have been used to identify or present some key factors that organizations ought to focus on in order to achieve their objectives. It refers to the limited areas where satisfactory results ensure successful competitive performance for the departments, organizations and specific individuals. The critical successful actors for one company differ to a great degree with those of others. For any company to be successful the application of the critical successful factors should be inline with the central activities of the organization in question. The management of demand and supply should endeavor to identify the key areas that will facilitate the matching of the demand to the supply for the customer's optimum satisfaction. The management should aim a stating the importance of the critical factors to the given business. This will enable the firm to concentrate its efforts on building their capabilities so as to meet the CSF's. For any organization the most basic critical factors include: new product development, effectiveness and advertising and good distribution (Rockart 1979, p 81-93).
Value chain analysis: Michael Porter 1985
The book ‘The Competitive Advantage' by Porter in 1985 was used to introduce the concept of value chain. He pointed out that chain activities within in an organization play the role of adding value to the company's products and services and all the activities should be run at most favorable levels if the organizations in question is to gain any real competitive advantage. He argues that if the chain activities were to be run effectively the value of the product that would be obtained ought to exceed the cost of running them; the customers ought to return to the organization and transact willingly and freely. Porter made a suggestion that the organization should be split into primary activities and secondary activities ‘support activities' (Porter 1996, p. 61-78).
Michael E. Porter's generic value chain model to illustrate markets and steps of business
Source: Value chain as a basis of critical success factoranalysis
The primary activities: inbound logistics refers to goods that are obtained from the organization's suppliers. The products / raw materials come ready to be used for the production of the end product (Porter 2010, Para. 2).
Operations: The goods and raw materials that are obtained are manufactured into the consumable product. This becomes the first stage of value addition in the production line (Porter 2010, Para. 2).
Outbound logistics: When a product has been manufactured to the end consumable product it is ready for distributed to the centers of distribution, wholesalers, retailers and consumers (Porter 2010, Para. 2).
Marketing and sales: The marketing process should ensure that a product is targeted to the product consumers. The use of marketing mix is for establishing a valuable strategy whereby any competitive advantage should be communicated with clarity to the target group using promotional mix (Porter 2010, Para. 2).
Service: after a service or a product has been sold the organization should offer support service. This may be in form of warranties, training, guarantee or others after sale services (Porter 2010, Para. 2).
Porter has argued that a combination of any of the above activities may be essential for an organization to develop the competitive advantage (Porter 2010, Para. 2).
Support: Secondary activities: The role of the support activities is to assist the primary activities in serving the organization so as to achieve its competitive advantage. The support activities include: procurement, technology development, Human resource management, and firm infrastructure (Porter 2010, Para. 3).
Procurement: The procurement department should source for the raw materials necessary for the production in an organization as well as obtain the best price for doing so. The department should be sensitive about the quality of the raw material obtained for it will determine the end product which consequently will have an effect on customer's preference (Porter 1996, p. 61-78).
Technology development: This involves the organization's use of technology so as to obtain a competitive advantage. The use of technology is paramount in todays technologically driven environment. Technology should be used to reduce the production cost while adding value to the product. It can also be used in research and development of new products or through utilization of the internet to provide the clients with online products (Porter 2010, Para. 3).
Human resource management: if an organization is to succeed in the achievement of its objectives, it has a role to recruit train and develop the most appropriate people for the organization. The management should motivate employees by offering them the market rate salaries and wages for them to stay with the organization. This will save the company from loosing the employees that it has used a lot of resources in training. The management should be careful not to loose the organization's experienced staff. In the service industries the organization's staffs are the one who will competitive advantage that is required within that field: Such staffs are employees of an airline industry (Porter 1996, p. 61-78).
Firm infrastructure: All organizations have a role of ensuring that their legal structure, management structure and finances are working efficiently in helping the organization to forge ahead towards its objectives (Porter 2010, Para. 3).
In the overall value chain involves the use of the whole organization while looking at how the primary activities and the support activities work together efficiently and effectively in helping an organization to gain a superior competitive advantage (Porter 2010, Para. 3).
Order winners order, order losers and order qualifiers:
Hill (2000) created the conception of order-winner criteria in the manufacturing strategy studies. His argument was that the reason behind the creation of order-winners criteria for the diverse products is for enhancing a company's understanding in its market. This helps the company in winning of more orders. For a company to be an order winner it must comply with the requests of the clients. This does not automatically qualify the company as an order winner. Order winners are the organizations with value that exceeds the components that are offered to customers which facilitates to the winning of orders. For a company to qualify as an order winner it must outperform the competitors failure to which it qualifies to be an order loser. Hsiu-Yuan Hu, Shao-I, Chiu and Tieh-Min Yen, (2009, 1) have argued that their relation to value they are classified into various items:
Price: As a product goes through the various stages of market stages such as production, growth, and maturity the importance of the price gradually increases becoming an order winner creation.
Delivery reliability: In this case the company focuses in on-time delivery. This show the supplier's capacity to deliver ordered products based on agreed delivery plan.
Delivery speed: An organization can with ease become an order winner by delivering products at a higher speed than the competitors.
Quality conformances: Quality is one of the most key factors in the competition; hence if a company lacks a clear definition of what quality is all about it may end up losing opportunities to be an order winner.
Demand increases: For any company to qualify a competitive order winner there is a need to run to respond to the customer's needs fast. This increases the market demand which is a resultant from market growth, unexpected needs, seasonal needs, or increase in customers' specific needs (Hsiu-Yuan Hu, Shao-I, Chiu and Tieh-Min Yen, 2009, 1).
Figure 2. Success factors in selling goods
Source: Free Trade Zone (FTZ) and Port Hinterland Development: http://www.unescap.org/ttdw/Publications/TFS_pubs/pub_2377/ftz_ch6.pdf
These are competitive characteristics that an organization must exploit so as to be viable competitor in the market place. For instant a firm may seek to compete on characteristics other than price nevertheless for it to qualify in the competition its cost as well as its related price must be within a specific range for consideration by the customer. For a company to succeed as a qualifier it needs to be as good as the competition while to provide for order winners the company must be better than the competitors. A Qualifier is not better than an order winner but its different and a complimentary to order winner (Free Trade Zone (FTZ) and Port Hinterland Development, p 104-105).
Manufacturers need to provide the qualifier so as to get into and even stay in the market place; although it's worth noting that providing qualifiers alone is not a guarantee to order winning. They just prevent a company from losing its orders to a competitor. When a qualifier has been achieved, the manufacturing should turn its attention to ways in which orders are won and ideally to provide these better than the competitors. In the past operations locating in FTZ low cost used to be the only order winner. Today both low costs as well as quality are a requirement to be competitive in the market (Free Trade Zone (FTZ) and Port Hinterland Development, p 105).
Customers' influence in Managing supply and demand
The quantity of product that is available in the market-the supply- and the quantity of the product that people want- the demand- are what makes a working market. A market then can be referred to as the way in which an economic activity is organized between the sellers and the buyers via their interaction and behavior with one another. The buyers are the determinant of the overall demand for a given brand of product at various prices while the sellers are the determinant of the supply of a specified product at various prices. Hence in the management of demand and supply the management should be keen so as to meet the customer demand (Environmental Literacy Council 2008, Para. 1).
The customers influences the market hence demand and supply in the following variable: the income, the price, the tastes, the prices of the related goods, and the expectations. The supply of products is influenced by the following variables: the price of the product, the cost of production also called input prices, the technology employed in the value chain, the expectations of the customers, and the number of sellers or distributers available (Environmental Literacy Council 2008, Para. 3).
The management of demand and supply of a company's product is entirely based on the requirements of the customer. The tradition of productivity assumes that customers of a product repetitively get products of a given company; this is not the case. Customers are directly influenced by a company's production process and outcomes of the process; the end product. Customer's participation in company's production process has a strong connection with service productivity. Customers should be present as the determinant of the end product in the production process; after all they are the product consumers hence failure to include them would mean a production of a product that they are not interested with. Customers should be seen as primary input factor in the management of demand and supply. The inclusion of the customers in the production and supply process enables them to offer input resources which may include the specification of the desired outcomes (Ojasalo 2003, p. 1).
After the products are produced and are ready for distribution to customer the managers of demand and supply have to match the demand from the customers to the supply. The noblest goal of a supply chain is to optimally match demand to supply. The customer is the greatest determinant of the products to be supplied; but this is also dependent on the quality of the product that the company produces. If the products are of high quality and pleasant to the customer then the customers will tend to demand for more hence influencing the supply. The management ought to be charismatic in order to ensure continued matching of the demand to the supply so that when the customer wants it, the product will not be missing or the organization produces too much such that if a competitor produces a more attractive product overshadowing the products in the market, the product will stagnate in the market (Lapide 2006, p. 2).
Business processes are very fundamental to the success of an organization in the production of its goods and services. If any organization is to maximize its competitiveness there is a need to employ processes which will work effectively for they are well designed for that role. The outcomes of a well designed business processes are increases effectiveness which consequently add values to the customer and increased efficiency which lowers the production cost for the business (Thomas 2008, p 66).
Standards value chain involves the interlinked activities that convert the inputs into the outputs which will in turn add to the bottom-line as well as creating a competitive advantage. A value chain may incorporate: logistics or inbound distributors, the manufacturing operations, the outbound distribution, the sales and marketing, the after sales services, the procurement or purchasing, the research and development, the corporate infrastructure, and the human resource development (Kannegiesser, 2008 p 106). In relation to management of supply and demand, the standards value chain facilitates to the effectiveness of the matching of the demand and supply.
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