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Value Chain Analysis

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Value Chain Analysis

Many organizations do not achieve the profits they anticipate by using incorrect methods or models to determine the true costs of products and services. This failure to correctly assess the costs associated with business not only affects the profit margin, but the organizations competitive advantage as well. In order to asses whether the organization is failing to realize optimum resource allocation, the organization should look at the methodology first popularized by Michael Porter titled the Value Chain Analysis (VCA). "VCA seeks to define the entire chain through which goods are supplied to a customer" (Booth, 1997, 2). The VCA can be a powerful tool in increasing an organization's competitive advantage; by correctly pricing products and assessing the true costs of materials and labor, organizations can align the improvements in efficiency, quality, and profits with its strategic objectives.

Before explaining the advantages that a value chain can offer, it is important to first identify the value chain itself. According to Stabell and Fjeldstad (1998) Porter's work on VCA began by disseminating an organization's activities into two categories, primary activities and support activities (See Figure 1):

Primary activities are directly involved in creating and bringing value to the customer, whereas support activities enable and improve the performance of the primary activities...The support lable underlines that support activities only affect the value delivered to customers to the extent that they affect the performance of primary activities (p 417).

Within the value chain, it is important for an organization to correctly identify how each primary activities category relates to its organization. The first category is Inbound Logistics. In a manufacturing environment inbound logistics would involve "receiving and warehousing of raw materials, and their distribution to manufacturing as they are required" (The Value Chain, 2006, 2). It is important to note however, that the value chain can be applied to service industries as well. For example, in healthcare, the raw materials would be replaced with patients, in the insurance industry the uninsured drivers could be considered raw materials. Stabell and Fjeldstad (1998), stated that inbound logisitics can even even apply to technology as inbound logistics can be "...receiving, storing, and disseminating inputs to the product" (p 417). Inbound logistics could be simplified by stating that it is the most basic requirement to begin the organization's processes; be it raw materials, patients, customers, or inputs. Let us assume that the organization is going to develop a new technology for physicians. The organization is going to develop a form of wireless PDA that is about the size of a clipboard. Instead of carrying a paper file into every patient appointment, the doctor will have this smart-pad that they can use to input patient data. Throughout the day, the physician hooks up the smart-pad to his office PC through a USB cable, and the information is transmitted into the patient history. Inbound logistics would include identifying what materials will be needed as well as what software will be needed to support the new technology. Inbound logistics would need to determine what components will be outsourced, which will be built in-house, and what software will be needed to support the new technology.

Once all steps of inbound logistics have been completed, the next step in the value chain is Operations. Operations involves the activities used in transforming the raw materials (be it physical goods, customers, or inputs) into the final product (Stabell and Fjeldstad, 1998). Going back to our example used for inbound logistics, in the case of the new physician's technology, operations would involve those activities necessary to convert the raw materials into the finished products. Operations, in this case, would involve component assembly and software installation, as well as packaging.

Once inbound logistics and operations are complete, the next step is outbound logistics. Outbound logistics are "activities associated with collecting, storing, and physically distributing the product to buyers" (Stabell and Fjeldstad, 1998, p 417). This may be an area where combining more than one methodology may be appropriate. For example, if products are completed and stored in warehouses until orders are received, this could have a negative effect on the organization's profit margins. But in analyzing the value chain it may have been identified that switching to a Just-in-time method of delivery may be more cost effective. The organization could look at the outsourcing of components and the reliability



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