Value chain
analysis is a process whereby a company defines its internal and external
business strengths and the role both play in defining the company’s value
assertion. A company’s internal strengths may relate to its excellence in
customer service, its engineering and design capabilities, its market knowledge
and business knowhow and ultimately its strengths in marketing, sales and
operations. However, the first link in any value chain is represented by a
company’s external business strengths, and these strengths are defined by how
the company structures and manages its supply chain.
The First Link in Your Chain
Your supply chain is the first and most important part of your value chain. Everything begins and ends with how your company manages its vendors, how it reduces its inventory financing costs, how it reduces its costs of freight on incoming and outgoing shipments of raw materials and finished goods, and ultimately how it uses its vendors to shorten its product to market lead times. A company that properly manages its supply chain is one that is able to use its vendors to reduce deliver times on finished goods.
Very few companies take the time to properly define their value chain. Fewer use it to define the value they bring to their market and their customers, and even fewer understand the importance of their supply chain within their company’s value assertion. Those companies that do understand are ones who come to view their vendors as strategic partners, ones who help the company improve their product designs, lower their delivery times on finished goods and improve their after-sales service and support.
The video above is from the post: Your Value Chain Defines Your Value Assertion: B2B Marketing Essentials
“Most Important Rule of Inventory Management: Your Supply Chain & Inventory Management Strategy Must Match Your Business Model”
In October 2011, I was asked to provide some insight into Dell’s Push-Pull supply chain strategy for the Institute of Supply Chain Management’s monthly publication, “Inside Supply Management”. A link to the article is available here.
In the article I explained that the biggest mistake my customers make is how they run a supply chain and inventory management strategy that is contrary to their business model, their market and the needs of their customer base. These customers end up in a vicious circle, one where they are constantly behind their market and never able to match their inventory counts to their market demand. So, why does this happen?
- Outside Influences: First, a number of business owners and managers are enamored by what they read works for other companies in other industries. In essence, they decide to run a supply chain strategy because it worked for another company in an entirely different industry. Ultimately, they ignore the needs of their customers, the needs of their market and their own business cycles.
- Impact of New Hires: Second, many companies rely upon the insight of new employees and new hires, ones with little or no experience with the company’s market. As such, it’s not uncommon for a new supply chain manager to go with an inventory management strategy based on something they learned from a completely different industry.
- Vendor Management Strategies: Third, most companies underestimate the value of their supply chain, the importance of their inventory and how properly managing vendors might help them reduce their financing costs and lower their carrying charges. These are the companies that assume the best way to manage vendors is by using threats, intimidation and coercion. What they fail to realize is that the best vendors should be managed as partners, ones who can help a company reduce its costs of capital and reduce the time it takes to bring products to market.
- Inventory and Customer Demand Gap: Finally, many companies are constantly changing strategies simply because they haven’t matched their inventory to their market’s demand. As such, they invariably end up caught between the two main inventory cost drivers; 1) lost sales cost of inventory and 2) high inventory carrying charges. The first refers to not having inventory when customer demand is high – these costs are measured by lost gross profit on sales, lost customers and eventually, lost market share. The second pertains to having high inventory levels but low customer demand. These costs are measured by high financing, obsolescence, damage, theft of inventory and high costs of capital (in addition to other costs).
The following video shows these two aforementioned cost drivers. It is from the post: The Customer Demand & Inventory Gap: The Bell Curve
Run the Right Inventory Strategy
When your company assess its supply chain, it must first start by defining its business model and its customers order frequencies. If your company is selling into a market with cyclical and seasonal demand, and one where business cycles are marked by high and low demand periods, then it’s more than likely that you should run a Min-Max inventory management strategy. While there are high carrying charges in Min-Max, these costs are more than offset by the lower costs of lost sales – you have the inventory ready when your customers need it most.
If your company has a small product line, sells large volumes across that line, is a dominant market leader and is your vendors’ number one priority, then you may be able to run JIT or a version of Push Pull. It’s important to note that JIT sounds like the ideal inventory management strategy – low cost of capital, low financing, quick inventory turns etc. However, very few enterprises have the clout, purchasing power, and position of importance with vendors, to properly run JIT.
To read about different inventory management strategies, please refer to: JIT Versus Min/Max Inventory Management Practices
Start your value chain analysis by performing a thorough assessment of your company’s supply chain strategies. Don’t go with running an inventory management approach that doesn’t fit your business model, your market and your customers’ needs. Instead, start by defining your market, your company’s structure and how and when your customers buy product.
Many companies are enamored by the success of other enterprises. It’s the reason why some business owners rely too much on what they’ve read in books. The intention isn’t to say that this information doesn’t have a purpose. What it does mean is that this information must be used properly by making sure the examples apply to your business before adopting specific strategies.
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