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Value chain analysis and value engineering
1. V C A
Prepared by:
Ayushi Gupta C013
Prasham Jain C015
Shreya Khare C018
Akshay Khatri C019
Apurve Paharia C027
(Group-7)
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2. First Key to effective cost management.
Value Chain Analysis is a useful tool for working out how you can
create the greatest possible value for your customers
Chain of activities adding value at each step In a company.
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4. 4
PRIMARY ACTIVITIES
contribute to the physical creation of the product or service, its sale
and transfer to the buyer, and its service after the sale.
inbound logistics, operations, outbound logistics, marketing and
sales, and service
5. 5
SUPPORT ACTIVITIES
• activities of the value chain that either add value by themselves or
add value through important relationships with both primary
activities and other support activities
• These activities include procurement, technology development,
human resource management, and general administration.
8. 1. Identify the value chain activities and disaggregate the firm into separate
activities.
2. Establish the relative importance of different activities in the total cost of the
product.
3. Compare costs by activity.
4. Identify cost drivers.
5. Identify linkages and interrelationships in the value chain.
6. Identify opportunities for reducing costs and/or improving value.
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10. 10
Cost advantage
This approach is used when organizations try
to compete on costs and want to understand the
sources of their cost advantage or disadvantage
and what factors drive those costs.
Step 1. Identify the firm’s primary and
support activities.
Step 2. Establish the relative importance of
each activity in the total cost of the product.
Step 3. Identify cost drivers for each activity.
Step 4. Identify links between activities.
Step 5. Identify opportunities for reducing
costs.
Sourcing coffee from diverse coffee beans producers and
maintaining relationship with them.
Company-operated restaurants, foodservice, Licensed
stores
Its price per pound of coffee beans, which Starbucks
sources from numerous continents
Sourcing beans and transforming them into coffee cup
, providing customer a good ambience in locations.
closing unprofitable stores, eliminating corporate jobs,
reduce milk wastage.
11. 11
Differentiation advantage
The firms that strive to create superior
products or services use differentiation
advantage approach.
Step 1. Identify the customers’
value-creating activities.
Step 2. Evaluate the differentiation
strategies for improving customer
value.
Step 3. Identify the best sustainable
differentiation.
makes customers feel at home , forming a
strong emotional attachment, great ambiance
in mind in accessible locations
Starbucks Rewards Card, Finest Coffee
Beans
well trained staff, more welcoming decor with
friendlier baristas, premium product mix
14. 14
Noble men! There
is a very
important matter
before the court
today.
The raw material
price is shooting up.
The material cost of
a sword has gone
up by Rs.10 . And
…. We are adding
50,000 soldiers to
our army this year.
I want to
handle this
situation
without
increasing the
taxes. Please
give your
valuable
suggestions as
to how we
should face this
situation.
18. 18
Presently,
the hilt has
7 parts.
The
proposed
design will
have 4 .
Existing Design
7 parts
New Idea
4 parts
Part Count
Reduction
19. 19
For the new hilt,
instead of designing
exclusive rivets, we
can use the rivets of
daggers.
Part
Commonisation
x
20. 20
When the Shah of
Persia was our
Guest last month ,
I observed that the
hilt in his sword
does not have a
curved portion. We
can design similar
hilts for our
experienced soldiers.
Benchmarkin
g
New IdeaExisting Design
Curved portion
24. 24
Your majesty. The
present design is
being used since the
time of Babur
without any failure.
We should not risk
any design change.
25. 25
Saheb, there is no
doubt that the present
sword designed by you
for my Grandfather’s
army is superior.
However, let us test
this new design in our
barracks.If they pass
the tests, we will
deploy them in the
battle field.
26. 26
If the ideas pass the
test, we can save at
least Rs. Ten Lakhs
this year, thus
serving the purpose
of cost reduction.
28. 28
Birbal! I wonder how
you developed these
ideas! Is there a
systematic way by
which others can
also be trained to
generate such ideas.
29. 29
Yes, your Majesty.
With the help of Functional
Analysis System
Technique(FAST) any body
can generate such ideas.
FAST is a powerful tool used
in Value Engineering (VE)
which is an extremely
effective system to improve
products and services for cost
and productivity
improvement.
30. 30
If six ideas for the
sword itself can
save Rs. Ten lakhs ,
imagine how much
money we can save
on other weapons
like spears, arrows
and cannons etc.
31. 31
Birbal! There are four divisions in
my army – Infantry,
Cavalry,Artillery and Elephant
brigade. I want you to teach the
engineers in each of these divisions
the application of Value Engineering
(VE). Each division should release
Armoury Change Requests (ACRs)
for the worth of Rs.25 lakh.
34. From the textbook…
The main aim of value engineering is to achieve a product's
target cost, by:
* Identifying improved product designs that reduce the
product's cost without sacrificing its functionality
* Eliminating unnecessary functions that increase the cost
of product.
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35. Phases of Value Engineering
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Information
phase
Function
analysis
phase
Creative
phase
Evaluation
phase
Development
phase
Presentation
phase
Cost advantage
To gain cost advantage a firm has to go through 5 analysis steps:
Step 1. Identify the firm’s primary and support activities. All the activities (from receiving and storing materials to marketing, selling and after sales support) that are undertaken to produce goods or services have to be clearly identified and separated from each other. This requires an adequate knowledge of company’s operations because value chain activities are not organized in the same way as the company itself. The managers who identify value chain activities have to look into how work is done to deliver customer value.
Step 2. Establish the relative importance of each activity in the total cost of the product. The total costs of producing a product or service must be broken down and assigned to each activity. Activity based costing is used to calculate costs for each process. Activities that are the major sources of cost or done inefficiently (when benchmarked against competitors) must be addressed first.
Step 3. Identify cost drivers for each activity. Only by understanding what factors drive the costs, managers can focus on improving them. Costs for labor-intensive activities will be driven by work hours, work speed, wage rate, etc. Different activities will have different cost drivers.
Step 4. Identify links between activities. Reduction of costs in one activity may lead to further cost reductions in subsequent activities. For example, fewer components in the product design may lead to less faulty parts and lower service costs. Therefore identifying the links between activities will lead to better understanding how cost improvements would affect he whole value chain. Sometimes, cost reductions in one activity lead to higher costs for other activities.
Step 5. Identify opportunities for reducing costs. When the company knows its inefficient activities and cost drivers, it can plan on how to improve them. Too high wage rates can be dealt with by increasing production speed, outsourcing jobs to low wage countries or installing more automated processes.
Differentiation advantage
VCA is done differently when a firm competes on differentiation rather than costs. This is because the source of differentiation advantage comes from creating superior products, adding more features and satisfying varying customer needs, which results in higher cost structure.
Step 1. Identify the customers’ value-creating activities. After identifying all value chain activities, managers have to focus on those activities that contribute the most to creating customer value. For example, Apple products’ success mainly comes not from great product features (other companies have high-quality offerings too) but from successful marketing activities.
Step 2. Evaluate the differentiation strategies for improving customer value. Managers can use the following strategies to increase product differentiation and customer value:
Add more product features;
Focus on customer service and responsiveness;
Increase customization;
Offer complementary products.
Step 3. Identify the best sustainable differentiation. Usually, superior differentiation and customer value will be the result of many interrelated activities and strategies used. The best combination of them should be used to pursue sustainable differentiation advantage.
Example
This example is partially adopted from R. M. Grant’s book ‘Contemporary Strategy Analysis’ p.241. It illustrates the basic VCA for an automobile manufacturing company that competes on cost advantage. This analysis doesn’t include support activities that are essential to any firm’s value chain, thus the analysis itself is not complete.
The differentiation strategy of being a premium and unique coffee drinking provider has allowed Starbucks to achieve a sustained competitive advantage
Information phase – In this phase further familiarization of the project by the team takes place. All team members participate to determine the true needs of the project and to identify the areas of high cost and low worth. The team reviews and defines the current conditions of the project and identifies the goal of the studies.
Function analysis phase – The team defines the project functions using a two word active verb/measurable noun context. The team reviews and analyzes these functions to determine which need improvement, elimination or creation to meet the goal of the project.
Creative phase – The team lists creative ideas generated from its review of the project with the aim of obtaining a large number of ideas through brainstorming and association of creative proposals. The team employs creative techniques to identify other ways to perform the project’s functions.
Evaluation phase – During this phase, creative ideas are analyzed and the team selects the best ideas for further development. The team follows a structured evaluation process to select those ideas that offer the potential for value improvement while delivering the project functions and considering performance requirements and resource limits.
Development phase – The team prepares alternative designs with capital and/or life cycle cost comparisons of original designs and proposed alternatives. All recommendations are supplemented with written descriptions, sketches, basic design concepts; technical information and cost summaries. The team develops the selected ideas into alternatives (or proposals) with a sufficient level of documentation to allow decision makers to determine if the alternative should be implemented.
Presentation phase – The objective in this phase to present the VE study report to the decision makers. The team leader develops a report and/or presentation that documents and conveys the adequacy of the alternatives developed by the team. The report includes a statement of the follow up necessary to ensure implementation.