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.
What is Value Chain
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Do curso por Korea Advanced Institute of Science and Technology(KAIST)
Gestão da cadeia logística: uma perspectiva investigativa
390 classificações
Korea Advanced Institute of Science and Technology(KAIST)
390 classificações
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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 value chain, what value chaining is.
The concept of a value chain was first suggested by Michael Porter
in around 1985.
Value chain has all these value creating activities.
In other words, the activities
that are necessary to create the value in a systematic way.
So let's thing about this very stylized value chain.
Porter said in order to create value, in other words,
in order to earn profit, or in order to earn margin,
the firm must perform some primary activities,
such as inbound logistics.
You need to procure some materials.
You need to have some raw materials, and so on and so forth.
So this is right with input factors.
With those inputs, you do transformation operations, maybe manufacturing function.
And then once you transform this input or you know,
materials into a physical output then you need
to deliver those things to the customers.
Which is outbound logistics.
You deliver your products to your customers, to the market.
And Porter said that there are additional marketing activities, and
also services after outbound logistics.
So only when company performs all this activities
harmoniously, the company will earn margin, or profit.
Porter said these are the primary activities.
In other words, the main activities that must be performed in order to earn profit.
But there are some other supportive activities as well.
For instance, as a form, it must have some sort of infrastructure.
For example, IT infrastructure and communication infrastructure.
And also the company has some policies and
some decisions related to human resource management.
Also, the company has to pay attention to R & D activities.
And the company also needs to do this company wide procurement.
Relatively speaking, the functions that close to
sources could option activities, or option functions.
Where as those activities and functions close to the market or customers,
we call them down stream activities.
So from operations perspective, inbound logistics is option activity.
Where as the service is down stream activity.
All right?
So, from outbound logistics perspective.
Operation is option activity and
service is down stream activity.
Alright so that's value chain.
And I would say that the value chain is pretty similar with the supply chain.
But the difference between these two is the value
chain is developed in let's say strategy area..
Because Porter is business strategy professor and
he studies this you know, business strategy.
Now let's think about supply chain.
This is a supply chain.
This is a supply chain for an automobile industry.
There are lots of functions.
Right?
So if this is car maker or assembler, right,
like BMW, and Honda, and Shanda, and
those are the car makers, we call that manufacturers.
But in order to make a car, there are really
many different parts and different elements,
and even different raw materials are required.
For example, in order to make a car, we probably need a engine.
So there is engine motor supply.
And obviously we need tires, so tires suppliers, and we need car seats as well.
And windows and some electronic systems, and so on and so forth.
So we call them as first tier suppliers.
In other words, these are the suppliers
that are directly interacting with the car makers.
But there are some other suppliers.
The suppliers that are doing business with these first tier suppliers.
They're called second tier suppliers, for example, steel and aluminum suppliers,
or sometimes plastic suppliers and bolts and nuts and small commodities.
And electronic parts and glasses, and so on and so forth.
So as you can see, in theory there are many tier
suppliers, many lower tier suppliers.
So we call that multi-tier suppliers there and manufacturers.
And obviously we know that there are dealers with dealer shops,
between the manufacturer and the consumers.
And we call that as a distribution function.
As you can imagine, in order to create value, we already said that
the value must be defined by customers, customers must define the value.
So we have to make sure that we create value, very significantly at that point,
where we interact with the consumer or the customers.
So in order to maximize our value at this point, in order to maximize our
value at this point, all of these activities,
all of these activities must be performed effectively.
That's how we create the value.
That's how we maximize the value.
This is another example supplied chain.
In this case it, it's in the consumer electronics industry.
And, It shows us multi-tier suppliers.
Multi-tier suppliers there.
And then there is manufacturing company.
And then the market.
The customers there.
There are multiple channels, multiple distribution channels.
So basically, we have suppliers, and then manufacturer,
in this case OEM, Original Equipment Manufacturer.
And we have some distribution options, and finally we have end market, customers.
In geology, you know, consumer election supply chain is
far more complex than this, far more complicated than this.
And as you can see, in order to maximize the value,
in order to create value to its maximum,
all of these activities must be coordinated with each other.
If something wrong through this value chain, or supply chain,
then there is no guarantee that we will be able to create value.
So, supply chain, is basically, very similar with the value chain,
and sometimes we can use those two interchangeably.
But, supply chain management is more based on,
operations management.
So somehow, people think that the terminologies especially,
in supply chain management have manufacturing flavor.
In other words, the terminology system serves pretty much manufacturing related.
That's true, to a certain extent, because this is a legacy sharesware.
The supply chain management, key concept in supply chain management,
originated from the manufacturing company's context, and
therefore many terminologies have some manufacturing flavor.
But that doesn't mean that the supply chain management can be
applied only to manufacturing sectors.
That's not true, as we will see very shortly.
Okay, So, I want to have simpler
description of supply chain.
Actually, I already talked about this.
There are, of course, multi layers or
multitude of suppliers.
First tier, second tier, third tier, and fourth tier.
In theory there are many, many tiers, but let's say,
I want to put them together, and I want to use one box, S.
You're presenting suppliers, and supply functions.
So there are supplies and vendors, and
if we want to look at this service sector,
we call them as a service supporters.
And then we have function M, which should present manufacturer or
manufacturing function, transformation function.
Or if this is a service industry, you call that a service creator.
And then there is distribution function,
so distributor, or call that service
contact, or service provider.
And finally, there is customer.
I want to put a larger box, encompassing S,
M, D, because these are the companies,
these are the firms that have the same fate.
I mean, that they must work together, to create value.
They must work together to make a product and
services that are desired by the customer.
So somehow, I would say that these three, S,M,D, Have the same fate.
They have to work harder together.
I mean, let's say this is an automobile industry,
this is an engine module, engine module supplier,
and this is, let's say, car maker, and this is dealers.
And let's say that is the point where the actual car
is delivered to the customer.
And obviously, when we say we create value,
the value must be embedded in this car.
The fiscal product, the final product that is transferred from
this supply chain system, to the customer.
And in order to make the best car, the customer and
the markets will love, suppliers and
manufacturers and distributors must work together.
They must work together harmoniously, effectively,
in order to deliver the car to the customer,
in the right place, at the right time, and at the right price.
Now, we already said the value is function of utility and cost.
In order to make utility a more realistic concept,
I said that utility is happiness,
Or satisfaction.
In other words, the customer, happy, the customer is
satisfied with the product and services, the utility goes up.
So in order to increase value, we must increase utility, given the same cost.
But the value is actually determined by,
not only utility, but also cost.
In other words, how much the customer has to spend in order to
attain that level of utility.
So others things being equal, if we can reduce this cost, the value will increase.
And I think that we better decompose this element further.
If we believe that utility increases when the customers are happy,
When the consumers are happy and when they are satisfied.
Then I wanna ask you a question, when?
When does the customer feel satisfied?
When does the customer feel happy?
The customer and the consumer would
be satisfied, would be happy,
when they get what they want.
When the company deliver their product or
service to that customer in the right price,
at the right time, and at the right price,
they will feel happy.
Their customers will be satisfied and their utility goes up.
Then what is it?
I mean that what is the act the act for
the firm to perform in order to deliver the product and
service to the customer in the right place,
at the right time, and at the right price.
That's company's responsiveness.
That's one of those abilities, one of those capabilities a firm must have.
Responsiveness is the firm's ability to deliver that product.
It's obvious to the customer and to the consumer,
in the right place, at the right time, and at the right price.
So responsiveness is.
Related with utility.
And what about cost?
Cost, okay, 1 over cost is actually related with efficiency.
In other words, if the company, if the firm performs a certain activities and
functions efficiently, that means that the firm would be able to reduce the cost.
So, if we reduce the cost, then the efficiency will go up
and therefore we have efficiency here.
So I'll just say that value, obviously there may be
some other factor, some other variables as well,
but I would just say that these are the basic things.
And having said that, the value consists of two elements,
two dimensions, responsiveness and efficiency.
And I would just say that responsiveness
is one type of value, and also,
efficiency is another type of value.
And then if I decompose the value into these two, I want to look at
where each one of these values is more relevant and more important.
For instance, let's look at this interaction point
between supply chain system and the customer, or the market.
If we define value as either one of these two, responsiveness and efficiency,
and if I have to point out one value at this particular time and
particular position, I would just say that
the responsiveness-driven value is more relevant at this point.
Similarly, I would just say that efficiency-driven value is more relevant
inside this supply chain system.
I'm not trying to say that responsiveness-driven value is the only
value important at this point.
Probably efficiency-driven value is also important to here.
But I just want to make a statement that,
which value is more relevant at which partition, at which point.
And basically what I'm trying to say is that the supply
chain system supplies manufacturers and distributors.
They all must work together in order to enhance not
only the efficiency-driven value, but
also responsiveness-driven value.
All right, so supply chain management,
what is the goal of supply chain management?
The goal of supply chain management is to maximize,
is to maximize both efficiency-driven value and
responsiveness-driven value, at the same time.
Not one or the other.
It's not a choice between these two.
The firm must try to enhance efficiency-driven value and
responsiveness-driven value at the same time.
And that cannot be possible
unless all these players,
all these entities inside supply chain system,
work together harmoniously, work together effectively.
So basically, in order to maximize the value
through supply chain management,
the firm must be able to coordinate all these activities,
and functions, and all these tasks performed
by supply chain partners in the same supply chain system.
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