author: tom macina reviewers: scott bender, peter fisher, cyrus villa, ammar maraqa bc value chain...
TRANSCRIPT
Author: Tom Macina
Reviewers: Scott Bender, Peter Fisher, Cyrus Villa, Ammar Maraqa
bc
Value Chain
March 1998Copyright© 1998 Bain & Company, Inc.
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Copyright© 1998 Bain & Company, Inc.
Value Chain AnalysisAgenda
•The concept
•Value Chain methodology
•Example
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Copyright© 1998 Bain & Company, Inc.
Value Chain AnalysisThe Concept
•Value chain analysis is a systematic method for disaggregating a firm or industry into its major discrete activities to understand sources of competitive advantage
•Value chain analysis can be used to identify opportunities to–gain cost advantage/improve performance– increase competitive differentiation
•Value chain analysis is an analytical tool which can help provide clarity to consultants and clients
–allows distinct boundaries to be drawn across business (or industry) process
–allows consultant to clearly evaluate and prioritize activities on which to focus
–facilitates client understanding
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Copyright© 1998 Bain & Company, Inc.
Value Chain AnalysisGeneric Value Chain
Successively finer disaggregations of activities are made to expose
differences important to competitive advantage
The generic value chain consists of six general activities.
Tech., R&DPurchasing/ Inbound Logistics
Manufact-uring/
Operations
Marketing&
Sales
Distribution/Outbound Logistics
Service
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Copyright© 1998 Bain & Company, Inc.
Value Chain AnalysisCommon Uses
Value chain analysis can be used as an analytical tool in two general situations.
Value Chain Analysisas a tool for
Competitive Advantage
Cost Analysis/Performance
Improvement
Competitive Positioning
•RCP
•Re-engineering
•Business definition
•VMR/Industry collaboration
•Competitive differentiation
•Drawing business boundaries
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Copyright© 1998 Bain & Company, Inc.
Value Chain Analysis
Distribu-tion/
OutboundLogistics
Service
Value Chain Scope
The scope of the value chain depends largely on the purpose for which the tool is being used.
System or Industry Value Chain:
Firm Value Chain:
Major Activity Value Chain:
Tech., R&D
Purchas-ing/
InboundLogistics
Manu- facturing/
Operations
Marketing&
Sales
MaterialPreparation
ConversionFinal
AssemblyQuality
AssurancePackaging
Inputs(Supplier)
Conversion(Manufacturer)
Distribution(Distributor/
Retailer)
Consumption(End-User) •VMR
•Cost Analysis
•Process Re-engineering•Cost Analysis
Sample Use
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Copyright© 1998 Bain & Company, Inc.
Value Chain AnalysisWhen to Use Value Chain Analysis
Cost Analysis/RCP
Process Re-Engineering
Business Definition
VMR/Industry Collaboration
Competitive Positioning
Map Major Activities Map Sub-Activities
Always
Sometimes
Unlikely
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bcCHI
Copyright© 1998 Bain & Company, Inc.
Value Chain AnalysisAgenda
•The concept
•Value Chain methodology
•Example
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Copyright© 1998 Bain & Company, Inc.
Value Chain AnalysisValue Chain Methodology (1 of 2)
1. What are the activities?
2. Which activities are most critical?
3. Which critical activities provide the most opportunity? (Where is the most leverage?)
Tech., R&D
Purchas-ing/
InboundLogistics
Manu-facturing/Opera-tions
Marketing&
Sales
Distri-bution/
OutboundLogistics
Service
Tech., R&D
Purcha-sing/
InboundLogistics
Marketing &
Sales
Distri-bution/
OutboundLogistics
Manu-facturing/
OperationsService
?
There are three steps in doing value chain analysis.
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Copyright© 1998 Bain & Company, Inc.
Value Chain AnalysisValue Chain Methodology (2 of 2)
1. What are the activities?
?
Step one is determining the appropriate activities to map.
•Determine key steps in designing, producing, marketing, delivering and supporting a product or service
•Activities can be separated and grouped based on– different economics– processes using different people/equipment/technology– high or growing percentage of total cost– distinction in mind of customer
•Helpful methodology in mapping out activities:– product flow– order flow– paper flow
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Copyright© 1998 Bain & Company, Inc.
Value Chain Analysis
Sanding/Dusting
Manu-facturing
Cutting
Packaging
Cooking Forming WrappingBulk
Containers
Major Activities:
Sub-Activities:
•Wrapping individual candies
•Bagging individually wrapped candies for retail sale
•Placing individually wrapped candies in bulk containers for delivery to retail outlets that sell loose candy
•Find “break points” in the process flow– cooking through sanding all one continuous line– product conveyed to wrapping line
•Packaging was actually separated into two activities, as there are two different product paths following wrapping– most process steps similar, however, suggesting a “packaging” grouping
Bagging
Drawing Activity Boundaries (Candy Co. Example)
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Copyright© 1998 Bain & Company, Inc.
Value Chain AnalysisValue Chain Methodology (1 of 3)
2. Which activities are most critical?
Step two is determining which activities are most critical.
Cost Analysis Case
Tech., R&D
Purch-asing/
InboundLogistics
Manu-facturing/Opera-tions
Market-ing &Sales
Distri-bution/
OutboundLogistics
Service
5% 35% 30% 15% 10% 5%
•What are cost drivers?
Explanation:
Percent of total cost:
•Allocate costs to each major activity
•Determine which activities account for the greatest portion of total cost
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Copyright© 1998 Bain & Company, Inc.
Value Chain AnalysisValue Chain Methodology (2 of 3)
Competitive Positioning Case
Tech., R&D
Purch-asing/
InboundLogistics
Manu-facturing/Opera-tions
Marketing&
Sales
Distri-bution/
OutboundLogistics
Service•Which criteria drive customer decisions?
Customer importance scale
(1=low, 7=high)
Product Innovation Reliability
Brand Image
Speed of Delivery Responsiveness
Explanation: •Determine relative importance of each activity in mind of customer
•Determine which activities drive purchase decision
Price4.0 6.3
4.8
6.0 5.1 4.7
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Copyright© 1998 Bain & Company, Inc.
Value Chain Analysis
Manu-facturing/
Operations
Value Chain Methodology (3 of 3)
Step three is determining which activities provide the most opportunity.
3. Which critical activities provide the most opportunity?
Tech., R&D
Purch-asing/
InboundLogistics
Market-ing &Sales
Distribu-tion/
OutboundLogistics
Manu-facturing/
Operations
Cost Analysis Case
Competitive Positioning Case
•Where is greatest relative opportunity to improve cost structure?
•Where is greatest relative opportunity to improve performance/create gap relative to competitors?
Tech., R&D
Purcha-sing/
InboundLogistics
Distribu-tion/
OutboundLogistics
Market-ing &Sales
Service
Service
Explanation:
Explanation:
• Determine which costs are most controllable– e.g., raw materials costs may be largely commodity
• Determine where largest relative performance gap lies– relative to competitors– relative to internal comparables
• Determine where largest relative performance gap lies– relative to customer expectations– relative to competitors
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Copyright© 1998 Bain & Company, Inc.
Value Chain AnalysisAgenda
•The concept
•Value Chain methodology
•Example
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Copyright© 1998 Bain & Company, Inc.
Value Chain AnalysisAce Consumer Products
Background: •Ace Consumer Products was a weak number three in the U.S. Ketchup market
•Division losing money, losses accelerating
Complication: •Business interlinked with other operations - can't be closed or divested
Question: •What cost reductions can be done to restore profitability?
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Chain
bcCHI
Copyright© 1998 Bain & Company, Inc.
Value Chain AnalysisValue Chain Methodology
1. What are the activities?
2. Which activities are most critical?
3. Which critical activities provide the most opportunity?
Tech., R&D
Purch-asing/
InboundLogistics
Manu-facturing/Opera-tions
Market-ing &Sales
Distribu-tion/
OutboundLogistics
Service
Tech., R&D
Purch-asing/
InboundLogistics
Market-ing &Sales
Distri-bution/
OutboundLogistics
Manu-facturing/
OperationsService
?
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Copyright© 1998 Bain & Company, Inc.
Value Chain Analysis
Service
Ketchup Value Chain
ActualValue Chain
Purchasing/ Inbound Logistics
Manu-facturing
Packaging Marketing SalesDistribution/OutboundLogistics
Generic Value Chain Tech.,
R&D
Purchasing/InboundLogistics
Manu-facturing/
Operations
Marketing&
Sales
DistributionOutboundLogistics
In this consumer products example, R&D and service were removed as major activities, packaging was broken out separately, and marketing & sales were separated.
•Very little investment in product formulation
–not a major activity
•Raw materials substantial, but largely commodity
–major activity
•Packaging critical for consumer products
–packaging broken out separately
•Brand building through marketing and sales force very discrete
–marketing and sales separated
•Captive fleet distributes to customer warehouses
–major activity
•Product support (800#) minimal and handled centrally with other product lines
–not a major activity
19valuechainValue
Chain
bcCHI
Copyright© 1998 Bain & Company, Inc.
Value Chain AnalysisValue Chain Methodology
1. What are the activities?
2. Which activities are most critical?
3. Which critical activities provide the most opportunity?
Tech., R&D
Purch-asing/
InboundLogistics
Manu-facturing/
Operations
Market-ing &Sales
Distribu-tion/
OutboundLogistics
Service
Tech., R&D
Purcha-sing/
InboundLogistics
Market-ing &Sales
Distribu-tion/
OutboundLogistics
Manu-facturing/
OperationsService
?
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Copyright© 1998 Bain & Company, Inc.
Value Chain AnalysisAce Consumer Products
100%
80%
60%
40%
20%
0%
Per
cent
of T
otal
Other
Vinegar
Propylene glycol
Sugar
Onions
Tomato
OtherVariable
manufacturing
Dep
reci
atio
n
Mainten- ance
Labor overhead
Direct labor
Other
Labels
Bottle
Gro
up
ad
min
istr
atio
nR
&D
Div
isio
n ad
min
.H
Q a
nd
syst
ems Operating margin
Other operating and administrative
Wages
Variable
Fixed
$0.20 $0.40 $0.60 $0.80 $1.00 $1.24
Cost per Eight Ounce Bottle Price to consumer ($1.08)
Raw Packaging
OtherOverhead
Promotion
Consumer
Media
Marketing Profit Retailer Deals
Ou
tbo
un
d f
reig
ht
Per
iod
dist
ribut
ion
War
ehou
sing
Red
istr
ibut
ion
Dis
trib
utio
n
Manufacturing Allo
catio
ns
Raw materials, manufacturing, packaging and marketing drive total cost.
Sal
es
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Chain
bcCHI
Copyright© 1998 Bain & Company, Inc.
Value Chain AnalysisValue Chain Methodology
1. What are the activities?
2. What activities are most critical
3. Which critical activities provide the most opportunity?
Tech., R&D
Purcha-sing/
InboundLogistics
Manu-facturing/
Operations
Market-ing &Sales
Distribu-tion/
OutboundLogistics
Service
Tech., R&D
Purcha-sing/
InboundLogistics
Market-ing &Sales
Distribu-tion/
OutboundLogistics
Manu-facturing/
OperationsService
?
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Chain
bcCHI
Copyright© 1998 Bain & Company, Inc.
Value Chain AnalysisRelative Cost Position - Methodology
DriversCompetitive Cost
Sources
•BAR/LNA
•Leemis
•Alumni interviews
Benchmarking was critical to understanding where the largest opportunities were.
•Material usage
•OH structure
•Advertising
•Promotion
•Wage rates
•Benefit structure
•Productivity
•Reverse engineering
•Plant surveys
•Alumni interviews
•Client plant reports
•Commodity markets
63.2¢ per 8oz.
Allocations
Sales
Marketing
Distribution
Packaging
Manufacturing
Raw
$0.00
$0.10
$0.20
$0.30
$0.40
$0.50
$0.60
$0.70
Cos
t to
Land
8oz
. Bot
tle in
Ret
aile
r W
areh
ouse
(C
ents
)
•Client product reports
23valuechainValue
Chain
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Copyright© 1998 Bain & Company, Inc.
Value Chain Analysis
Package
Distribution
Marketing
Manufacturing
Raw
Package
Distribution
Marketing
Manufacturing
Raw
Distribution
Sales
Package
Distribution
Marketing
ManufacturingAllocations
Regular Spicy Barbecue
7.8¢
(2.4¢)
7.8¢
(2.9¢)
19.3¢
(0.9¢)
($0.05)
$0.00
$0.05
$0.10
$0.15
$0.20
Cos
t Adv
anta
ge (
Dis
adva
ntag
e) p
er B
ottle
(C
ents
)Cost Variance
5.5¢ 5.0¢
18.4¢
Manufacturing turned out to be the activity with the greatest relative cost disadvantage.
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Copyright© 1998 Bain & Company, Inc.
Value Chain AnalysisKetchup
133%
120%
100%
80%
60%
40%
20%
0%0% 20% 40% 60% 80% 100% = 830MM pounds
Total Ketchup Capacity
Product Type
It was the low level of capacity utilization that created sizable manufacturing cost disadvantages. Average annual
utilization13 week Peak period utilizationAverage capacity7 day 20 hours per day
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Copyright© 1998 Bain & Company, Inc.
Value Chain Analysis
Lima Alternate Use
Green Bay Alternate Use
Period Cost Reduction
Productivity Increase
Product Cost
Transportation Costs
Inventory Build/Outside Storage/Overtime
$7.5MM
($3.6MM)($4)
($2)
$0
$2
$4
$6
$8
On
-Goi
ng
Co
sts/
Sa
vin
gs (
Mill
ion
s of
Do
llars
)Consolidation Savings
Consolidating from six plants to four would save $3.9MM annually.
$3.9MMConsolidating two plants has on-going savings impact of $3.9MM