💼Strategic Cost Management Unit 13 – Value Chain & Supply Chain in Cost Management

Key Concepts

• Value chain encompasses all activities that create value for customers, from product conception to after-sales service
• Supply chain focuses on the flow of goods, information, and finances from suppliers to end customers
• Cost management strategies aim to optimize costs throughout the value chain and supply chain
• Value chain analysis identifies primary and support activities that contribute to a company's competitive advantage
• Supply chain management coordinates and integrates all supply chain activities to improve efficiency and customer satisfaction
• Lean manufacturing minimizes waste and maximizes value in the production process
• Just-in-time (JIT) inventory management reduces inventory costs by delivering materials just as they are needed
• Total quality management (TQM) emphasizes continuous improvement and customer satisfaction across the value chain

Value Chain Basics

• The value chain concept was introduced by Michael Porter in 1985 to describe the series of activities that create value for customers
• Primary activities in the value chain include inbound logistics, operations, outbound logistics, marketing and sales, and service
  • Inbound logistics involve receiving, storing, and distributing raw materials and components
  • Operations transform inputs into finished products or services
  • Outbound logistics distribute finished products to customers
• Support activities include firm infrastructure, human resource management, technology development, and procurement
  • Firm infrastructure includes general management, planning, finance, and legal support
  • Human resource management involves recruiting, training, and compensating employees
• Value chain analysis helps companies identify areas for cost reduction and differentiation

Supply Chain Fundamentals

• The supply chain encompasses all organizations involved in fulfilling a customer request, from raw material suppliers to end customers
• Key supply chain processes include planning, sourcing, manufacturing, delivering, and returning
  • Planning involves forecasting demand, planning production, and managing inventory
  • Sourcing involves selecting suppliers, negotiating contracts, and managing supplier relationships
• Supply chain management aims to coordinate and integrate all supply chain activities to improve efficiency and customer satisfaction
• Effective supply chain management requires collaboration and information sharing among all supply chain partners
• Supply chain performance metrics include cost, quality, delivery, and flexibility
• Supply chain risks include supply disruptions, demand volatility, and quality issues

Cost Management Strategies

• Cost management strategies aim to optimize costs throughout the value chain and supply chain
• Activity-based costing (ABC) assigns costs to activities based on their resource consumption, providing more accurate cost information than traditional costing methods
• Target costing sets a target cost based on market price and desired profit margin, then works to achieve that cost through product design and process improvements
• Kaizen costing focuses on continuous incremental cost reductions throughout the product life cycle
• Value engineering analyzes product functions and costs to identify opportunities for cost reduction without sacrificing quality or functionality
  • Value engineering often involves redesigning products or processes to eliminate unnecessary features or components
• Cost-benefit analysis compares the costs and benefits of different cost management strategies to determine the most effective approach

Value vs. Supply Chain: What's the Difference?

• The value chain focuses on creating value for customers, while the supply chain focuses on delivering products and services to customers
• The value chain includes all activities that create value, from product conception to after-sales service, while the supply chain focuses on the flow of goods, information, and finances from suppliers to end customers
• Value chain analysis identifies primary and support activities that contribute to a company's competitive advantage, while supply chain management aims to optimize the flow of goods and information across the supply chain
• The value chain is more customer-focused, while the supply chain is more operations-focused
• The value chain emphasizes differentiation and customer value, while the supply chain emphasizes efficiency and cost reduction
• The value chain and supply chain are interconnected, as supply chain activities support the value creation process

Optimizing the Value Chain

• Value chain optimization involves identifying and improving activities that create the most value for customers while minimizing costs
• Value chain mapping visually represents all activities in the value chain, helping to identify areas for improvement
• Benchmarking compares a company's value chain performance to industry best practices or competitors to identify gaps and opportunities for improvement
• Process reengineering involves fundamentally rethinking and redesigning business processes to improve performance
  • Process reengineering often involves eliminating non-value-added activities and streamlining processes
• Outsourcing non-core activities can reduce costs and improve focus on core competencies
• Vertical integration, or bringing more value chain activities in-house, can improve control and coordination but may increase costs and complexity

Supply Chain Efficiency Techniques

• Supply chain efficiency techniques aim to reduce costs, improve quality, and increase responsiveness across the supply chain
• Vendor-managed inventory (VMI) involves suppliers managing inventory levels at customer locations, reducing inventory costs and stockouts
• Collaborative planning, forecasting, and replenishment (CPFR) involves sharing information and collaborating with supply chain partners to improve demand forecasting and inventory management
• Cross-docking involves unloading materials from incoming vehicles and loading them directly onto outgoing vehicles, reducing storage and handling costs
• Postponement delays final product configuration until customer orders are received, reducing inventory costs and increasing customization
• Radio-frequency identification (RFID) uses radio waves to track and identify items in the supply chain, improving visibility and reducing errors

Real-World Applications

• Zara, a fast-fashion retailer, has optimized its value chain to quickly respond to changing customer demands by vertically integrating design, production, and distribution
• Toyota's lean manufacturing system, the Toyota Production System (TPS), has become a model for efficient production and continuous improvement
• Amazon has revolutionized the e-commerce supply chain through innovations like two-day shipping, drone delivery, and predictive analytics
• Procter & Gamble has improved supply chain efficiency through initiatives like vendor-managed inventory and collaborative planning with key retailers like Walmart
• Cisco Systems has outsourced much of its manufacturing to focus on core competencies like product design and marketing
• Apple has achieved a competitive advantage through its focus on product design and customer experience, supported by an efficient global supply chain

Challenges and Future Trends

• Globalization has increased the complexity of value chains and supply chains, requiring greater coordination and risk management
• Sustainability concerns are driving companies to consider the environmental and social impacts of their value chain and supply chain activities
• The COVID-19 pandemic has highlighted the importance of supply chain resilience and the need for greater flexibility and agility
• Digitalization and Industry 4.0 technologies like the Internet of Things (IoT), artificial intelligence (AI), and blockchain are transforming value chains and supply chains
  • IoT enables real-time monitoring and optimization of supply chain processes
  • AI can improve demand forecasting, production planning, and logistics optimization
• Omnichannel retailing, which integrates online and offline channels, requires new approaches to supply chain management and fulfillment
• The circular economy, which emphasizes reuse, recycling, and regeneration, is driving new approaches to value chain and supply chain design