As a human being, we all consume products and/or services all the time. This morning you got up and ate your breakfast, e.g., eggs, milk, bread, fresh fruits, and the like. After the breakfast, you drove your car to work or school. At your office, you used your computer, perhaps equipped with 27” LCD monitor. During your break, you drank a cup of coffee and played with your iPhone. So on and so forth. You probably take it for granted that you can enjoy all of these products. But if you take a closer look at how each of these products can be made and eventually delivered to you, you will realize that each one of these is no short of miracle. For example, which fruit do you like? Consider fresh strawberries. In order for the strawberries to be on your breakfast table, there must be numerous functions, activities, transactions, and people involved in planting, cultivating, delivering, and consuming strawberries. Moreover, all of these functions, activities, transactions, and people are connected as an integral chain, through which physical products like strawberries themselves and virtual elements such as information and communication flow back and forth constantly. By grouping related functions or activities, we have a supply chain, comprised of four primary functions such as supplier, manufacturer, distributor, and finally consumer. A supply chain is essentially a value chain. For the society or economy as a whole, the goal is to maximize value, i.e., to create satisfactory value without spending too much. In order to create the maximum value for the strawberry supply chain, every participant in the chain must carry out its function efficiently. In addition, all of the members must coordinate with each other effectively in order to ensure value maximization. We have to face the same issues for almost all the products and services we take for granted in our everyday life, e.g., cars, hamburgers, haircuts, surgeries, movies, banks, restaurants, and you name it! In this course, we want to understand fundamental principles of value creation for the consumers or the market. We try to answer questions like how the product or service is made, how the value-creating activities or functions are coordinated, who should play what leadership roles in realizing all these, and so on. As our course title hints, we approach all of these issues from a learning perspective, which is dynamic in nature and emphasizes long-term capability building rather than short-term symptomatic problem solving.
Value Creation Hierarchy
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Introduction to Value, Value Creation, and Supply Chain Management
In this chapter, we will learn what a supply chain is, what supply chain management is all about, and why it is important to grasp the fundamentals of supply chain management in creating real value for the customers.
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Bowon KimProfessor
KAIST Business School
Okay.
Now let's think about this value creation hierarchy.
We already talked about the core of a firm, in other words why a firm exists.
And we said that profitability.
Profitability is.
The goal of a firm.
In other words, firm is just to earn profit.
But in order to earn profit, the company must create a certain values, right?
So, that's the value.
And,
Basically the value must be defined.
Must be defined by the customer.
[SOUND] Of course, sometimes, some people think
or some managers think a value can be defined by.
Internal managers or in-house engineers or scientists, where
actually, that was the case, probably in the 1960s or 70s.
During those times, managers thought that They themselves, could define the value.
And then based on that value, they made their
products and you know, provided services to the market.
And they assumed that the market, or the customers, would like them.
But that was then.
In other words during 1970s or early 80s, supply was usually best in demand.
In other words you know, the firm dominating period.
The customers.
Are just buying those product and services offered by the companies.
And nowadays the situation is changed quite significantly.
We might say that the bargaining power, shifted
to the market, shifted to the customers or consumers.
And therefore, the firm, must not believe that.
It can actually define the value, unilaterally.
So the value, now there's belief that, it must be defined by the customers,
and by the market, and therefore, the firm must try to understand.
What the market truly wants, what the customers really want to buy.
Okay, so, value creation is the precondition for profitability.
And then there are two ways for a firm to.
Create value.
In other words either make physical
products, or provide services.
Sometimes, there is a very clear distinction between products and services.
But, now there's, I believe that it is not very meaningful
to make any distinction between product and services.
For example, is McDonald a service company or, manufacturing company?
When we look at the hamburgers as a physical
product, it seems like McDonald is a manufacturing company.
But, in the McDonald transaction process, the
customers are really, really, you know, involved.
Very much involved.
In the value creation process.
Then, you just say that McDonald is a service-intense company, so.
Is McDonald a service company or a manufacturing company?
Both, actually.
And that happens all the time.
Think about [UNKNOWN], it's automobile
company, car maker, is it a manufacturing company?
Obviously, because the company produces cars, which
is a fiscal product, but nowadays when the.
Consumers buy cars.
They are not just looking for physical things only.
They want to get, great services, from the company as well.
It's not just services that they're going to purchase only.
Sometimes we want to have very.
You know, efficient and effective maintenance policies,
which is a big portion of services.
And therefore, nowadays, car makers like SsangYong Motor
and BMW, they are all mixture of manufacturing and services.
So, we cannot say that fiscal product is completely
different or dis, distinguished from services or vice versa.
So, every company, has to focus on fiscal
products, and also services at the same time.
And now, let's go down this hierarchy of a little bit further.
And then what should a company do, or what should a company
have, in order to make products, or in order to provide services?
I would say there are three things.
First of all,
the firm must have resources to make.
Product or to provide the services.
Think about this car maker.
SsangYong Motor or BMW.
You know that for the company to build your
car, it must have raw materials, and sources, right?
It probably needs to have a steer,
plastics, some chemicals, or some electronic devices.
And all those things.
And also, they need human resources as well.
So, resources, are one of those conditions, one of those factors.
The firm has to have, in order to create value.
In order to make products or services.
But let's say, the company has you know, lots of the resources in its warehouse.
Is it enough?
I mean that, if, if you have lots of resources.
Are those resources transforming themselves into final product or services?
That is not the case, and again let's
think about this car making industry, or automobile industry.
Those resources must go through certain tasks and activities, and, you know.
They are called processes.
And think about this assembly line.
The raw materials and steers and, you know, plastics, and some
chemical materials, they must go through a series of activities,
through which those resources are transformed into.
The final product.
So, in order to make a product, or in order
to provide the services, the firm must utilize these resources.
In other words, the firm must have some processes.
Processes are actually, the activities and functions.
So, by performing those activities, tasks and functions, the
firm can transform those resources into the final product.
Okay, so, we know that the resources
and processes are the two most important factors.
The firm must have in order to create value.
But now lets say, there are two components.
Component A, and component B, and lets say, in terms of
resources, the company has same or very similar type of resources.
Probably, the two companies have you know, the same raw material suppliers.
And let's say, these two companies, have the same processes.
Probably they bought the same machines from the same
vendors, and same equipment, and so on and so forth.
Of course we cannot assume that resources and processes are exactly the same.
But, for the sake of explanation, let's, let's assume that
company A and B, have resources and processes, that are sufficiently similar.
Having said that, let's say, they make their product.
In other words, let's say, the company A
makes a certain product, we call that product A.
And company B makes product, we call that product B.
But these two products are the same.
Let's say, this is a car.
If the two companies, use the same resources, and utilize the same processes.
Can you say, the output of these two companies, are exactly the same?
Do you think that if BMW, and some other
companies, maybe in China, in Korea or whatever.
Let's say, you know, there is another company.
Car maker, as suppose the BMW and the other
car maker, uses the same resources and same processes.
Can we say that the cars, produced by these two companies, are exactly the same?
Probably not.
We do not want to say that these two products, are exactly
the same, simply because they use the same resources and the same processes.
Why is that?
Somehow, that implies that we believe there is another thing, another factor.
That is a required, in order to make
product and services, in order to create value.
And that factor, is quite different between, you know, between
different companies, and we will say that, that's the capability.
In other ways, company A has its own
capability, and company B has its own capability,
and depend, depending on what kind of capability
each the company has, their products will be different.
Even if they used the same resources and same processes.
Okay, so I would just say, I would call these three things, resources, processes
,and capabilities, as the fundamental building blocks for value creation.
In other words, in order to make a product and services.
Every company, every firm must have these three factors.
Resources, processes, and capabilities.
And now, the issue is very clear.
Traditionally.
Operations management, traditionally operations management, is about
how to utilize, how to manage all these three things, resources, processes
and capabilities, in order to make products and services,
that are valued by the customers, that are valued by.
The market, so that we can maximize these profit.
That's more traditional perspective of operations management.
Now, that sounds interesting, right,
operations management is about value creation.
By utilizing these three fundamental building blocks, effectively.
But, in the past, probably, again in 1980s, in 1990s,
traditional operations management, was more focused on.
Individual company's value creation.
In other words, the main focus was within, one single individual company's boundary.
But, let's think about what's happening these days.
Let's think about Apple.
I want to understand, what is the competitive advantage of Apple.
I want to understand how Apple creating value, how
and why Apple is such a good company.
I want to understand that.
But, if I look at, resources, and processes, and capabilities,
owned by Apple only, can I explain the competitive advantage of Apple?
Probably not.
Even if I understand to a certain extent.
It cannot be complete.
I cannot truly understand Apple's competitive advantages, by
looking at Apple's own resources, processes, and capabilities.
Why?
Because Apple.
Does not make its own fiscal product,
in general, right?
Apple, does not have, huge in-house manufacturing, and
In order to understand Apple's competitive advantages, we have
to understand, how this physical products, iPhones, iPads,
iPods, these physical products, how these things are made.
Even if Apple is very good at design.
How can Apple create value?
How can Apple earn money?
Apple finally earns money, by selling physical things,
physical iPhones, physical iPads and physical iPods.
But.
But interestingly, Apple does not make those things.
Then, who makes those things for Apple?
One of those companies.
One of those partners working with Apple is Foxconn in China.
So, if we truly understand Apple's competitive advantages.
We have to look at not only Apple's own resources, processes, and capabilities,
but also we have to look at, Foxconn's resources, processes, and capabilities.
In other words, nowadays, if we
truly understand the companies competitive advance.
Companies competence.
We have to look beyond the company's own boundary.
In other words, we have to go beyond a single
company's boundary, and we have to look at the companies.
That share the same-value chain.
That share the same supply chain with the company.
So now, our perspective at must to shift to form a single company boundary to,
multiple companies, multiple partners, that share the
same value-chain, that share the same supply chain.
And if we have that kind of perspective, if we
have that kind of perspective, that's exactly the value-chain perspective.
And now we have to understand this inter-firm
coordination, and, that's basically about supply chain management.
Supply chain management is about.
Looking at all those firms and all those activities, that
consist in the value-chain, consist in the supply chain.
I want to, talk about more details about, you know, value-chain
and the supply chain, and so on and so forth.
Obviously, we already talked about value, value-chain, supply chain, a lot
so far, but even without defining those things more, you know, formally.
But, I think that all of you, probably have at
least some, you know casual understanding of these terminologies, so.
I thought that it was okay, for us to talk about this concept,
even before we formally define, these things more clearly.
Before I start, more formal definition of value-chain and supply chain.
I want to give a caveat.
I talked about this resources, process, and capabilities as three
fundamental building blocks, but sometimes they are overlapping with each other.
In other words some people say that process
is a part of resources, that are defined.
Where some people say that human resources
are the sources of the capabilities, and therefore,
there is some overlap between resource and
capability, resource process, and also, process and capability.
That's fine.
I'm not saying that resources and process
and capabilities are three completely distinguishable elements.
I, I think they are related with each other, and they are sometimes
have some overlaps with each other, that will be fine, that's very natural.
And I totally except that.
But the reason I want to look at these three
elements separately is that, although they overlap with each other.
To a large extent, they are thoroughly independent concept.
And I think that, by understanding these elements independently,
we will be, better able to understand this entire picture.
Of supply to management.
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