Author: Tom Macina Reviewers: Scott Bender, Peter Fisher, Cyrus Villa, Ammar Maraqa bc Value Chain...

Author: Tom Macina

Reviewers: Scott Bender, Peter Fisher, Cyrus Villa, Ammar Maraqa

bc

Value Chain

March 1998Copyright© 1998 Bain & Company, Inc.

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Copyright© 1998 Bain & Company, Inc.

Value Chain AnalysisAgenda

•The concept

•Value Chain methodology

•Example

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Value Chain AnalysisThe Concept

•Value chain analysis is a systematic method for disaggregating a firm or industry into its major discrete activities to understand sources of competitive advantage

•Value chain analysis can be used to identify opportunities to–gain cost advantage/improve performance– increase competitive differentiation

•Value chain analysis is an analytical tool which can help provide clarity to consultants and clients

–allows distinct boundaries to be drawn across business (or industry) process

–allows consultant to clearly evaluate and prioritize activities on which to focus

–facilitates client understanding

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Value Chain AnalysisGeneric Value Chain

Successively finer disaggregations of activities are made to expose

differences important to competitive advantage

The generic value chain consists of six general activities.

Tech., R&DPurchasing/ Inbound Logistics

Manufact-uring/

Operations

Marketing&

Sales

Distribution/Outbound Logistics

Service

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Value Chain AnalysisCommon Uses

Value chain analysis can be used as an analytical tool in two general situations.

Value Chain Analysisas a tool for

Competitive Advantage

Cost Analysis/Performance

Improvement

Competitive Positioning

•RCP

•Re-engineering

•Business definition

•VMR/Industry collaboration

•Competitive differentiation

•Drawing business boundaries

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Value Chain Analysis

Distribu-tion/

OutboundLogistics

Service

Value Chain Scope

The scope of the value chain depends largely on the purpose for which the tool is being used.

System or Industry Value Chain:

Firm Value Chain:

Major Activity Value Chain:

Tech., R&D

Purchas-ing/

InboundLogistics

Manu- facturing/

Operations

Marketing&

Sales

MaterialPreparation

ConversionFinal

AssemblyQuality

AssurancePackaging

Inputs(Supplier)

Conversion(Manufacturer)

Distribution(Distributor/

Retailer)

Consumption(End-User) •VMR

•Cost Analysis

•Process Re-engineering•Cost Analysis

Sample Use

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Value Chain AnalysisWhen to Use Value Chain Analysis

Cost Analysis/RCP

Process Re-Engineering

Business Definition

VMR/Industry Collaboration

Competitive Positioning

Map Major Activities Map Sub-Activities

Always

Sometimes

Unlikely

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•The concept


•Example

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Value Chain AnalysisValue Chain Methodology (1 of 2)

1. What are the activities?

2. Which activities are most critical?

3. Which critical activities provide the most opportunity? (Where is the most leverage?)

Tech., R&D

Purchas-ing/

InboundLogistics

Manu-facturing/Opera-tions

Marketing&

Sales

Distri-bution/

OutboundLogistics

Service

Tech., R&D

Purcha-sing/

InboundLogistics

Marketing &

Sales

Distri-bution/

OutboundLogistics

Manu-facturing/

OperationsService

?

There are three steps in doing value chain analysis.

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?

Step one is determining the appropriate activities to map.

•Determine key steps in designing, producing, marketing, delivering and supporting a product or service

•Activities can be separated and grouped based on– different economics– processes using different people/equipment/technology– high or growing percentage of total cost– distinction in mind of customer

•Helpful methodology in mapping out activities:– product flow– order flow– paper flow

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Sanding/Dusting

Manu-facturing

Cutting

Packaging

Cooking Forming WrappingBulk

Containers

Major Activities:

Sub-Activities:

•Wrapping individual candies

•Bagging individually wrapped candies for retail sale

•Placing individually wrapped candies in bulk containers for delivery to retail outlets that sell loose candy

•Find “break points” in the process flow– cooking through sanding all one continuous line– product conveyed to wrapping line

•Packaging was actually separated into two activities, as there are two different product paths following wrapping– most process steps similar, however, suggesting a “packaging” grouping

Bagging

Drawing Activity Boundaries (Candy Co. Example)

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Step two is determining which activities are most critical.

Cost Analysis Case

Tech., R&D

Purch-asing/

InboundLogistics


Market-ing &Sales

Distri-bution/

OutboundLogistics

Service

5% 35% 30% 15% 10% 5%

•What are cost drivers?

Explanation:

Percent of total cost:

•Allocate costs to each major activity

•Determine which activities account for the greatest portion of total cost

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Competitive Positioning Case

Tech., R&D

Purch-asing/

InboundLogistics


Marketing&

Sales

Distri-bution/

OutboundLogistics

Service•Which criteria drive customer decisions?

Customer importance scale

(1=low, 7=high)

Product Innovation Reliability

Brand Image

Speed of Delivery Responsiveness

Explanation: •Determine relative importance of each activity in mind of customer

•Determine which activities drive purchase decision

Price4.0 6.3

4.8

6.0 5.1 4.7

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Manu-facturing/

Operations

Value Chain Methodology (3 of 3)

Step three is determining which activities provide the most opportunity.

3. Which critical activities provide the most opportunity?

Tech., R&D

Purch-asing/

InboundLogistics

Market-ing &Sales

Distribu-tion/

OutboundLogistics

Manu-facturing/

Operations

Cost Analysis Case

Competitive Positioning Case

•Where is greatest relative opportunity to improve cost structure?

•Where is greatest relative opportunity to improve performance/create gap relative to competitors?

Tech., R&D

Purcha-sing/

InboundLogistics

Distribu-tion/

OutboundLogistics

Market-ing &Sales

Service

Service

Explanation:

Explanation:

• Determine which costs are most controllable– e.g., raw materials costs may be largely commodity

• Determine where largest relative performance gap lies– relative to competitors– relative to internal comparables

• Determine where largest relative performance gap lies– relative to customer expectations– relative to competitors

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•The concept


•Example

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Value Chain AnalysisAce Consumer Products

Background: •Ace Consumer Products was a weak number three in the U.S. Ketchup market

•Division losing money, losses accelerating

Complication: •Business interlinked with other operations - can't be closed or divested

Question: •What cost reductions can be done to restore profitability?

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Value Chain AnalysisValue Chain Methodology




Tech., R&D

Purch-asing/

InboundLogistics


Market-ing &Sales

Distribu-tion/

OutboundLogistics

Service

Tech., R&D

Purch-asing/

InboundLogistics

Market-ing &Sales

Distri-bution/

OutboundLogistics

Manu-facturing/

OperationsService

?

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Service

Ketchup Value Chain

ActualValue Chain

Purchasing/ Inbound Logistics

Manu-facturing

Packaging Marketing SalesDistribution/OutboundLogistics

Generic Value Chain Tech.,

R&D

Purchasing/InboundLogistics

Manu-facturing/

Operations

Marketing&

Sales

DistributionOutboundLogistics

In this consumer products example, R&D and service were removed as major activities, packaging was broken out separately, and marketing & sales were separated.

•Very little investment in product formulation

–not a major activity

•Raw materials substantial, but largely commodity

–major activity

•Packaging critical for consumer products

–packaging broken out separately

•Brand building through marketing and sales force very discrete

–marketing and sales separated

•Captive fleet distributes to customer warehouses

–major activity

•Product support (800#) minimal and handled centrally with other product lines

–not a major activity

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Tech., R&D

Purch-asing/

InboundLogistics

Manu-facturing/

Operations

Market-ing &Sales

Distribu-tion/

OutboundLogistics

Service

Tech., R&D

Purcha-sing/

InboundLogistics

Market-ing &Sales

Distribu-tion/

OutboundLogistics

Manu-facturing/

OperationsService

?

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Value Chain AnalysisAce Consumer Products

100%

80%

60%

40%

20%

0%

Per

cent

of T

otal

Other

Vinegar

Propylene glycol

Sugar

Onions

Tomato

OtherVariable

manufacturing

Dep

reci

atio

n

Mainten- ance

Labor overhead

Direct labor

Other

Labels

Bottle

Gro

up

ad

min

istr

atio

nR

&D

Div

isio

n ad

min

.H

Q a

nd

syst

ems Operating margin

Other operating and administrative

Wages

Variable

Fixed

$0.20 $0.40 $0.60 $0.80 $1.00 $1.24

Cost per Eight Ounce Bottle Price to consumer ($1.08)

Raw Packaging

OtherOverhead

Promotion

Consumer

Media

Marketing Profit Retailer Deals

Ou

tbo

un

d f

reig

ht

Per

iod

dist

ribut

ion

War

ehou

sing

Red

istr

ibut

ion

Dis

trib

utio

n

Manufacturing Allo

catio

ns

Raw materials, manufacturing, packaging and marketing drive total cost.

Sal

es

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2. What activities are most critical


Tech., R&D

Purcha-sing/

InboundLogistics

Manu-facturing/

Operations

Market-ing &Sales

Distribu-tion/

OutboundLogistics

Service

Tech., R&D

Purcha-sing/

InboundLogistics

Market-ing &Sales

Distribu-tion/

OutboundLogistics

Manu-facturing/

OperationsService

?

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Value Chain AnalysisRelative Cost Position - Methodology

DriversCompetitive Cost

Sources

•BAR/LNA

•Leemis

•Alumni interviews

Benchmarking was critical to understanding where the largest opportunities were.

•Material usage

•OH structure

•Advertising

•Promotion

•Wage rates

•Benefit structure

•Productivity

•Reverse engineering

•Plant surveys

•Alumni interviews

•Client plant reports

•Commodity markets

63.2¢ per 8oz.

Allocations

Sales

Marketing

Distribution

Packaging

Manufacturing

Raw

$0.00

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

$0.70

Cos

t to

Land

8oz

. Bot

tle in

Ret

aile

r W

areh

ouse

(C

ents

)

•Client product reports

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Package

Distribution

Marketing

Manufacturing

Raw

Package

Distribution

Marketing

Manufacturing

Raw

Distribution

Sales

Package

Distribution

Marketing

ManufacturingAllocations

Regular Spicy Barbecue

7.8¢

(2.4¢)

7.8¢

(2.9¢)

19.3¢

(0.9¢)

($0.05)

$0.00

$0.05

$0.10

$0.15

$0.20

Cos

t Adv

anta

ge (

Dis

adva

ntag

e) p

er B

ottle

(C

ents

)Cost Variance

5.5¢ 5.0¢

18.4¢

Manufacturing turned out to be the activity with the greatest relative cost disadvantage.

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Value Chain AnalysisKetchup

133%

120%

100%

80%

60%

40%

20%

0%0% 20% 40% 60% 80% 100% = 830MM pounds

Total Ketchup Capacity

Product Type

It was the low level of capacity utilization that created sizable manufacturing cost disadvantages. Average annual

utilization13 week Peak period utilizationAverage capacity7 day 20 hours per day

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Lima Alternate Use

Green Bay Alternate Use

Period Cost Reduction

Productivity Increase

Product Cost

Transportation Costs

Inventory Build/Outside Storage/Overtime

$7.5MM

($3.6MM)($4)

($2)

$0

$2

$4

$6

$8

On

-Goi

ng

Co

sts/

Sa

vin

gs (

Mill

ion

s of

Do

llars

)Consolidation Savings

Consolidating from six plants to four would save $3.9MM annually.

$3.9MMConsolidating two plants has on-going savings impact of $3.9MM

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Author: Tom Macina Reviewers: Scott Bender, Peter Fisher, Cyrus Villa, Ammar Maraqa bc Value Chain...

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