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  • Sunayan Banerjee Creating Value Through Supply Chain

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    Creating Value Through Supply Chain Recently I was closely following one of the major engineering achievements in the Indian Automobile sector- the launch of Tata Nano. The small bean shaped car captured the imagination of hundreds of visitors at Pragati Maidan in Delhi. Scenes of people coming from nearby villages ready with their cheque books were a common sight and our television channels did every thing they could to catch the excitement. The reason I quote this at the beginning is the fact that it made me think! It made me think, why is such a small basic car getting so much of attention? Is it only because its cheap to buy? Or is it deeper than that? Is it not because of the immense and unique value that the car promises to its customers? The article tries to raise and answer many such questions about value and its relevance. The key take away of this article is summarized below.

    In the recent times we have seen the resurgence of globalization and shrinking boundaries between nations, societies, businesses and of course people. This has led to an ever increasing importance for integrated supply chains and value creation. In a true sense, in todays dynamic world, organizations compete through their supply chains. In a conference, Mike Eskew, Chairman and CEO of UPS, described supply chain management that seeks to optimize costs as second generation supply chains (SCM 2.0), and went further to describe the third generation supply chain management as being focused on customer intimacy, and being a synchronized supply chain where consumers have the power to pull value. This brings out the fact that SCM, CRM and value chain, all need to function in synchronously. And indeed, the third generation supply chains have to be a reality for the organizations to sustain and grow. Value The term value means something that the customers will pay for. In other words, value enables a company to reach the customers wallet through its products or services. The concept of Value Chain was introduced by Michael Porter in his work Competitive Advantage. Here Porter tries to explain as to how competitive advantage leads to superior business performance. He has defined value as the amount the buyers are willing to pay for what a firm provides. Value chain is a combination of the various value added activities that take place within a firm. The value chains can further be linked together between the firms to create a value system. Value can be best described by taking a simple example of a person outdoors in a cold winter night without any woolens. A single warm jacket/ sweater will be of immense value to him at that time because he is freezing in the cold. Will he have any consideration for the brand the jacket belongs to? The answer I guess is NO. Lets go a

    What is value and value chain? What is the importance of value chain and how does its presence or absence effect the

    customer? How can Supply Chain and Value Chain work together to achieve greater customer

    satisfaction? Where does CRM fit in this context? Case study on Tata Indigo CS

  • Sunayan Banerjee Creating Value Through Supply Chain

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    little deeper. Say, he has cash or a credit card with him. Does it matter to him that which shop he goes in to buy himself some warm clothing? The answer is again NO. Does he even care whether the price is too high? Probably no! So even money may not be a consideration! The point is what is his need? What is his perception of value? We can work out a number of similar examples from our personal experiences where we may realize what value actually means to us, as a consumer. In their book Blue Ocean Strategy W. Chan Kim and Renee Mauborgne explain how companies like Starbucks, Apple and Southwest Airlines have used innovation create a niche for themselves and come up with profitable and rewarding business models. Not only this, they are so efficient in their value chains, that they are able to operate in a Blue Ocean market i.e. without getting into the cut throat price competitions with other players (avoiding the Red Ocean scenario). A Blue Ocean is based on the principle of creating new markets where no one else has ventured before. Thus, the companies can avoid getting into direct competition and price wars (the Red Ocean). The authors talk about using value innovation to fuel a companys Blue Ocean strategy. However, the strategy works only if they are a part of the intrinsic processes involving improvements in operations, functionality and price (value and supply chains). At Southwest Airlines, they had a unique model of low cost convenient flying between numerous airports. The company started its operations in the year 1971. The company had over 2300 flights and employing over 31, 000 people. The company offers unique features like low cost fares and very fast turn around times. The company has standardized the fleet of jets (over 500 Boeing 737 jets) it operates and hence reducing the operational and maintenance costs. It offers unique employee benefits like free air fares and multi faceted job profiles along with a fun at work environment. The point to note here is that the company carved out a niche (Blue Ocean) through innovation and unique value creation. This became possible my remaining close to the customers pulse and having the knowledge what are his needs and wants. TATA has come up with a one lakh car that may again create a unique market position for the Nano brand and operate in a Blue Ocean market. The Value a Nano will bring to its customers will be totally different from a high end car say a Mercedes S Class. But, because the value is as perceived by the buyer, it will be unique. Value flows from the customer to the supplier. This is contrary to a supply chain where the flow is from the supplier to the customer.

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    Value can be categorized in various layered levels. At the core is the Product Value or the technical value derived from a source of supply. For e. g. let us again consider the TATA Nano. The product value for the buyer may be access to an economic mode of four wheel transportation. The second layer consists of the Service Value or the value provided by the services surrounding the product. The service value for the Nano may be the warranty the car will carry which in turn will provide an ownership experience free of maintenance costs. The third and the penultimate ring will be the Wow value or the factors leading to customer delight. These may consist of factors such as space (which is said to be considerably more than the Maruti-800, its nearest competitor) and ergonomics of the car, given the price point it will operate in. The interesting thing here is to note that these factors will be completely different for a Mercedes customer. The Wow value i.e. space in the TATA Nano wont excite such a customer. May be a beer cooler as a standard accessory will! Toyota launched its luxury sedan Lexus as a different brand (not as another Toyota car) because they felt that to compete with the BMW and Mercedes brands, they need a brand which will provide a greater snob value which the value for money image of Toyota brand couldnt afford.

    Further, the aim throughout should be to minimize the activities that dont add any value to the customer. These activities are waste or Muda. Thus we can achieve greater efficiency in the value chain. The Supply Chain Supply chain is concerned with the total flow of materials / finished goods/ services from the suppliers to the end customers. As stated earlier, in the modern business scenario, we often realize that our companies are just as good as their supply chains are. Keith Oliver coined the term supply chain management in the year 1982. The primary aim of SCM has always been to overcome suboptimal deployment of inventory & capacity and ensure a more integrated approach to managing the delivery processes. A robust supply chain has become inherent to all successful and profitable companies world over. Retail giants such as Wal-Mart thrive on cost effective and efficient supply chains. In a push scenario, the supplier plans about what he is producing based on the demand estimations done. On the contrary, supply chains based on pull phenomenon are more effective than those based on push. In pull, its the demand that dictates the inventory at various points. The demand is percolated through the supply chain and the

    CUSTOMER DELIGHT VALUE

    SERVICE VALUE

    PRODUCT VALUE

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    supplier ends up producing only what and in whatever quantity/ numbers are actually required by the customer. In other words, he produces what actually adds value to the customer. This contributes in reducing the muda in the system and saves resources. There is a very interesting phenomenon that occurs in a supply chain called the Bullwhip Effect. This is a common observation in forecast-driven distribution channels and supply chains. The speculative nature and dynamism of market demand leads to crusts and troughs in the demand curve which get accentuated through the supply chain. This leads to large inventories and non value adding activities throughout. Every entity in the supply chain tends to keep some safety stock to meet contingencies. This moves up cumulatively from the customers to the raw material supplier and results in excess inventory. This may also lead to stock outs at some points because of the inaccurate forecasts and speculations. As we see

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