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Value Driven Supply Chain Management

Michael Porter introduced the value chain concept as a way to help organizations evaluate and better understand how their core competencies drive competitive advantage. Although the concept was introduced back in 1985, it is still regarded as a highly effective model for measuring and managing productivity in business today.

Value Chain analysis targets the activities performed within an organization which generate value. Value generating activities are defined as the core activities which drive a company's competitive advantage. There are five primary value chain activities. The goal of each primary activity is to create value which exceeds the cost of providing the product or service, thus generating a profit margin (1).

Porter's Primary Value Chain Activities

Primary Value Chain Activities

  1. Inbound Logistics - receiving, warehousing, and inventory control of raw materials (inputs) used in the manufacturing process.

  2. Operations - process of transforming inputs into finished goods or services.

  3. Outbound Logistics - the warehousing and transportation activities required to get the finished goods to the customer.

  4. Marketing and Sales - identifying customer needs and generating sales of the product or service.

  5. Service - activities which enhance or maintain the product or service's value after the sale of the product (customer support, repair services, etc.).

Porter's theory identifies two categories which classify a firm's competitive advantage; cost advantage and differentiation. Cost advantage functions as a means of providing comparable buyer value more efficiently than the competition. Organizations achieving a cost advantage have been successful in reducing the cost of individual value chain activities (3). Differentiation is achieved when activities are performed in ways which create more buyer value than the competition, hence creating a unique product offering. Differentiation may result in higher costs and command a premium price for the goods or services (2).

The value chain is intrinsically tied to supply chain activities regarding inbound and outbound logistics. Value chain activity analysis requires the firm to look outside its four walls for solutions and consider the benefits of having a synchronized supply chain to increase service levels and/or lower the delivered cost of the product or service.

Organizations can create value through its supply chain by considering alternative ways to align with suppliers and service partners.

  • Outsource non-core activities to other members of the value chain to increase the efficiency of production within the value chain. Assign resources to oversee the activities as opposed to performing supply chain functions in house.

  • Proactive management of your supply chain - Use information to drive planning and forecasting activities in addition to measuring current processes. Establish specific metrics or data elements required of each touch point in your supply chain and require supply chain partners to provide this information. There is value in planning ahead and evaluating where waste can be reduced. Using data to drive decision making will enable firms to be more proactive when planning ahead for anticipated supply chain events.

  • Require visibility to supply chain activities and shipping milestones from logistics partners. Many companies have realized the benefit of being electronically connected to transportation business partners. Creating better visibility to supply chain activities proves to hold many benefits. Warehousing expenses can be reduced on inbound shipments by creating a more efficient receiving process, in turn improving outbound fulfillment planning. Visibility to outbound logistics functions brings a proactive approach to forecasting and can improve response time regarding order replenishment with end customers. Higher order fill rates improve customer service and loyalty which will increase revenue and profit margins (4).

  • Provide feedback to supply chain partners. In order to maintain or improve on the initiatives implemented with supply chain partners, schedule recurrent sessions to review the goals and overall compliance with the criteria established for each partner. Encourage dialogue from your supply chain business partners and ask for their input on ways to add value to the overall process.

As management initiates the value planning process, consider including Expeditors as part of the focus group overseeing the project. By taking advantage of Expeditors' 30 years of industry expertise and leveraging our global network, we can implement programs to meet your specific value chain objectives.

Expeditors' offers a variety of supply chain solutions to complement the inbound and outbound logistics functions supported by your organization. It is Expeditors' goal to partner with our customers to provide solutions aligned with your objectives. Expeditors' collaborative approach focuses on improving productivity and reducing costs. Solutions are not limited to one mode of transit or one transit schedule. Expeditors will customize service offerings to create value and improve supply chain performance.

Expeditors' knowledgeable staff and service culture, in conjunction with our integrated global network of 251 offices, will listen to your unique business needs and offer solutions for all aspects of your supply chain.

Bibliography:

  1. "The Value Chain," Quick MBA Strategic Management.
    http://www.quickmba.com/strategy/value-chain (accessed March 25, 2011).
  2. "The Value Chain," NetMBA. http://www.netmba.com/strategy/value-chain (accessed March 29, 2011).
  3. Pieri, Nathan; "Creating a High-Velocity Supply Chain," InboundLogistics.Com.
    http://www.inboundlogistics.com/articles/itmatters/itmatters1201.shtml (accessed March 29, 2011).