Page 18 - DMGT523_LOGISTICS_AND_SUPPLY_CHAIN_MANAGEMENT

Unit 1: 21st Century Supply Chains

Notes
Example: Suppliers, producers, distributors, customers, and others.
Each member of the value chain will use its standing in the value chain, market position and
negotiating power to get a higher proportion of this margin. A successful value chain is developed
when each member of the value chain believes that it obtains value from the relationship. The
ability of an organization to influence the performance of other organizations in the value chain
is often a core capability and a source of competitive advantage. Many organizations have
special functions that are involved in ancillary development, dealer and distributor training,
etc.
In looking at the strategic capability of an organisation, it is not sufficient to look inside the
organisation. We must look into the interconnections. Much of the value creation will occur in
the supply and distribution chain. Any analysis of the strategic capability has to be viewed from
a holistic view that includes the entire value chain.

Example: An analysis into the value chain may show that some of these interconnections
will be critical to the competitive advantage of the organisation; some can perhaps have
substitutes; others can be eliminated.
Hence, value chain analysis should cover the whole value system in which the organization
operates. A value chain is one of the most common sources of increasing the technological
competence of organisations. Knowledge is spread between members in the value chain through
the process of diffusion. This results in adding competencies both to the provider and receiver of
the knowledge. The traditional structure of the Japanese industry is illustrative of this. Units
attached to the mother unit cooperated with each other to improve their efficiency, teach each
other and learn from each other new and better ways of accomplishing their tasks, and help each
other to reduce their costs. In doing so, they are able to achieve a higher total margin to the
benefit of all of the members in the system.

1.3.1 Value Chain Analysis

Value chain analysis is not a very difficult exercise conceptually. However, depending on the
nature of the product, the linkages, the primary processes involved, etc. it is often an exercise
that can be quite complex and requires a large amount of information and data processing
capacity for the analysis. However, many of the concepts of breaking up functions into activities
and attributing costs to them are now a standard cost accounting practice which makes the
process easier. Once the basic information has been collected and the linkages established, it
becomes a routine exercise. A typical value chain analysis can be performed in the following
steps:
1. Analysis of own value chain – identify the primary and support activities. Each of these
activity categories needs to be broken up into its basic components and costs are allocated
to every single activity component.
2. Analysis of customers value chains – examine how does our product fit into the value
chain of the customer.
3. Identify activities that differentiate the firm and the potential cost advantages in comparison
with competitors.
4. Identify potential value added for the customer – how can our product add value to the
customers value chain (e.g. lower costs or higher performance) – where does the customer
see such potential?
5. The final step is to identify those activities that provide a differential advantage compared
to competitors. These are the competencies or the core competencies of the organization.

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