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Value Chain Analysis as a Vehicle for Cost Saving



There is no doubt that the economic shock happened. Companies are now beginning to cut costs again, as in 2008 or 2014. But at the same time, they face the same question as then: how not to reduce the necessary costs? How can they get rid of unnecessary expenses without threatening the already declining demand? To answer this question, you will need the method of analyzing the Value Chain.


To make a decision, you will need two things that most companies do not have: a list of customer values and the calculation of the cost of the main processes. The list of customer values should be provided by the marketing department based on the research results, and if there are no customer values, you can make a list of customer values based on expert opinions. Сustomer values are the expectations of end users of a product similar to that of the company. For example, a consumer may expect low prices, stocks, a wide (or special) range of products, fast (convenient) delivery, etc. from an online store. Values should be ranked according to their importance (for example, on a ten-point scale).


Then a map of the company’s key processes should be drawn up. The important detail is that the map is not a sequence of current operations, but rather the logic of the company’s work with the customer. At the entrance of the chain, there is the customer’s need, say, continuing the example of an online store, the desire to conveniently and inexpensively buy goods. And the chain itself is a sequence of steps to meet this need, from identification and understanding of the need and creation of the product and ending with the “last mile”, delivery of goods to the customer. In manufacturing companies, as shown in the figure below, the process of value chain begins with analytical marketing and the R&D process (i.e. product development), and ends with the delivery of the product to the retail network and after-sales service (for example, work with complaints):


Inbound logistics are purchases and foreign trade activities, outgoing logistics – delivery to the distribution center networks (hereinafter DC networks), proactive marketing – advertising and promotion, sales – work with the distribution network. The given chain in an example which is simplified to a certain degree. For the analysis, you probably will have to make more deep Value Chain, having broken up large processes on subprocesses, but you will understand it only after the analysis of KSF, as described below.

 

Further, when the KSF itself is drawn up, at least drafted, you need to understand which KSFs, or Key Success Factors, work in this market, and what processes are creating specific KSF s. For example, in the pizza delivery market, one of the main KSFs is the speed of delivery; in Internet commerce – the convenience of delivery, in retail and catering – location, etc. The list of KSF is a list of factors that allow business to work and thrive in this particular market.

 

In this case, KSFs are divided into two types:

  1. The threshold KSFs are KSFs, without which the business simply cannot exist. For example, if an online store does not offer several delivery options, in today’s world, it probably will not survive. But the very presence of two or three delivery options does not guarantee success. This is, rather, the hygienic norm for such a business.
  2. KSF of advantages are key success factors that can create a company that meets the values and expectations of customers, in which the company is superior to its competitors. For example, for a manufacturing company, it may be product quality, for a retailer it may be a special product range, for a service industry it may be a personal manager for each client, etc.

 

Threshold of KSF and KSF of advantages should be checked for compliance with the list of customer values. Both should correspond to at least one item on the list of values. For example, “personal manager” KSF may correspond to such customer values as “convenience” or “individual approach to the customer”. KSF is a company’s ability to meet customer expectations. The difference is that threshold KSFs are the ability to meet minimum requirements, and advantage KSFs are the ability to create excellent differentiation in the company’s products or services from competitors.

 

Few top managers think about customer values, especially those who do not intersect with them in any way (for example, purchasing, production, HR, etc.). But in fact, directly or indirectly, most processes either create KSFs or affect them. A unique system of testing suppliers and input control of raw materials in procurement can create a unique difference (KSF of advantages) related to such customer values as “product quality” or “safety”. If production is capable of creating unique products or is flexible or fast, it may also be KSFs that are important from a customer’s point of view. Once you have distributed all the KSFs through the processes, you will get the following picture.



In the example in the figure, some processes do not create any KSFs, some create only thresholds, and some create KSF of advantages.

 

As presented, we can use the estimation of processes’ cost that was mentioned at the beginning of the post. Most businesses never evaluate their key processes in monetary terms. Standard profit and loss statements are not designed for this purpose, they group the articles on the basis of similarity. For example, office lease costs are not divided between departments, they are grouped in one line. But a part of the office is used to create KSFs, and a part of the office is rented simply by necessity (for example, for accounting unit purposes). Logistics costs are often scattered between warehouses, transport, purchases, etc., and it is not always possible to determine exactly how much the company spends on warehousing activities and how much on delivering goods to customers. You can make such an assessment quickly enough, because in this case, the accuracy is not important, the main thing is not to make a heavy mistake. 

 

So, now we know what processes create KSF and what kind of KSF they are, and how much each process costs. We can start to optimize costs. At the same time, I recommend that you follow a simple rule:

  1. Processes that do not create KSFs, have to be considered, first of all, from the optimization point of view. If you have correctly estimated your customers’ needs, cost reduction will not significantly affect sales and customer satisfaction;
  2. Processes that only create threshold KSFs, have to be considered with the utmost care. Even minor cost reductions can bring down already falling sales. After all, threshold KSFs are the minimum requirements of customers, and if we do not satisfy them, they may refuse to buy at all;
  3. The processes that create KSF advantages, should not be touched at all. Perhaps, it is worth investing in them, on the contrary, in order to gain an advantage over ruined competitors.

 

Many entrepreneurs act intuitively to save costs. Having such a system can help them start acting in a more structured way and avoid heavy mistakes.

 

Svyatoslav Biryulin

CEO 

KVAN Svetovanje, Ljubljana

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