VALUE CHAIN RESEARCH AND DEVELOPMENT-DESIGN-PRODUCTIONMARKETING DISTRIBUTION AND CUSTOMER CARE

VALUE CHAIN

A value chain is used to define the combination of all the activities and resources needed for 

generating products and services. The value chain often consists of several operators (manufacturing 

industry, wholesale trade, retail trade, customer, etc.) The value chain ends with the customer.

Michael Porter introduced the value chain analysis concept in his 1985 book ‘ The Competitive 

Advantage’ . Porter suggested that activities within an organisation add value to the service and 

products that the organisation produces, and all these activities should be run at optimum level if the 

organisation is to gain any real competitive advantage. If they are run efficiently the value obtained 

should exceed the costs of running them i.e. customers should return to the organisation and transact 

freely and willingly. Michael Porter suggested that the organisation is split into ‘primary activities’ 

and ‘support activities’.

Primary Activities

Inbound logistics : Refers to goods being obtained from the organisation's suppliers and to be used 

for producing the end product.

Operations : Raw materials and goods are manufactured into the final product. Value is added to 

the product at this stage as it moves through the production line. 

Outbound logistics : Once the products have been manufactured they are ready to be distributed to 

distribution centres, wholesalers, retailers or customers. Distribution of finished goods is known as 

outbound logistics. 

Marketing and Sales: Marketing must make sure that the product is targeted towards the correct 

customer group. The marketing mix is used to establish an effective strategy, any competitive 

advantage is clearly communicated to the target group through the promotional mix.

Services: After the product/service has been sold what support services does the organisation offer 

customers?. This may come in the form of after sales training, guarantees and warranties.

With the above activities, any or a combination of them are essential if the firm are to develop the 

"competitive advantage" which Porter talks about in his book. 

Support Activities

Support activities assist the primary activities in helping the organisation achieve its competitive 

advantage. They include:

Procurement: This department must source raw materials for the business and obtain the best price 

for doing so. The challenge for procurement is to obtain the best possible quality available (on the 

market) for their budget. 

Technology development: The use of technology to obtain a competitive advantage is very 

important in today’s technological driven environment. Technology can be used in many ways 

including production to reduce cost thus add value, research and development to develop new 

products and the internet so customers have 24/7 access to the firm.

Human resource management: The organisation will have to recruit, train and develop the correct 

people for the organisation to be successful. Staff will have to be motivated and paid the ‘market 

rate’ if they are to stay with the organisation and add value. Within the service sector such as the 

airline industry, employees are the competitive advantage as customers are purchasing a service, 

which is provided by employees; there isn't a product for the customer to take away with them. 

Firm infrastructure: Every organisations needs to ensure that their finances, legal structure and 

management structure work efficiently and helps drive the organisation forward. Inefficient 

infrastructures waste resources, could affect the firm's reputation and even leave it open to fines and 

sanctions. 

Types of value chain

There are various types of value chain:

i) Simple value chain: The value chain describes the full range of activities which are required to 

bring a product or service from conception, through the different phases of production (involving a 

combination of physical transformation and the input of various producer services), delivery to final 

consumers, and final disposal after use.

ii) Extended value chain: In the real world, of course, value chains are much more complex than 

this. For one thing, there tend to be many more links in the chain. Take, for example, the case of the 

furniture industry. This involves the provision of seed inputs, chemicals, equipment and water for 

the forestry sector. Cut logs pass to the sawmill sector which gets its primary inputs from the 

machinery sector. From there, sawn timber moves to the furniture manufacturers who, in turn, obtain 

inputs from the machinery, adhesives and paint industries and also draw on design and branding 

skills from the service sector. Depending on which market is served, the furniture then passes 

through various intermediary stages until it reaches the final customer, who after use, consigns the 

furniture for recycling.

iii) One or many value chains: In addition to the manifold links in a value chain, typically 

intermediary producers in a particular value chain may feed into a number of different value chains. 

In some cases, these alternative value chains may absorb only a small share of their output; in other 

cases, there may be an equal spread of customers.

But the share of sales at a particular point in time may not capture the full story – the dynamics of a 

particular market or technology may mean that a relatively small (or large) customer/supplier may 

become a relatively large (small) customer/supplier in the future. Furthermore the share of sales may 

obscure the crucial role that a particular supplier controlling a key core technology or input (which 

may be a relatively small part of its output) has on the rest of the value chain.

iv) One or many labels: There is a considerable overlap between the concept of a value chain and 

similar concepts used in other contexts. One important source of confusion –particularly in earlier 

years before the value chain as outlined above became increasingly widespread in the research and 

policy domain – was one of nomenclature and arose from the work of Michael Porter in the mid1980s. Porter distinguished two important elements of modern value chain analysis

- The various activities which were performed in particular links in the chain. Here he drew the 

distinction between different stages of the process of supply (inbound logistics, operations, 

outbound logistics, marketing and sales, and after sales service), the transformation of these 

inputs into outputs (production, logistics, quality and continuous improvement processes), and 

the support services the firm marshals to accomplish this task.

- He complements this discussion of intra-link functions with the concept of the multilinked value 

chain itself, which he refers to as the value system. The value system basically extends his idea of 

the value chain to inter-link linkages,

There are six main business functions of a value chain:

- Research and Development

- Design of Products, Services, or Processes

- Productions

- Marketing and Sales

- Distribution

- Customer Service

IMPORTANCE OF VALUE CHAIN ANALYSIS

There are three main sets of reasons why value chain analysis is important in this era of rapid 

globalization. They are:

- With the growing division of labour and the global dispersion of the production of components, 

systemic competitiveness has become increasingly important

- Efficiency in production is only a necessary condition for successfully penetrating global 

markets. Value chain analysis helps in understanding the advantages and disadvantages of firms 

and countries specializing in production rather than services.

- Entry into global markets which allows for sustained income growth – that is, making the best of 

globalization - requires an understanding of dynamic factors within the whole value chain; value 

chain analysis helps to explain the distribution of benefits, particularly income, to those 

participating in the global economy. This makes it easier to identify the policies which can be 

implemented to enable individual producers and countries to increase their share of these gains. 

This is an especially topical issue at the turn of the millennium and has captured the attention of a 

wide variety of parties.

JUST IN TIME (JIT)

This concept advocates zero inventory and stockless production through just-in-time purchasing and 

just-in-time production. Organizations create a closer relationship with the suppliers and arrange for 

more frequent deliveries of small quantities. The objective of just-in-time purchasing is to purchase 

goods so that delivery is made immediately before their use.

JIT is considered economical since it eliminates the cost of carrying inventory and reduces the 

inefficiencies that the inventories create. JIT purchasing increases the number of orders as the 

enterprises order more frequently and in smaller quantities. Holding cost is reduced by a significant 

proportion as it only arises due to waste and inefficiency created by inventory. It calls for 100 per 

cent quality. Some of the major features of JIT include:

a) Frequent and reliable deliveries to avoid inventory buildup. Penalties are imposed on those who 

do not meet the deadline.

b) Strategic location of firms. This may be closeness to suppliers and/or customers.

c) Improved communication between companies and suppliers through the use of computerized 

purchasing systems that allows for online ordering.

d) Single sourcing and building long-term relations with a few trusted suppliers.

e) Increased supplier involvement in the design aspects of a product to ensure that they meet the 

company’s quality requirements.

f) Maintenance of strict quality control by all parties. Suppliers guarantee the quality of stock 

items.

Objectives of JIT /Advantage

The benefits include lower inventory level, emphasis on strict quality control by all parties, faster 

market response, smaller manufacturing facilities and lower set up costs.

1. Set up times is significantly reduced in the factory.Cutting down the set up time to be more 

productive will allow the company to improve their bottom line to look more efficient and focus 

time spent on other areas that may need improvement. This allows the reduction or elimination of 

the inventory held to cover the “changeover” time.

2. The flows of goods from warehouse to shelves are improved.Having employees focused on 

specific areas of the system will allow them to process goods faster instead of having them 

vulnerable to fatigue from doing too many jobs at once and simplifies the tasks at hand. Small or 

individual piece lot sizes reduce lot delay inventories which simplifies inventory flow and its 

management.

3. Employees who possess multiple skills are utilized more efficiently.Having employees trained 

to work on different parts of the inventory cycle system will allow companies to use workers in

situations where they are needed when there is a shortage of workers and a high demand for a 

particular product.

4. Better consistency of scheduling and consistency of employee work hours.If there is no 

demand for a product at the time, workers don’t have to be working. This can save the company 

money by not having to pay workers for a job not completed or could have them focus on other jobs 

around the warehouse that would not necessarily be done on a normal day.

5. Increased emphasis on supplier relationships.No company wants a break in their inventory 

system that would create a shortage of supplies while not having inventory sit on shelves. Having a 

trusting supplier relationship means that you can rely on goods being there when you need them in 

order to satisfy the company and keep the company name in good standing with the public.

6. Supplies continue around the clock keeping workers productive and businesses focused on 

turnover.Having management focused on meeting deadlines will make employeeswork hard to 

meet the company goals to see benefits in terms of job satisfaction,promotion or even higher pay.

Disadvantages of JIT

1) High ordering cost due to high orders

2) There are chances of stock outs in case of failure on the side as the supplier

USE OF COMPUTERS IN COSTING

A computer is a set of electronic device that can systematically and sequentially follow a set of 

instructions called a program to perform high-speed arithmetic and logical operations on data.

Because of the rapid changes in finances and its related fields, accurate record keeping is critical. 

Computerizing a business’ tasks of accounting procedures, increases efficiency. With a computer 

and its appropriate software, one can request and receive an in house balance sheet, an income 

statement, cash flow and statements of affairs and other accounting reports within a short time: 

hence an increase in productivity.

Let’s take time to briefly see the role computers are playing in the field of accounting, changing 

some of the things that were manually done and facilitating accounting data processing.

General Ledger

Electronic General Ledgers are labor saving device for the preparation of financial statements and 

for establishing multiple income and cost entries. It takes charge of secondary postings.

Inventory Control

Electronic Inventory Control module has multiple functions, which includes tracking inventory for 

both costing and tax purposes, aid managers in controlling purchasing (and the overall level of 

expenditure) and minimizing the investment in inventory (and subsequent loss of cash flow). It is 

integrated with the general ledger so it can automatically set aside the correct amount for processing 

further.

Many shops now use stock control systems. The term "stock control system" can be used to include 

various aspects of controlling the amount of stock on the shelves and in the stockroom and how 

reordering happens.

Typical features include:

- Ensuring that products are on the shelf in shops in just the right quantity.

- Recognizing when a customer has bought a product.

- Automatically signaling when more products need to be put on the shelf from the stockroom.

- Automatically reordering stock at the appropriate time from the main warehouse.

- Automatically producing management information reports that could be used both by local 

managers and at Head office.

These might detail what has sold, how quickly and at what price, for example. Reports could be used 

to predict when to stock up on extra products, for example, at Christmas or to make decisions about 

special offers, discontinuing products and so on. Sending reordering information not only to the 

warehouse but also directly to the factory producing the products to enable them to optimize

production.

Computer Aided Manufacturing (CAM)

Today, increasing competition level in the markets require using CAM systems that enable firms to 

manufacture quality products for customer demands in a short time. Using CAM systems in 

manufacturing processes has brought about important changes in firms’ performance measurement 

systems.

Spreadsheets

Electronic Spreadsheets allow you to do anything that you would normally do with a calculator, 

pencil and columnar scratch pad. A typical integrated double entry accounting spreadsheet system 

will contain some of the following components: general ledger, inventory levels, order entry, 

payroll, time, and billing etc...

Job Order Costing System

A job order costing system is utilized by businesses that manufacture products for specific orders. It 

is employed in circumstances where a business wants to know the expenses associated with 

manufacturing different jobs, products, or services for a given period. By using this system to 

determine the costs of expenses, the expenses are tracked to the activity (job) and then the expenses 

of performing the activity are split-up by the unit numbers of the activity to succeed in determining 

the cost per-unit average of the product. The costs of producing each job in a job order costing 

system must be captured and tracked in order to determine the accurate cost of producing the 

specific product. Some costs for a business that would be associated with this may include materials, 

labor, and overhead related to producing a product. However, materials labor and overhead will 

differ from specific product and specific customer order to the next. Personalized production that is 

specific to a customer want or job order need which may involve greater encouragement from our 

resources than that of the common productivity movement within the business would be an example 

of a particular customer or job order. 

INVENTORY MANAGEMENT

Inventory management software is a computer-based system for tracking inventory levels, orders, 

sales and deliveries. It can also be used in the manufacturing industry to create a work order, bill of 

materials and other production-related documents. Companies use inventory management software 

to avoid product overstock and outages. It is a tool for organizing inventory data that before was 

generally stored in hard-copy form or in spreadsheets. It is often associated with and is similar to 

distribution software.

The Uses of Computers in Inventory Control

Computerization has revolutionized inventory management, as technologies ranging from automatic 

scanners to radio frequency identification chips now allow businesses to track their inventory from 

the moment a company buys it wholesale to the moment the products leave the building in the hands 

of a customer.

Receipt of Goods

A retail store or a central warehouse uses bar code or radio-frequency identification scanning at the 

point of receipt of goods. Scanning individual items or shipment pallets allows a company to itemize 

all shipments from the supplier, which can be compared against the purchase order for errors or 

losses in transit. When your business ships these goods out of the warehouse to their point of sale, a 

second scan can automatically tally the remaining stock in the warehouse, and send messages to the 

purchasing managers indicating that it is time to reorder.

Retail Turnover

Many businesses use similar scanning techniques at the point of checkout. As of 2010, bar code 

scanners are more popular than RFID for this purpose. Both will automatically enter the correct 

price at the register and prevent data entry errors. They also can create a perfect real-time record of 

how much stock remains on the shelves, how much is available in on-site storage, and whether a 

new shipment is necessary from the warehouse. Combine this information with warehousing data, 

and your business can create additional alerts to key management when a bottleneck occurs. For 

example, if a dozen retail stores anticipate needing restocking, but the warehouse does not have 

sufficient goods on hand, your business can place a rush order to fill the need.

Stock Management and Cost Reduction

The process of moving goods through a company pipeline is always economically inefficient. The 

purchase of the goods represents an investment of company capital, which your business cannot 

recoup until you sell your inventory. Warehousing of goods before sale introduces the possibility of 

inventory shrinkage in value from theft, damage, deterioration or changes in customer taste. Moving 

goods from warehouses to the point of sale involves shipping costs, especially if the shipment is 

incorrect, or if the internal shipping process is inefficient. Computerization provides a real-time 

picture of this entire work flow process, and allows managers to reduce purchasing costs through 

minimizing inventory, increase the efficiency of internal shipping systems, and reduce the 

possibility of theft or damage by being able to track each item down to the individual staffer who 

takes responsibility for it.

Cost centre analysis

Conducting cost and revenue analyses involves using a spreadsheet-based software tool to help 

develop a baseline of programmatic and financial data for your facility. The tool’s completed 

spreadsheets provide a picture of current situation and help identify needed changes to increase a 

program’s cost efficiency and revenue generation. The tool is also useful for exploring the possible 

impact of making changes, such as:

- Changing standard practices;

- Adding new services or facilities;

- Using some services or facilities to subsidize others.

BUDGETING AND DECISION MAKING

DECISION SUPPORT SYSTEMS (DSS)

DSS are alternatively termed end-user computing systems. Their objective is to support managers in 

their work, especially decision making.

DSS tend to be used in planning, modeling, analyzing alternatives and decision making. They 

generally operate through terminals operated by the user who interacts with the computer system. 

Using a variety of tools and procedures the "manager (i.e. the user) can develop his own systems to 

help perform his functions more effectively. It is this active involvement and the focus on decision 

making which distinguishes a DSS from a data processing system. The emphasis is on support for 

decision making not on automated decision making which is a feature of transaction processing.

DSS are especially useful for semi-structured problems where problem sol ' is improved by 

interaction between the manager and the computer system emphasis is on small, simple models 

which can easily be understood and used h the manager rather than complex integrated systems 

which need informal specialists to operate them. 

The main characteristics of DSS are:

a) The computer provides support but does not replace the manager's judgement nor does it provide 

predetermined solutions.

b) DSS are best suited to semi-structured problems where parts of the analysis can be computerized 

but the decision maker's judgement and insight is needed to control the process.

c) Where effective problem solving is enhanced by interaction between the computer and the manager