OM2. CHAPTER 2. VALUE CHAINS. DAVID A. COLLIER AND JAMES R. EVANS. Chapter 2 Learning Outcomes. l e a r n i n g o u t c o m e s. 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.
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DAVID A. COLLIER
JAMES R. EVANS
l e a r n i n g o u t c o m e s
LO1Explain the concept of value and how it can be increased.
LO2Describe a value chain and the two major perspectives that characterize it.
LO3Describe a supply chain and how it differs from a value chain.
LO4Discuss key value chain decisions.
LO5Explain offshoring and the key issues associated with it.
LO6Identify important issues associated with value chains in a global business environment.
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?
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.
The Value Chain
Examples of Goods-Producing and Service-Providing Value Chains (slide 1)
Examples of Goods-Producing and Service-Providing Value Chains (slide 2)
The Value Chain at Buhrke Industries
Source: Buhrke Industries company web site
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.
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
Procter & Gamble’s Conceptual Model of a Supply Chain for Paper Products
AutomobileSuppliers – Vanish or Rebound?
Clips & Clamps Industries located in Plymouth, Michigan has been selling metal brackets for decades to the big three Detroit automobile manufacturers—General Motors, Ford, and Chrysler. But a few years ago, the firm decided it must become a tier-one supplier to Toyota, Honda, and Nissan if it was to survive the global economic downturn. Mr. Aznavirian, President and co-owner, said “You can’t sit around waiting for the Big Three to come back.” Mr. Aznavirian lead efforts to gain work from the Japanese firms by reducing equipment downtime, producing less scrap, and becoming a more efficient part of the global supply chain. --- Mr. Craig Fitzgerald, a consultant, noted that “more than half of North America’s 1,200 small auto suppliers will vanish into bankruptcies, mergers, and liquidations…. But some like Clips and Clamps will reinvent themselves and rebound.”
Suppose that a manufacturer needs to produce a custom aluminum housing for a special customer order. Because it currently does not have the equipment necessary to make the housing, it would have to acquire machines and tooling at a fixed cost (net of salvage value after the project is completed) of $250,000. The variable cost of production is estimated to be $20 per unit. The company can outsource the housing to a metal fabricator at a cost of $35 per unit. The customer order is for 12,000 units. What should they do?
VC1 = Variable cost/unit if produced = $20
VC2 = 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.
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.
Offshoring is the building, acquiring, or moving of process capabilities from a domestic location to another country location while maintaining ownership and control.
Four Degrees of Offshoring Scenarios
Example Issues to Consider When Making Offshore Decisions
Rocky Brands Value Chain
TuneMan Case Study
1. Draw the “bricks and mortar” process stages by which traditional CDs are created, distributed, and sold in retail stores. How does each player in the value chain make money? (You can use the exhibits in the chapter to help you identify major stages in the value chain.)
2. Draw the process stages for creating and downloading music today. How does each player in this electronic/digital value chain make money?
3. Compare and contrast the approaches in the previous two questions. What’s changed? What’s new? Are there any advantages/disadvantages of each approach?
4. Compare the role of operations in each of these value chain structures and approaches.