Strategic Procurement &Value Chain

CONSTRUCTION SUPPLY CHAIN MANAGEMENT (MGT60803/QSB 2433)

Objectives Today

• Strategic Procurement • What is Value Chain?• Porter’s Value Chain

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Strategic Procurement

• Procurement is the process of obtaining goods and services from another while a strategic procurement objective is to facilitate added-value.

• Procurement has been seen as a function for reducing costs instead of adding value.

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Strategic Procurement

• Procurement strategies, however, cannot be developed in isolation, they need to be integrated with corporate strategy to succeed.

• Hence, a strategic procurement does not only add values to the procurement process but the entire value chain.

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What is Value Chain?

• A value chain is a set of activities that an organization carries out to create value for its customers. (E.g. Paper Birthday Card)

• Porter proposed a general-purpose value chain that companies can use to examine all of their activities, and see how they are connected.

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What is Value Chain?

• The way in which value chain activities are performed determines costs and affects profits.

• This tool can help you understand the sources of value for your organization.

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How Value is Created Within Organizations?

• How do you change business inputs into business outputs in such a way that they have a greater value than the original cost of creating those outputs?

• Example, manufacturing companies create value by acquiring raw materials and using them to produce something useful.

• Example, a company create value by using the raw materials to build a hotel.

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Value Created

• The value that's created and captured by a company is the profit margin:

• Value Created and Captured – Cost of Creating that Value = Margin

Example: Selling Price of a birthday card is RM 4.90 – Cost of creating a card is RM 0.50 = Profit Margin is RM 4.40.

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Value Created

• The more value an organization creates, the more profitable it is likely to be.

• When you provide more value to your customers, you build competitive advantage.

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Value Chain• The value chain displays total value, and consists

of value activities and margin.• Value activities are the physically and

technologically distinct/unique activities a firm performs to create valuable products to buyers.

• Example, a company uses IBS to build wall panel (increase value – T,C,Q) and BIM is a technology advancement in building information (increase value – T,C,Q).

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Value Chain

• Margin is the differences between total value and the collective cost of performing the value activities.

• Value Created and Captured – Cost of Creating that Value = Margin

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Porter’s Value Chain

• Porter's Value Chain focuses on how inputs are changed into the outputs purchased by consumers.

• Porter described a chain of activities common to all businesses, and he divided them into primary and support activities.

• Called value activities.

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Porter’s Value Chain

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Porter’s Value Chain

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Five Primary ActivitiesPrimary activities relate directly to the physical creation, sale, maintenance and support of a product or service. •Inbound logistics: These are all the processes related to receiving, storing, and distributing inputs internally. Your supplier relationships are a key factor in creating value here.

Porter’s Value Chain

• Operation: These are the transformation activities that change inputs into outputs that are sold to customers. Here, your operational systems create value.

• Outbound logistics: These activities deliver your product or service to your customer. These are things like collection, storage, and distribution systems, and they may be internal or external to your organization.

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Porter’s Value Chain

• Marketing and sales activities: These are the processes you use to persuade clients to purchase from you instead of your competitors.

• The benefits you offer, and how well you communicate them, are sources of value here.

• Building customer’s relationships.

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Porter’s Value Chain

• Service activities: These are the activities related to maintaining the value of your product or service to your customers, once it's been purchased.

• Such as installation, spare parts delivery, maintenance and repair, technical assistance, buyer’s enquires and complaints.

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Porter’s Value Chain

Support activitiesThese activities support the primary functions above.•Procurement – This is what the organization does to get the resources it needs to operate. This includes finding vendors and negotiating best prices.

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Porter’s Value Chain

• Human resource management (HRM) – This is how well a company recruits, hires, trains, motivates, rewards, and retains its workers.

• People are a significant source of value, so businesses can create a clear advantage with good HR practices.

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Porter’s Value Chain

• Technological development – These activities relate to managing and processing information, as well as protecting a company's knowledge base.

• Minimizing information technology costs, staying current with technological advances, and maintaining technical excellence are sources of value creation.

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Porter’s Value Chain

• Infrastructure – These are a company's support systems, and the functions that allow it to maintain daily operations.

• Accounting, legal, administrative, and general management are examples of necessary infrastructure that businesses can use to their advantage.

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Porter’s Value Chain

• Companies use these primary and support activities as "building blocks" to create a valuable product or service.

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Porter’s Value Chain

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Value Added

What is value?•In competitive terms, value is the amount buyers are willing to pay for what a firm provides them. (worth)•Value is measured by total revenue, a reflection of the price a firm’s product commands and the units it can sell.

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Value Added

• A firm is profitable if the value it commands exceeds the costs involved in creating the product. (E.g. Taylor’s University)

• Creating value for buyers that exceeds the cost is the goal of any strategy.

• Value must be used in analyzing competitive position, instead of cost.

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Conclusion

• Firms in the same industry may have similar chains, but the value chains of competitors often differ.

• Differences among competitor value chains are the key source of competitive advantage.

• To diagnose competitive advantage, it is necessary to define a firm’s value chain for competing in a particular industry.

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