Amity Business School
Amity
AmityBusiness
BusinessSchool
School
MBA
MBAGeneral
GeneralSemester
Semester22
Operations
OperationsManagement
Management
Dr.
[Link]
RanjitRoy
Roy
OM, Ch. 1 Goods, Services, and Operations Management
©2009 South-Western, a part of Cengage Learning
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VALUE CHAINS
OM, Ch. 1 Goods, Services, and Operations Management
©2009 South-Western, a part of Cengage Learning
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Chapter 2 Learning Outcomes
learning outcomes
LO1 Explain the concept of value and how it can be
increased.
LO2 Describe a value chain and the two major
perspectives that characterize it.
LO3 Describe a supply chain and how it differs from a
value chain.
LO4 Discuss key value chain decisions.
LO5 Identify important issues associated with value
chains in a global business environment.
OM, Ch. 1 Goods, Services, and Operations Management
©2009 South-Western, a part of Cengage Learning
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Chapter 2 Value Chains
t a time when more than 98% of all shoes sold in the United States are
made in other countries, Allen-Edmonds Shoe Corp. is a lonely holdout
against offshoring. Moving to China could have saved as much as 60
percent. However, John Stollenwerk, Chief Executive, will not compromise on
quality, and believes that Allen-Edmonds can make better shoes, and serve
customers faster, in the United States. An experiment in producing one model in
Portugal resulted in lining that wasn’t quite right and stitching that wasn’t as fine.
Stollenwerk noted “We could take out a few stitches and you’d never notice it – and
then we could take out a few more. Pretty soon you’ve cheapened the product, and
you don’t stand for what you’re about.” Instead, Allen-Edmonds invested more than
$1 million to completely overhaul its manufacturing process into a leaner and more
efficient system that could reduce 5 percent off the cost of each pair of shoes. One
year after implementing its new production processes, productivity was up 30
percent, damages were down 14 percent, and order fulfillment neared 100 percent,
enabling the company to serve customers better than ever.
What do you think? What is your opinion of companies that move operations
to other countries with cheaper labor rates? Should governments influence or
legislate such decisions?
OM, Ch. 1 Goods, Services, and Operations Management
©2009 South-Western, a part of Cengage Learning
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Chapter 2 Value Chains
Value Chains
• The underlying purpose of every organization
is to provide value to its customer and
stakeholders.
• Value is the perception of the benefits
associated with a good, service, or bundle of
goods and services (i.e., the customer benefit
package) in relation to what buyers are
willing to pay for them.
OM, Ch. 1 Goods, Services, and Operations Management
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Chapter 2 Value Chains
Value Chains
• The decision to purchase a good or service,
or a customer benefit package, is based on
an assessment by the customer of the
perceived benefits in relation to its price.
• The customer's cumulative judgment of the
perceived benefits leads to either satisfaction
or dissatisfaction.
OM, Ch. 1 Goods, Services, and Operations Management
©2009 South-Western, a part of Cengage Learning
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Chapter 2 Value Chains
One of the simplest functional forms of value is:
Value = Perceived benefits/Price (cost) to the customer
If the value ratio is high, the good or service is perceived
favorably by customers, and the organization providing it is
more likely to be successful. To increase value, an
organization must:
(a) increase perceived benefits while holding price or cost
constant,
(b) increase perceived benefits while reducing price or cost, or
(c) decrease price or cost while holding perceived benefits
constant.
OM, Ch. 1 Goods, Services, and Operations Management
©2009 South-Western, a part of Cengage Learning
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Chapter 2 Value Chains
Value Chains
• A value chain is a network of facilities and
processes that describes the flow of goods,
services, information, and financial transactions
from suppliers through the facilities and
processes that create goods and services and
deliver them to customer.
• A value chain is a “cradle-to-grave” model of
the operations function (see Exhibit 2.1).
OM, Ch. 1 Goods, Services, and Operations Management
©2009 South-Western, a part of Cengage Learning
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Chapter 2 Value Chains
Value Chains
• The value chain begins with suppliers.
Suppliers might be distributors, employment
agencies, dealers, financing and leasing agents,
information and Internet companies, field
maintenance and repair services, architectural
and engineering design firms, and contractors,
as well as manufacturers of materials and
components.
OM, Ch. 1 Goods, Services, and Operations Management
©2009 South-Western, a part of Cengage Learning
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Exhibit 2.1 The Value Chain
OM, Ch. 1 Goods, Services, and Operations Management
©2009 South-Western, a part of Cengage Learning
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Chapter 2 Value Chains
Value Chains
• The inputs suppliers provide might be physical
goods such as:
automobile engines or microprocessors
provided to an assembly plant;
meat, fish, and vegetables provided to a
restaurant;
trained employees provided to organizations
by universities and technical schools; or
information such as computer specifications
or a medical diagnosis.
OM, Ch. 1 Goods, Services, and Operations Management
©2009 South-Western, a part of Cengage Learning
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Chapter 2 Value Chains
Value Chains
• Inputs are transformed into value-added goods
and services through processes or networks of
work activities, which are supported by such
resources as land, labor, money, and
information.
• The value chain outputs—goods and services—
are delivered or provided to customers and
targeted market segments.
OM, Ch. 1 Goods, Services, and Operations Management
©2009 South-Western, a part of Cengage Learning
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Examples of Goods-Producing and Service-Providing Value Chains
Exhibit 2.2 (slide 1)
OM, Ch. 1 Goods, Services, and Operations Management
©2009 South-Western, a part of Cengage Learning
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Examples of Goods-Producing and Service-Providing Value Chains
Exhibit 2.2 (slide 2)
OM, Ch. 1 Goods, Services, and Operations Management
©2009 South-Western, a part of Cengage Learning
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Exhibit 2.3 Pre- and Postservice View of the Value Chain
OM, Ch. 1 Goods, Services, and Operations Management
©2009 South-Western, a part of Cengage Learning
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Chapter 2 Value Chains
Buhrke Industries, Inc. Value Chain
• ABC LTd., provides stamped metal parts to many
industries, including automotive, appliance, computer,
electronics, hardware, housewares, power tools,
medical, and telecommunications.
• ABC LTD objective is to be a customer’s best total-
value producer with on-time delivery, fewer rejects,
and high-quality stampings. However, the company
goes beyond manufacturing goods; it prides itself in
providing the best service available as part of its
customer value chain.
OM, Ch. 1 Goods, Services, and Operations Management
©2009 South-Western, a part of Cengage Learning
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Exhibit 2.4 The Value Chain at ABC LTD
Source: Buhrke Industries company web site
OM, Ch. 1 Goods, Services, and Operations Management
©2009 South-Western, a part of Cengage Learning
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Chapter 2 Value Chains
• Service is more than delivering a product
on-time. It's also partnering with customers
by providing personalized service for fast,
accurate response; customized engineering
designs to meet customer needs; preventive
maintenance systems to ensure high machine
uptime; experienced, highly trained, long-term
employees; and troubleshooting by a
knowledgeable sales staff.
OM, Ch. 1 Goods, Services, and Operations Management
©2009 South-Western, a part of Cengage Learning
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Chapter 2 Value Chains
Value and Supply Chains
A supply chain is the portion of the value chain
that focuses primarily on the physical movement
of goods and materials, and supporting flows of
information and financial transactions through the
supply, production, and distribution processes.
Many organizations use the terms “value chain”
and “supply chain” interchangeably; however, we
differentiate these two terms in this book.
OM, Ch. 1 Goods, Services, and Operations Management
©2009 South-Western, a part of Cengage Learning
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Chapter 2 Value Chains
Value and Supply Chains
A value chain is broader in scope than a supply
chain, and encompasses all pre- and post-
production services (see Exhibit 2.3) to create and
deliver the entire customer benefit package.
A value chain views an organization from the
customer's perspective—the integration of goods
and services to create value—while a supply
chain is more internally-focused on the creation
of physical goods.
OM, Ch. 1 Goods, Services, and Operations Management
©2009 South-Western, a part of Cengage Learning
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Exhibit 2.3 Pre- and Postservice View of the Value Chain
OM, Ch. 1 Goods, Services, and Operations Management
©2009 South-Western, a part of Cengage Learning
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Chapter 2 Value Chains
Procter & Gamble’s Supply Chain Structure
A model of a supply chain developed by Procter &
Gamble—P&G’s “Ultimate Supply System”—is shown
in Exhibit 2.5.
The supply chain focus is on understanding the
impact of tightly coupling supply chain partners to
integrate information, physical material, product
flow, and financial activities to increase sales,
reduce costs, increase cash flow, and provide the
right product at the right time at the right price to
customers.
OM, Ch. 1 Goods, Services, and Operations Management
©2009 South-Western, a part of Cengage Learning
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Procter & Gamble’s Conceptual Model of a Supply Chain
Exhibit 2.5 for Paper Products
Source: Wegryn, Glenn W., and Siprelle, Andrew J.,
“Combined Use of Optimization and Simulation Technologies to design an Optional Logistics Network,”
[Link]
OM, Ch. 1 Goods, Services, and Operations Management
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Chapter 2 Value Chains
Value Chain Design and Management
Outsourcing is the opposite of vertical
integration in the sense that the
organization is shedding (not acquiring) a
part of its organization.
OM, Ch. 1 Goods, Services, and Operations Management
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Chapter 2 Value Chains
Value Chain Design and Management
• Vertical integration refers to the process of
acquiring and consolidating elements of a value
chain to achieve more control.
• Outsourcing is the process of having suppliers
provide goods and services that were
previously provided internally.
OM, Ch. 1 Goods, Services, and Operations Management
©2009 South-Western, a part of Cengage Learning
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Chapter 2 Value Chains
Value Chain Design and Management
• Backward integration refers to acquiring
capabilities at the front-end of the supply
chain (for instance, suppliers), while forward
integration refers to acquiring capabilities
toward the back-end of the supply chain (for
instance, distribution or even customers).
• Companies must decide whether to integrate
backward (acquiring suppliers) or forward
(acquiring distributors), or both.
OM, Ch. 1 Goods, Services, and Operations Management
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Chapter 2 Value Chains
Value chain integration is the process of
managing information, physical goods, and
services to ensure their availability at the
right place, at the right time, at the right
cost, at the right quantity, and with the
highest attention to quality.
OM, Ch. 1 Goods, Services, and Operations Management
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Chapter 2 Value Chains
Value chain integration in services—where value is in
the form of low prices, convenience, and access to special
time-sensitive deals and travel packages—takes many
forms. Examples include:
• Third-party integrators for the leisure and travel industry
value chains include Orbitz, Expedia, Priceline, and
Travelocity.
• Many financial services use information networks provided
by third-party information technology integrators, such as
AT&T, Sprint, IBM, and Verizon, to coordinate their value
chains.
• Hospitals also use third-party integrators for both their
information and physical goods, such as managing patient
billing and hospital inventories.
OM, Ch. 1 Goods, Services, and Operations Management
©2009 South-Western, a part of Cengage Learning
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Chapter 2 Value Chains
Complex global value chains are more difficult to
manage than small domestic value chains. Some
of the many issues include the following:
Global supply chains face higher levels of risk
and uncertainty, requiring more inventory and
day-to-day monitoring to prevent product
shortages. Workforce disruptions, such as labor
strikes and government turmoil in foreign
countries, can create inventory shortages and
disrupting surges in orders.
OM, Ch. 1 Goods, Services, and Operations Management
©2009 South-Western, a part of Cengage Learning
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Chapter 2 Value Chains
Some of the many issues include:
Transportation is more complex in global value
chains. For example, tracing global shipments
normally involves more than one mode of
transportation and foreign company.
The transportation infrastructure may vary
considerably in foreign countries. The coast of
China, for example, enjoys much better
transportation, distribution, and retail
infrastructures than the vast interior of the
country.
OM, Ch. 1 Goods, Services, and Operations Management
©2009 South-Western, a part of Cengage Learning
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Chapter 2 Value Chains
Global purchasing can be a difficult process to
manage when sources of supply, regional
economies, and even governments change. Daily
changes in international currencies necessitate
careful planning and in the case of commodities,
consideration of futures contracts.
International purchasing can lead to disputes and
legal challenges relating to such things as price
fixing and quality defects.
Privatizing companies and property is another form
of major changes in global trade and regulatory
issues.
OM, Ch. 1 Goods, Services, and Operations Management
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