Understanding Value Chain in Supply Chain Management

1. Faculty of Management Sciences Supply Chain Management (SCM711S) Lecturer; Ms. Sylvia Kwenani UNIT 3 May 2019 Value Chain

2. Faculty of Management Sciences Course Learning Outcome Upon successful completion of the course students will, through assessment activities, show evidence of their ability to • Evaluate the different supply chain decisions. • Analyse different components of Supply Chain Management. • Analyse critically the benefits from implementing supply chain practices. • Evaluate the implementation of different supply chain strategies in organisations

3. Faculty of Management Sciences Unit 3 Learning Outcome Upon successful completion of this unit students will, through assessment activities, show evidence of their ability to • Explain value chain • Identify the activities within a value chain • Discuss the bullwhip effect and its causes • Describe the distribution channel

4. VALUE CHAIN A value chain represents all activities necessary to ensure a product or service is produced and delivered to the final consumer with any residual disposals done satisfactorily. For example, from product/service design, procurement through into production, storage, distribution to final customer and final disposal after use. Basically it is a linked set of value-creating activities beginning with basic raw materials coming from suppliers, moving on to a series of value-added activities involved in producing and marketing a product or service, and ending with distributors getting the final goods into the hands of the ultimate consumer. Porter’s (1985) stated that value chain separates the internal activities of a firm into a sequential chain. These activities are classified as primary and supportive functions.

5. Value chain Source: Kotler, 1999

6. Value chain cont. • Primary activities • Are those activities involved in the creation, transfer of products and sales (including after sales service). • Inbound Logistics • Which looks at activities concerned with receiving, unloading, unpacking, storing, handling and distribution inputs as well as controlling inventories. • Operations • Deals with the transformation of inputs into final products. Processes involves manufacturing, assembly, packaging, maintenance of equipment, designing, etc. • Outbound Logistics • This includes the activities that are linked or associated to physical distribution of the products to buyers. In retail it includes checkout operationse.g. processing of orders, warehousing of finished goods and delivery.

7. Value chain cont. • Primary activities cont. • Marketing and sales • creating awareness of the product or service in the buyers, persuading them to buy, making the product available in a number of locations to facilitate purchasing. In a nutshell it is the identification of customer needs and generating of sales e.g. advertising, promotion and distribution. • Service • Basically this looks at how to maintain the value of the product after it is purchased. After sales customer service including installation, maintenance, training, repair and parts availability.

8. Value chain cont. • Secondary activities • These are there merely just to support the primary activities. • Procurement • Looks at obtaining purchased inputs of all kinds e.g. raw materials, equipment etc. • Human Resource Management • Involves recruiting, training, developing and organising of personnel. • Research and Development/Technology • This is conducting basic research and the design and development of both products and processes. These activities are carried out in order to improve the product and the process. This can happen in many parts of the firm. • Firm Infrastructure • managerial process and all general management activities such as planning and control, quality management, obtaining and allocating funds, the work of the legal department and dealing with governments.

9. Value chain cont. Value chains of many industries can be split in two segments, being upstream and downstream categories. E.g. In the petroleum industry a company like shell’s upstream activities will include oil exploitation, drilling and moving the crude oil to the refinery. Whereas the downstream looks at refining the oil and the transportation and marketing of petrol and refined oil to distributors and petrol station retailers. Value analysis is a systematic and objective evaluation of the value of goods or services, focusing on the analysis of function relative to the cost of manufacturing or providing the items or service. Value analysis provides insight on the worth of the final goods or service, possibly altering specifications and quality requirements that could reduce costs without impairing functional suitability. In simple terms value analysis refers to the analysis of an existing product or service process. Value engineering This involves the analysis of value at design engineering stage of the product development process. Value engineering refers to analysis of an existing product or service process that are under design and have not yet been finished.

10. Supply chain vs Value chain Supply Chain is the inter-connection of all the activities that starts from the manufacturing of raw material into the finished product and ends when the product reaches the final customer. Value Chain is a set of activities that focuses on creating or adding value to the product. The two networks help provide quality products to the customer at a reasonable price.

11. Supply chain vs Value chain cont.

12. Supply Chain Bullwhip Effect The bullwhip effect refers to the phenomenon of amplification and distortion of demand in a supply chain. In simpler terms it is the variability of the orders received by the supplier which can be greater than the demand variability in a supply chain. Failure of a firm in achieving the SCM ideal, it may suffer from one of the most dramatic consequences called the bullwhip effect. The bullwhip effect is generally referred to as an inverse ripple effect of forecasting errors throughout the supply chain that often leads to amplified supply and demand misalignment where orders to the upstream supply chain member (e.g., the supplier) tend to exaggerate the true patterns of end-customer demand since each chain member of the supply chain’s view of true demand can be blocked by its immediate downstream supply chain member.

13. Supply Chain Bullwhip Effect cont.

14. Supply Chain Bullwhip Effect cont. • The common symptoms of the bullwhip effect include delayed new product development, constant shortages and backorders, frequent order cancellations and returns, excessive pipeline inventory, erratic production scheduling, and chronic overcapacity problems. • Causes of Bullwhip Effect • Information Failure • Chain Complexity • Sales Promotion • Economies of scale • Speculative Investment Behavior

15. Causes of Bullwhip Effect Information Failure An unprecedented number and variety of products competing in today’s markets make it increasingly difficult for manufacturers, suppliers, retailers to predict and plan for orders and production volume (Fisher, Hammond, Obermeyer, and Raman, 1994). Meaning demand uncertainty, leads to a firm’s sales forecasting based on order history from its immediate downstream supply chain members to distort the true end-customer demand and thereby contributing to upstream order variability. Chain Complexity In a typical chain structure, each chain member tends to specialize in certain functions. Manufacturers concentrate on production and national promotion, whereas distributors concentrate on product assortment, bulk-breaking, storing, and delivering. Although distributors are considered sales agents of manufacturers, they often represent multiple manufacturers with diverse products.

16. Causes of Bullwhip Effect cont. Chain Complexity cont. As such, channel intermediaries such as distributors by nature cannot match the quantities and characteristics of products desired by ultimate end-customers to those of products provided by manufacturers. For this reason, the presence of channel intermediaries may contribute to the bullwhip effect. For instance, Dell Computer successfully adopted a direct marketing plan called A Built-to-Order to reinvent the personal computer (PC) industry’s traditional supply chain by delivering its PCs directly to customers within 36 hours after the order (Austin et al., 1997). Sales Promotion Today’s customers tend to shop only when sales promotion in the form of coupons, and seasonal discounts is available. This shopping pattern often results in peaks and valleys of customer orders and correlates with frequent price changes. Although sales promotion is intended to benefit end-customers, many downstream distributors also tend to stockpile huge amount of promotional inventory with an expectation of future price increase. Thus, sales promotion is likely to create phantom demand throughout the supply chain, contributing to over-order, overproduction, or temporary product shortages.

17. Causes of Bullwhip Effect cont. Economies of scale To exploit cost saving opportunities resulting from economies of scale, many firms prefer to order on a periodic basis so that they can accumulate orders large enough for volume purchasing or freight consolidation. Such periodic ordering is likely to cause order surges at the end of month, quarter or year, which not only amplifies order variability, but also increases order cycle time. Freight consolidation also increases managerial time and responsibilities for sorting traffic, assembling loads, bulk-breaking, material handling and arranging prepayment. Therefore, freight consolidation can substantially increase order cycle time, exacerbating the bullwhip effect.

18. Causes of Bullwhip Effect cont. Speculative Investment Behavior In years of economic upturns, many firms tend to perceive product shortages as the loss of market share or revenue, thereby triggering a period of overinvestment and production. In particular, a firm may overestimate the actual demand. For instance, encouraged by various forms of government incentives such as increased local content rules, preferential loans and government bailouts, many automakers in Asia substantially increased their production capacity in the early 90s and were left with huge amount of inventory as the growth rate of auto sales declined. Such a speculative investment behavior may have contributed to the downfall of the Korean auto giant named Kia and the Indonesian national car-maker in the nineties.

19. Remedies of Bullwhip Effect • Reducing Uncertainty • Reducing uncertainty is the major step towards reducing the Bullwhip Effect. Centralizing the demand information can reduce uncertainty to a great extent. • Reducing Variability • Reducing the variability in the demand can reduce the Bullwhip Effect considerably. Frequent variation in product prices results in a pseudo increase or decrease in demand thereby introducing the variation into the system. If a product is offered for a consistent price as in EDLP (everyday low pricing), the Bullwhip Effect can be reduced to a considerable extent. • Lead Time Reduction • Lead-time can be divided into order lead-time and information lead-time. Reducing both types of lead times will reduce a significant amount of variation in the system. In forecasting, safety stock levels and reorder points are a function of lead-time; reduction in lead-time reduces the variation. Systems such as cross docking and EDI (Electronic Date Interchange) can reduce both the ordering lead-time and the information lead-time

20. Remedies of Bullwhip Effect cont. • Advanced Information Technology • Advances in information technology has made the concept of information at your fingertips possible. E-Commerce eliminates the intermediaries such as the retailer from the system and gives the point-of-sale demand to all the supply chain partners.

21. Distribution Channels A distribution channel - set of independent organizations involved in the process of making a product or service available to the consumer or business user. It is used to move the customer towards the product or the product to the customer. When looking at international trade, the term is described as the physical routes that a product follows from the seller (exporter) to the buyer (importer) • Role of Intermediaries • To create greater efficiency in making goods readily available to target markets. • Intermediaries provide channel functions: • Contacts • Experience • Specialisation

22. Channel Functions • Information • Promotion • Matching • Negotiation • Physical Distribution • Financing • Risk taking • Channel Levels • Manufacturer • Wholesaler • Retailer • Consumer

23. Channel Behavior and Conflict • The channel will be most effective when: • each member is assigned tasks it/they can do best. • all members cooperate to attain overall channel goals and satisfy the target market. • Focus on individual goals leads to conflict • Horizontal Conflict occurs among firms at the same level of the channel. • Vertical Conflict occurs between different levels of the same channel.

24. Channel Behavior and Conflict cont. For example, suppose a toy manufacturer has deals with two wholesalers, each contracted to sell products to retailers in different regions. If one wholesaler decides to branch its operations into the other wholesaler’s region, a conflict will result. If the manufacturer doesn't help solve the problem, its business dealings with both the wholesalers and the downstream retailers might be in jeopardy.

25. Channel Behavior and Conflict cont. For example, if the toy manufacturer discovers its products are arriving at retail stores later than scheduled, a conflict might develop between the manufacturer and the wholesaler responsible for shipping to retailers. At the same time, the retail stores might be in conflict with the wholesaler due to its inability to ship products on time.

26. Extended supply chains When looking at a traditional supply chain, a company that buys products from a wholesale supplier and then after sells them in their retail store, or a manufacturer that buys parts from a part supplier, then uses them to make a product. Each of those suppliers has suppliers of their own, and companies can save money and avoid problems by finding out more about this extended supply chain. Example of a extended supply chain A store owner who sells a particular brand of hat in his/her store may not know so much about who originally made the hat, where it was made, how it was transported to the wholesaler's warehouse or what the warehouse is like. All the people involved in creating, storing or transporting the hat are members of the extended supply chain, including those whom the store owner would never expect to deal with directly. Traditionally, companies manage their supply chain issues by selecting and negotiating with their direct suppliers, whereas managing the extended supply chain requires research and collaboration. Managing an extended supply chain For example, if a popular hat brand experienced being out of stock, the store owner could call up the supplier and ask when they are expected to have more of that type of hat available. However, if the owner knew where the supplier got its hats from and that the hat supplier was having trouble, he/she would know not to expect more hats to be available from that supplier any time soon, but he/she could then try to find a similar hat from another supplier to avoid dissatisfying customers.

27. Extended supply chains cont.

28. The Total Cost Concept The Total Cost Concept (TCC) has been developed to ensure that all costs associated with the ownership of a particular product and service are included in the calculation to give the true picture of costs. The TCC places costs into three categories:

29. The Total Cost Concept cont. Acquisition costs these include a price paid for e.g. materials, product or service. They may also include freight paid, delivery, duties and taxes, interests chargeable, site preparation, training, installation and testing. Ownership costs these include risks associated with ownership, e.g. the need to maintain an inventory level, life cycle cost like storage, handling operational costs, and supply network costs. Post-ownership costs these are high costs, especially for capital costs, to include salvage disposal, failed warranties, and product liabilities.

30. Faculty of Management Sciences THE END