1. VALUE CHAINS CHAPTER 2 DAVID A. COLLIER AND JAMES R. EVANS OM

2. Chapter 2 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 Explain offshoring and the key issues associated with it. LO6 Identify important issues associated with value chains in a global business environment. l e a r n i n g o u t c o m e s

3. 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? Chapter 2 Value Chains

6. 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. Chapter 2 Value Chains

9. Exhibit 2.1 The Value Chain

12. Exhibit 2.2 Examples of Goods-Producing and Service-Providing Value Chains (slide 1)

13. Exhibit 2.2 Examples of Goods-Producing and Service-Providing Value Chains (slide 2)

14. Exhibit 2.3 Pre- and Postservice View of the Value Chain

18. Source: Buhrke Industries company web site Exhibit 2.4 The Value Chain at Buhrke Industries

20. 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.

21. 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.

22. Exhibit 2.3 Pre- and Postservice View of the Value Chain

23. 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. Chapter 2 Value Chains

24. Exhibit 2.5 Procter & Gamble’s Conceptual Model of a Supply Chain for Paper Products Source : Wegryn, Glenn W., and Siprelle, Andrew J., “Combined Use of Optimization and Simulation Technologies to design an Optional Logistics Network,” http://www.simulationdynamics.com/PDFs/Papers/CLM%20P&G%Opt&Sim.pdf

25. 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. Chapter 2 Value Chains

31. Solved Problem — Outsourcing & Breakeven Analysis Solution: VC 1 = Variable cost/unit if produced = $20 VC 2 = Variable cost/unit if outsourced = $35 FC = fixed costs associated with producing the part = $250,000 Q = quantity produced Using Equation 2.1 we obtain: Q = 250,000/($35 - $20) = 16,667 In this case, because the customer order is for only 12,000 units, which is less than the break-even point, the least cost decision is to outsource the component. Chapter 2 Value Chains

32. 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. Chapter 2 Value Chains

38. Exhibit 2.6 Four Degrees of Offshoring Scenarios

39. Exhibit 2.7 Example Issues to Consider When Making Offshore Decisions

41. Exhibit 2.8 Rocky Shoes & Boots Value Chain

43. Exhibit 2.8 Rocky Shoes & Boots Value Chain