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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 category/improvement concept

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.

Figure 2.3

Example of a Business Value Chain

example of a business value chain drawing

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.

Importance of Value Chain Mapping and Analysis

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.

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Constructing a Value Chain Map

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 service

Figure 2.4

Example of a Value Chain Map

image of figure 2.4 value chain map

Activity-Based Costing (ABC)

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 organization.

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.

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Key Performance Indicators

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.

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