Explaining Concepts and Models of the Value chain

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The value chain, also called value chain analysis, is a concept in business management which was first described by Michael Porter in his book named Competitive Advantage: Creating and Sustaining Superior Performance in 1985

Concept

[edit] Firm Level

A value chain is a chain s of activities for a firm operating in a specific industry. The business unit is the appropriate level for construction of a value chain, not the divisional level or corporate level. Products pass through all activities of the chain in order, and at each activity the product gains some value. The chain of activities gives the products more added value than the sum of added values of all activities. It is important not to mix the concept of the value chain with the costs occurring throughout the activities. A diamond cutter can be used as an example of the difference. The cutting activity may have a low cost, but the activity adds much of the value to the end product, since a rough diamond is significantly less valuable than a cut diamond. Typically, the described value chain and the documentation of processes, assessment and auditing of adherence to the process routines are at the core of the quality certification of the business, e.g. ISO 9001.

[edit] Activities

The value chain categorizes the generic value-adding activities of an organization. The "primary activities" include: inbound logistics, operations (production), outbound logistics, marketing and sales (demand), and services (maintenance). The "support activities" include: administrative infrastructure management, human resource management, technology (R&D), and procurement. The costs and value drivers are identified for each value activity.

[edit] Industry Level

An industry value chain is a physical representation of the various processes that are involved in producing goods (and services), starting with raw materials and ending with the delivered product (also known as the supply chain). It is based on the notion of value-added at the link (read: stage of production) level. The sum total of link-level value-added yields total value. The French Physiocrat's Tableau économique is one of the earliest examples of a value chain. Wasilly Leontief's Input-Output tables, published in the 1950's, provide estimates of the relative importance of each individual link in industry-level value-chains for the U.S. economy.

[edit] Significance

The value chain framework quickly made its way to the forefront of management thought as a powerful analysis tool for strategic planning. The simpler concept of value streams, a cross-functional process which was developed over the next decade,[2] had some success in the early 1990s[3].

The value-chain concept has been extended beyond individual firms. It can apply to whole supply chains and distribution networks. The delivery of a mix of products and services to the end customer will mobilize different economic factors, each managing its own value chain. The industry wide synchronized interactions of those local value chains create an extended value chain, sometimes global in extent. Porter terms this larger interconnected system of value chains the "value system." A value system includes the value chains of a firm's supplier (and their suppliers all the way back), the firm itself, the firm distribution channels, and the firm's buyers (and presumably extended to the buyers of their products, and so on).

Capturing the value generated along the chain is the new approach taken by many management strategists. For example, a manufacturer might require its parts suppliers to be located nearby its assembly plant to minimize the cost of transportation. By exploiting the upstream and downstream information flowing along the value chain, the firms may try to bypass the intermediaries creating new business models, or in other ways create improvements in its value system.

Value chain analysis has also been successfully used in large Petrochemical Plant Maintenance Organizations to show how Work Selection, Work Planning, Work Scheduling and finally Work Execution can (when considered as elements of chains) help drive Lean approaches to Maintenance. The Maintenance Value Chain approach is particularly successful when used as a tool for helping Change Management as it is seen as more user friendly than other business process tools.

Value chain analysis has also been employed in the development sector as a means of identifying poverty reduction strategies by upgrading along the value chain [4]. Although commonly associated with export-oriented trade, development practitioners have begun to highlight the importance of developing national and intra-regional chains in addition to international ones [5].

[edit] SCOR

The Supply-Chain Council, a global trade consortium in operation with over 700 member companies, governmental, academic, and consulting groups participating in the last 10 years, manages the Supply-Chain Operations Reference (SCOR), the de facto universal reference model for Supply Chain including Planning, Procurement, Manufacturing, Order Management, Logistics, Returns, and Retail; Product and Service Design including Design Planning, Research, Prototyping, Integration, Launch and Revision, and Sales including CRM, Service Support, Sales, and Contract Management which are congruent to the Porter framework. The SCOR framework has been adopted by hundreds of companies as well as national entities as a standard for business excellence, and the US DOD has adopted the newly-launched Design-Chain Operations Reference (DCOR) framework for product design as a standard to use for managing their development processes. In addition to process elements, these reference frameworks also maintain a vast database of standard process metrics aligned to the Porter model, as well as a large and constantly researched database of prescriptive universal best practices for process execution.

[edit] Value Reference Model

A Value Reference Model (VRM) developed by the global not-for-profit Value Chain Group offers an open source semantic dictionary for value chain management encompassing one unified reference framework representing the process domains of product development, customer relations and supply networks.

The integrated process framework guides the modeling, design, and measurement of business performance by uniquely encompassing the plan, govern and execute requirements for the design, product, and customer aspects of business.

The Value Chain Group claims VRM to be next generation Business Process Management that enables value reference modeling of all business processes and provides product excellence, operations excellence, and customer excellence.

Six business functions of the Value Chain:

Research and Development

Design of Products, Services, or Processes

Production

Marketing & Sales

Distribution

Customer Service

The DELL computers and its value chain

Summary of DELL computers value chain analysis

Primary activities:

Inbound logistics:

Goods received from the suppliers are stored until they are needed in the assembly line. Dell relies on its highly reliable suppliers wherein it can streamline its operations and relies on computer monitor supplier to ship directly to the customer. Till the time supplier retains its leadership position, dell will collaborate with it in achieving success mutually.

Operations:

This is the area where goods are manufactured or assembled. Every product of dell is built to order and hence customers get exactly what they want. Dell uses the feedback from customers before and after sales thereby to provide customer satisfaction by reliability and tailor made service.

Outbound logistics:

When dell came into the market with its products, its competitors were selling computers through distributors to the customers. Dell on the other hand, sells directly to the customers without any intermediaries. Dell also continuously communicates with the customer who adds to its benefits of gaining knowledge regarding the sales trends and knowing about the unmet needs of customers. It relies on the customer's knowledge on what are their requirements and when to complete transaction in order to drive their direct business model. Dell leverages this knowledge by making it possible for them to place the customized order electronically.

Marketing and sales

Dell's direct to customer model has solved the problem of additional capital requirement for sales and marketing. By selling directly to customers dell has eliminated the retailers or distributors along the line. A main advantage of this system is that they are in continuous contact with customers and are benefiting in gaining knowledge of unmet customer needs and sales trends.

Service

Dollars are spent on training well educated business segment managers in providing state-of-the art advice to customers. It has also initiated a collaborative solution teams who collaborate with customers in fulfilling unmet customers if any. Employees are continually inspired in staying abreast of technology threats and opportunities which can alter their competitive landscape in future due to their nature of work.

Support activities

Procurement

This is an activity where dell is weak because dell doesn't like being protected by trademark or patent or copyright technology. All industry players are aware of the technology being used.

Technology development

An important source of competitive advantage is technology. And this is the area which forms the strength for dell because of its better access to technology. Dell introduces the latest technology much more quickly as compared to other companies with indirect distribution channels.

Human resource management (HRM)

Dells mission statements says it all "to be successful computer company in the world at delivering the bets customer experience in market s we serve". To ensure dells continued competitiveness dells employees, direct salespeople, help-desk operators, engineers are ought to be highly knowledgeable and customer focused.

Firm infrastructure

By introducing the direct to customer model dell revolutionized the traditional value chain of computer manufacturing industry. It has employed global business consultancy, in helping to develop a set of metrics in judging business unit performance. Because of this, daily decision making has become more efficient. The main financial objective that steered the managerial evaluation at dell was return on investment; which led to no inventory backup, as it turns over its inventory every six days on average keeping the related costs low.

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