Linked to the concept of Value Chain Analysis
When we talk business, we talk on the lines of cost incurred, benefits offered to customers, margins generated, revenues earned and ultimately competitive advantage created.
The concept of value chain revolves around this. Michael Porter developed a value chain model as a strategic management tool which guides businesses towards increasing their margins & revenues by adopting the route of cost reduction for themselves or value enhancement for their customers. As this route leads to sustainable competitive advantage.
To briefly explain the value chain model, it divides the organization activities into 2 broad sets of Primary & Secondary activities. Primary being more in-market, direct customer impacting & customer facing activities like Inbound Logistics, Operations, Outbound Logistics, Marketing-Sales and Services. Secondary are more back-end kind of activities but which facilitate the functioning of organization and smooth conduct of Primary activities, like Firm Infrastructure, Human Resource Management, Technology Development and Procurement. For different kinds of businesses, the set of Primary and Secondary activities may get composed in different way, not necessarily in the fixed standardized way as given by Porter’s value model.
But the main objective and application of this Value analysis tool remains the same. Objective is revenue enhancement for the organization and value enhancement for the customers. Organizations need to study its entire structure and various activities very closely to know, where all through effective usage of resources and through optimum combination of activities, either costs can be saved for the organization and/or value can be enhanced for the customer leading to increase in margins and revenues.
Now in the light of this concept of Porter’s Value Chain Model, let me analyse a news piece I came across recently. This is from HT Mint dated 5th May, 2021, titled, ‘Thanks to covid-19, carmakers say goodbye to the ‘just-in-time’ model’.
A small brief first on Just-in-time model:
Just-in-time popularly known as JIT model of manufacturing & inventory controls was introduced in 1970 within the Toyota manufacturing plants by Taiichi Ohno and then perfected over 15 years there. JIT which is also known as “lean manufacturing” helps business owners save money and reduce wastage, that is, minimize the amount of equipment, materials, parts, space, and worker's time. All this is achieved, along with providing their customers with the quality products in a timely manner, which indicates enhanced value for them.
This JIT model and its objective fits in completely with the objective of Value chain model which I have described above and touches most of the activities which fall in the primary and secondary set.
Covid-19 has shook it completely.
Following are a few excerpts from the news article (which can be found online here) that I would encourage you to read for comprehensive understanding.
Now after reading through different snippets from the news, what can be analyzed is-
Under JIT model, ordering inventory stock on a “just when you need” basis, which sounded and proved to be a cost saving and value enhancing proposition, suddenly turned to be a highly expensive and inefficient one with the catastrophic attack of Covid. Now for these businesses a re-look to the manufacturing-inventory model, a fresh insight into cost-benefit analysis is required through a proper study of its organization's value chain. This will provide a fresh perspective in the current challenging time.
Today, when occurrences of crisis situation has become so frequent, need to keep large quantities of inventory would entail heavy cost but one that will lead to uninterrupted customer service & satisfaction. In the wake of intense competition and easy alternatives available to customers, those businesses which will be able to address customers’ problems related to disruption in supplies and provide immediate solutions will be the value providers, resulting in gaining loyalties and increased margins.
JIT has been in existence since last 50 years with benefits drawn by organisations across different industries like retailing, restaurants, on-demand publishing, tech manufacturing, automobile manufacturing and many more. On the retailing front, as per JIT model, unsold stock sitting on shelves indicates inefficiency as it increases inventory holding costs and takes up space. But today, in the covid-struck world, this would indicate seamless supply chain process, looked as value by the struggling customers. Therefore, extra cost incurred on any of the activities of value chain, if get translated to benefits for the customers, then those satisfied customers get ready to pay even a premium, which leads to increase in margins and revenues for the brand. Most importantly those satisfied customers generate a stream of revenues for a longer period of time for that organization.
To give an example from my own experience during Covid. All groceries of my house are ordered online now as would be the case with majority of Indian households. My 3 main go-to online stores are DMart, JioMart, Bigbasket. To provide a small comparison, At DMart minimum order has to be of Rs.1000/- and it takes delivery charges.
At JioMart and Bigbasket there is no minimum order bracket. While JioMart doesn’t have any delivery charges, Bigbasket has created some slabs of delivery charges for small orders and order above Rs.1200/- delivered free of charge. Different business revenue models created by these different players, based on their value chain analysis.
Inspite of DMart having a minimum order bracket of Rs.1000/- and delivery charges attached, still my maximum orders go to DMart, as I get timely delivery of quality products at right price backed by efficient customer service in case of any problem with the delivered goods. So the customer in me is ready to pay the delivery charges for that superior value offered. And marketer like DMart get higher revenues due to volumes and economies of scale. Proper value chain study and cost-benefit analysis comes out as a win-win for both, the marketer and the customer.
Comments