Perform Value Chain Mapping and Analysis
Recognizing value in an organization or industry is a core competency for
successful management. "Value chain" is a term that denotes a process
comprising a number of related steps, with each step adding value to the total
outcome. Value chain analysis combines activity-based costing (ABC), key
performance indicators, and maturity profiles to evaluate performance and
identify areas for improvement and priority setting. Value chain analysis helps
set the strategic direction for implementation of those elements of supply
chain management (SCM) that are most important. For example:
• Which product categories should the Postal Service produce,
improve, and/or focus on?
• Which distribution network should the Postal Service consider?
• Which improvement concepts should the Postal Service consider
or set as the priority?
Four primary tasks are involved in any value chain analysis:
• Interview key individuals in each product category to identify and
acknowledge future plans
• Baseline current costs, using ABC to provide a standard format
• Collect key performance indicators from interviews or from
historical data in existing reports
• Prepare maturity scorecards for each product
The analysis results drive the estimation of costs and potential savings that
can be achieved if investments are made in particular processes.
When analyzing the specific activities through which organizations can create
a competitive advantage, it is beneficial to view a model of the organization
as a chain of value-creating activities. It is important to note that the
perspective will differ based on the viewer's position in the value chain.
Figure 2.3 illustrates a typical value chain.
Example of a Business Value Chain
The value chain of a business process often begins with raw materials, to
which a business adds its particular technology. This could be process
technology, formula or packaging, ease of use, or some way of transforming
the raw materials into useful resources of benefit to the Postal Service.
Manufacturing follows technology; it adds value to technology, to generate
units for sale. The units for sale proceed through a logistics step, which
makes them available to the customer, either directly or indirectly through
distribution networks. Marketing is the next step; it adds the value of
positioning, advertising, image, and all that is necessary to enhance the
features and product benefits. The sales channel is leveraged for making the
units available to the customer. Finally, the customer's needs are met when
they purchase the product and/or service.
The business value chain illustrates how each step adds discrete value to the
business process output. Having maximum process effectiveness, then, is
defined as having every task and function in the process as productive as
possible. Tasks or functions are productive only if they directly add value to
the outcome. For example, securing the right raw material with the right
qualities and delivering it to the point of use clearly adds value to the
business process. However, actually filling out a purchase order, securing
approvals, transmitting requisitions, etc., creates no value to the outcome.
Thus, value chain mapping is an analysis that identifies the underlying activity
structure and enables better understanding of the value added (or not) by
each activity. Value chain mapping enables the organization to map its value
chain and recognize value sources or lack of value sources. It allows the key
player in the organization to identify areas of opportunity for value
optimization, as well as areas of potential risk.
Value chain mapping and analysis are the keys to unlocking process gridlock
and achieving maximum process effectiveness. To begin, the Item Manager
and the selected suppliers map the complete steps of providing a material or
service, proceeding from the supplier to the end user, including the delivery
and use of the material or service. What emerges is a picture of the intricate
interlocking steps that span the supplier/purchaser relationship. The
opportunities for change emerge from seeking three goals:
• Achieving the best/lowest total costs, including all process,
transactional, and handling costs for the entire supply chain
• Pursuing the fastest cycle time performance
• Identifying and implementing "best-in-class" practices for each
core activity, subprocess, or process
The main purpose of value chain mapping and analysis is to create value that
exceeds the cost of providing the product or service and generates a profit
margin. The benefits of implementing various SCM improvements are
quantified; bottlenecks and high-/low-cost value processes are isolated. Value
chain mapping and analysis also provide an assessment of competency in
core areas. Key performance indicators for each category are used to identify
efficiency and effectiveness.
The Postal Service can create a value chain map by interviewing key
individuals within each product category to construct a detailed
representation of all steps involved in the process or flow of a product or
service, from raw material/creation to end-user consumption/use. Current
costs are then baselined, using ABC to identify the cost pools, or activity
centers, in an organization. Costs are assigned to products and services
based on the number of events or transactions involved in the process of
providing a product or service. ABC helps managers determine which steps
of a particular process are creating or eliminating value. This is similar to
process flowcharts; the only difference is that each step is then categorized
into three types of work.
Figure 2.4 shows ten steps in a typical purchase process. Of these ten steps,
two are value-adding, four are essential, and four are non-value-adding.
• Value-adding - tasks or work steps directly required to create
the product or service
• Essential - tasks or work steps necessary to support a function,
but in and of themselves adding no direct value to the finished
product or service
• Non-value-adding - tasks or work steps neither necessary nor
required to meet cost or quality standards for a given product or
Example of a Value Chain Map
Once the value chain map of the process is finalized, the following tasks
should be performed to conclude the activity-based costing (ABC) analysis:
• Identify relevant costs and highlight cost drivers - ABC goes
beyond identifying and allocating supplier's indirect costs to
products and services by identifying the drivers of such costs.
Examples of cost drivers are the number of orders, length of
setups, specifications, engineering changes, and liaison trips
required. This identification allows management to identify and
implement cost-saving opportunities.
• Analyze and produce activity costs (as-is) - ABC allocates as-is
costs to specific activities rather than departments or functions.
These costs may include as-is labor costs, material costs,
overhead, etc. Therefore, it is the activity that drives the cost, and
not the reverse.
• Analyze and produce activity costs (to-be) - ABC allocates to-be
costs to specific activities. To-be costs are costs that are
associated with the proposed project or purchase that the Postal
Service would like to invest in.
• Assess the implications of potential changes - review all costs,
and determine whether the changes will have any effect on the
All steps in the process must be carefully reexamined to determine whether
each step is value-adding, essential, or non-value-adding. Detailed attention
should be given to value-adding and essential, rather than non-value-adding
activities. Non-value-adding activities should be considered for removal if it is
determined that performing the activities would increase cost and time to
adhere to the Client's need.
Value chain mapping and analysis help identify key performance indicators
(KPIs) for each category in the process. KPIs are directly measurable,
process-oriented assessments of performance that drive financial results.
KPIs provide continuous feedback on current performance and are measures
of the effectiveness and efficiency of the primary processes being performed
to serve Clients and end customers.