Value Chain Management: Functional Strategies for Competitive Advantage

McGraw-Hill/IrwinContemporary Management, 5/e

Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.

chapter nine

9-2

Functional Strategies and Value-Chain Management

Value chain - coordinated series or sequence of functional activities necessary to transform company resources (“inputs”) into finished goods or services customers value and want to buy (“outputs”)

Turning Resources in Products

Information

Plant, facilities,

equipment

Labor Capital

Products: Goods & Services

Inputs

Conversion or

transformation

processes

Outputs

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.

What are “Products”?

Products = Goods (tangible) & Services (intangible)

Q. Name some businesses that only produce goods. Name some businesses that only provide

services. Name businesses that do both.

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Functional Activities and the Value Chain

9-6

Functional Strategies and Value-Chain Management

1. Product development – engineering and scientific research activities

involved in innovating existing products or bringing new products to the market

2. Marketing – 4 P’s: Product, Promotion, Price, & Place– “Find a Need and Fill It”

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Functional Strategies and Value-Chain Management

3. Materials management– controls the movement of physical materials

from the procurement of inputs through production and into distribution and delivery to the customer

4. Production (aka “Manufacturing”)– responsible for the creation, assembly or

provision of a good or service, for transforming inputs into outputs

Manufacturing Function

• AKA “Production Management”• All about making things efficiently

Basic Requirements of Production Management:1. Create the products the customer wants

when they want them2. Provide at the lowest possible cost3. Provide an acceptable level of quality

Manufacturing Processes Types

Conversion Changing iron ore into steel sheets.

Fabrication Changing sheet metal into a car bumper.

Assembly Assembling parts into a car.

Process Example

Testing Systems check on a newly manufactured car.

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.

Production Terminology

• Mass production – Producing as many identical units as possible

+’s = lower costs, simplicity

-’s = variety, flexibility• Just-In-Time (JIT) Inventory• Lean Manufacturing – less people, less space, less

time, less cost (Easy to say!)• Mass Customizing – tailoring products for specific

customers• Competing in Time – being the fastest• Computer-Aided Design (CAD) & Computer-Aided

Manufacturing (CAM)

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More Production Terminology

Process Reengineering - fundamental rethinking and radical redesign of the business process to achieve dramatic improvement in critical measures of performance

Quantum product innovation - development of radically different kinds of goods and services brought about by pioneering discoveries & technological advances

Incremental product innovation - gradual improvements and refinements to existing products over time as existing technologies are perfected, and managers drive efficiencies and effectiveness gains

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Functional Strategies and Value-Chain Management

5. Sales– plays a crucial role in locating customers

and then informing and persuading them to buy the company’s products

6. Customer service function – provides after sales service and support– Can create a perception of superior value

by solving customer problems

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Improving Responsiveness to Customers

• Good value-chain management requires that managers focus on defining the company business in terms of customer needs & wants. What do customers need & want?...

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What Do Customers Want?

1. A lower price and/or a good value

2. Quick service and good after-sales service

3. Products with many useful or valuable features

4. Products that are tailored to their unique needs

5. High-quality products

Quality

Q. How do you define “quality” when you’re talking about a restaurant

experience?

Q. How do you define “quality” when you’re talking about a car?

Some Dimensions of Quality

• Performance

• Features

• Reliability

• Conformance

• Durability

• Serviceability

• Aesthetics

• Perceived Quality

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Total Quality Management

• Total quality management (TQM) – focuses on improving the quality of an

organization’s products and stresses that all of an organization’s value-chain activities should be directed toward this goal

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Steps to Successful TQM Implementation

1. Build organizational commitment to quality

2. Focus on the customer

3. Find ways to measure quality

4. Set goals and create incentives

5. Solicit input from employees

6. Identify defects and trace to source.

7. Introduce just-in-time (JIT) inventory systems.

8. Work closely with suppliers.

9. Design for ease of production.

10. Break down barriers between functions.

Facilities PlanningFacilities Planning

1.What Buildings and Equipment are necessary

2.Where they should be located = “Site selection”

Q. What are the important factors to consider when locating each of these types of facilities?

• Manufacturing Plant

• Sales Office

• Retail Store

.

Site Selection Factors

1. Revenue• Location of customers and accessibility• Location of competitors

2. Costs• Construction & Land• Materials• Transportation costs: materials, products, people• Wage rates• Taxes: income, property, sales• Utility rates• Rental rates• Communication costs

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.

Site Selection Factors (cont’d)

3. Other factors• Availability of labor with appropriate skills• Availability of materials, utilities, supplies• Union activity• Community attitudes and culture• Political situation• Pollution laws and restrictions• Climate• General living conditions • Personal Preferences of Owner(s) – lifestyle, family,

network, lenders

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.

Alternatives to building new facilities

Options for expanding capacity instead of building a

new one:

– Subcontract work.

– Add another shift.

– Work overtime.

– Expand the current facility.

– Keep the current facility and add another facility

elsewhere.

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.

Facilities Layout

Facilities Layout - Process of planning the optimal physical arrangement of facilities, including personnel, equipment, storage space, office space, and customer needs.

Needed for a variety of reasons:

Construction of new facilities.

Obsolescence of current facilities.

Changes in demand.

Development of a new or redesigned product or process.

Personnel considerations: frequent accidents, poor working environment, or prohibitive supervisory costs.

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.

Designing the Physical Facilities

Physical facilities should be practical, not pretentious (there are rare exceptions)

The ideal building matches the functional requirements of the business–Age and condition of building–Fire hazards–Heating and air conditioning–Lighting–Restroom facilities–Entrances and exits–Number of levels

Designing the Physical Facilities:Retail Store Layout

Objectives

1. Display merchandise to maximize sales and provide customer service

2. Help the customer find products

3. Have an appealing atmosphere

4. Project the right image - Quality? Elegance? Thrift? Must match the customer self-image

5. Protect equipment and merchandise from theft and damage

6. Have an efficient layout to minimize costs

Designing the Physical Facilities:Retail Store Layout

Layouts• Grid pattern - A block-like layout where merchandise is

set up in aisles (ex: supermarket)

Q. Why would a facility be laid out in a grid pattern?

• Free-flow pattern - A flexible layout that is visually appealing and gives the customers freedom of movement (ex: clothing store)

Q. Why would a facility be laid out in a free-flow pattern?

Grid Pattern for Retail Store

Display Racks

Racks

Racks

RestroomsStorageOffice

Disp

lay

Disp

lay Racks

Ch

eck-ou

t

Do

or

Do

or

Free-Flow Pattern

Door

Door

Racks

Display Racks

Ch

eck-ou

t

Office

Storage

Storage

Disp

lay

Table

Arranging Merchandise

Impulse Goods (candy, magazines)–Place where they can easily be seen and near or at the

register/checkout area

Customer-Necessary goods (milk)–Place at the back of the store or in out-of-the-way

places where customers must seek them out.

Entry Areas–Put goods at right front of store to catch customers’ eye

as they enter the store or to draw them in.

The best spaces (usually front right)– should be used for the highest profit goods

Facility Layout Exercise

Exercise: Break into groups of 5. You group is the owner of the retail business listed below which is currently under construction. Discuss and then develop 5 specific actions you will take in designing the layout of your facility. Then select a member of your group to present you the actions you will take and why you will take them.

Group 1 - An Upscale Grocery Store located in a wealthy neighborhood

Group 2 - A Family-style Restaurant located in a small town

Group 3 – A Sunglass Retailer located in a mallGroup 4 – A Large Bookstore located in a strip mallGroup 5 – A Sporting Goods store located near a mall