CSCM Chapter 3 strategic procurement and value chain cscm
- 1. Strategic Procurement & Value Chain CONSTRUCTION SUPPLY CHAIN MANAGEMENT (MGT60803/QSB 2433)
- 2. Objectives Today • Strategic Procurement • What is Value Chain? • Porter’s Value Chain 2
- 3. Strategic Procurement • Procurement is the process of obtaining goods and services from another while a strategic procurement objective is to facilitate added- value. • Procurement has been seen as a function for reducing costs instead of adding value. 3
- 4. Strategic Procurement • Procurement strategies, however, cannot be developed in isolation, they need to be integrated with corporate strategy to succeed. • Hence, a strategic procurement does not only add values to the procurement process but the entire value chain. 4
- 5. What is Value Chain? • A value chain is a set of activities that an organization carries out to create value for its customers. (E.g. Paper Birthday Card) • Porter proposed a general-purpose value chain that companies can use to examine all of their activities, and see how they are connected. 5
- 6. What is Value Chain? • The way in which value chain activities are performed determines costs and affects profits. • This tool can help you understand the sources of value for your organization. 6
- 7. How Value is Created Within Organizations? • How do you change business inputs into business outputs in such a way that they have a greater value than the original cost of creating those outputs? • Example, manufacturing companies create value by acquiring raw materials and using them to produce something useful. • Example, a company create value by using the raw materials to build a hotel. 7
- 8. Value Created • The value that's created and captured by a company is the profit margin: • Value Created and Captured – Cost of Creating that Value = Margin Example: Selling Price of a birthday card is RM 4.90 – Cost of creating a card is RM 0.50 = Profit Margin is RM 4.40. 8
- 9. Value Created • The more value an organization creates, the more profitable it is likely to be. • When you provide more value to your customers, you build competitive advantage. 9
- 10. Value Chain • The value chain displays total value, and consists of value activities and margin. • Value activities are the physically and technologically distinct/unique activities a firm performs to create valuable products to buyers. • Example, a company uses IBS to build wall panel (increase value – T,C,Q) and BIM is a technology advancement in building information (increase value – T,C,Q). 10
- 11. Value Chain • Margin is the differences between total value and the collective cost of performing the value activities. • Value Created and Captured – Cost of Creating that Value = Margin 11
- 12. Porter’s Value Chain • Porter's Value Chain focuses on how inputs are changed into the outputs purchased by consumers. • Porter described a chain of activities common to all businesses, and he divided them into primary and support activities. • Called value activities. 12
- 14. Porter’s Value Chain 14 Five Primary Activities Primary activities relate directly to the physical creation, sale, maintenance and support of a product or service. •Inbound logistics: These are all the processes related to receiving, storing, and distributing inputs internally. Your supplier relationships are a key factor in creating value here.
- 15. Porter’s Value Chain • Operation: These are the transformation activities that change inputs into outputs that are sold to customers. Here, your operational systems create value. • Outbound logistics: These activities deliver your product or service to your customer. These are things like collection, storage, and distribution systems, and they may be internal or external to your organization. 15
- 16. Porter’s Value Chain • Marketing and sales activities: These are the processes you use to persuade clients to purchase from you instead of your competitors. • The benefits you offer, and how well you communicate them, are sources of value here. • Building customer’s relationships. 16
- 17. Porter’s Value Chain • Service activities: These are the activities related to maintaining the value of your product or service to your customers, once it's been purchased. • Such as installation, spare parts delivery, maintenance and repair, technical assistance, buyer’s enquires and complaints. 17
- 18. Porter’s Value Chain Support activities These activities support the primary functions above. •Procurement – This is what the organization does to get the resources it needs to operate. This includes finding vendors and negotiating best prices. 18
- 19. Porter’s Value Chain • Human resource management (HRM) – This is how well a company recruits, hires, trains, motivates, rewards, and retains its workers. • People are a significant source of value, so businesses can create a clear advantage with good HR practices. 19
- 20. Porter’s Value Chain • Technological development – These activities relate to managing and processing information, as well as protecting a company's knowledge base. • Minimizing information technology costs, staying current with technological advances, and maintaining technical excellence are sources of value creation. 20
- 21. Porter’s Value Chain • Infrastructure – These are a company's support systems, and the functions that allow it to maintain daily operations. • Accounting, legal, administrative, and general management are examples of necessary infrastructure that businesses can use to their advantage. 21
- 22. Porter’s Value Chain • Companies use these primary and support activities as "building blocks" to create a valuable product or service. 22
- 24. Value Added What is value? •In competitive terms, value is the amount buyers are willing to pay for what a firm provides them. (worth) •Value is measured by total revenue, a reflection of the price a firm’s product commands and the units it can sell. 24
- 25. Value Added • A firm is profitable if the value it commands exceeds the costs involved in creating the product. (E.g. Taylor’s University) • Creating value for buyers that exceeds the cost is the goal of any strategy. • Value must be used in analyzing competitive position, instead of cost. 25
- 26. Conclusion • Firms in the same industry may have similar chains, but the value chains of competitors often differ. • Differences among competitor value chains are the key source of competitive advantage. • To diagnose competitive advantage, it is necessary to define a firm’s value chain for competing in a particular industry. 26