IEC 2008: Value chain analysis delivers customers
Value chain analysis has been extended beyond individual organizations and can be applied to whole supply chains and distribution networks.
Dr. Luis Enriquez, AFAN International Consultant Group, presented a practical approach to evaluating the value chain in egg production and processing, with the ultimate goal of maximizing value creation while minimizing costs.
The concept has been extended beyond individual organizations and can be applied to whole supply chains and distribution networks. The delivery of a mix of products and services to the end consumer will mobilize different economic factors, each managing its own value chain.
“A value chain analysis was a way of thinking through which you deliver value to your customers and also for reviewing all the things you can do to maximize that value defined in terms of outcome,” he asserted. While this concept is obvious in the manufacturing sector, it is just as important to the service industries where people use the inputs of time, knowledge, equipment and systems to create service of real value to the customer.
Customers are not necessarily outside an organization; they can be bosses or co-workers. “All of these could be considered as customers in one way or another, just as long as they directly or indirectly, pay your wages,” he added.
He then asked, “Do you have the appropriate physical, technological and human resources to provide a chain of value or only a product?”
Three process steps
Value chain analysis helps companies identify ways to create value for their customers and helps them maximize this value by building a team around clear objectives or envisaged outcomes.
The analysis was a three-step process:
- Activity analysis - identify the activities required to deliver your product or service.
- Value analysis - for each activity consider what adds the greatest value for customers from the end product perspective.
- Evaluation and planning - evaluate whether it is worth making changes and devise an action plan. Make the necessary changes and check the results.
“By adding value to the quality procedure system you can increase the differences between your chain of value against those of your competitors. But, each link of the chain must be efficient, flexible, fast and consumer-oriented,” he stated.
The first step in the activity analysis is to brainstorm activities that the individual, the team, or the company undertake, that in some way contribute toward their customers’ positive experiences. This includes the step-by step business processes that are used to serve customers, market the products or services, sales and order taking, operational processes, delivery and support.
Involve teams in process
For Dr. Enriquez, teamwork is a culture, not simply a training program or activities, and is achieved when all personnel were involved in the flow of the work, focussing on the target outcome.
Regarding value analysis, make a list of the value factors for each activity identified – the thing that your customers value in the way each activity is conducted. Taking telephone ordering as an example, he said that customers value a quick answer, fast and knowledgeable replies to queries and an efficient and quick resolution of any problems that arose.
He continued, “If you are thinking about delivering a professional service, your customers will value an accurate and correct solution, based on complete up-to-date information, which is clearly expressed, and easily acted on. Next to each activity identified, write down their value factors for the intended outcome and what needs to be done or changed to provide greater value for each.”
Having generated several ideas for increasing the value to customers, pick out those that are quick, easy and inexpensive to achieve.
Next, examine the more difficult changes. Some might be impractical, while others might only deliver marginal improvements at considerable cost. These should be dropped. Then prioritize the remaining tasks, planning them in an achievable step-by-step way, which delivers steady improvements while maintaining your staff’s enthusiasm.
He went on to assert that a mapping analysis is also an important tool for assessing the potential for profitability in an industry and that, with a little adaptation, is also useful for assessing the balance of power in more general situations.
Five forces affect competition
The analysis offered by Dr. Enriquez looked at the strength of five important forces that affect competition.
- Supplier power: the power of suppliers to drive up the prices and the quality of your inputs.
- Buyer power: the power of your customers to drive down your prices and be aware of the big differences in the chain of value.
- Competitive rivalry: the strength of competition in the industry.
- Threat of substitution: the extent to which different products and services could be used in place of your own.
- Threat of new entry: the ease with which new competitors could enter the market if they saw that you were making good profits (and then drive prices down).
By thinking through how each of these forces affect you and by identifying the strength and direction of each force you can assess the strength of your position and your ability to make a sustained profit in the industry. “You can then look at how you can affect each of the forces to move the balance of power more in your favour,” he added.
Production chain value
A production chain integrates the set of links that form economical processes from the raw materials to the distribution of the final product. At each step of the process, value must be added in line with the outcome as envisaged. During each process you should assure quality to avoid having quality control only at the end of the process.
“Companies who do not design their production chains to add value and who have not, as a final objective, consumer care, have none or little responsibility and the wrong social attitude” he concluded.