The notion of value chain is entirely based on the process view of the company, the impression of viewing a manufacturing company as the system that are made up of the subsystems each with the inputs, transformation procedure and outputs (Kaplan and Atkinson 2015). The activities of value chain are usually conducted to determine the cost and affects profits. Majority of the organizations that are indulged in the hundreds of activities are mainly engaged in the process of converting the inputs to outputs.
The corporate value chain, accounting and reporting standards enables the companies to assess their whole value chain emission effect and recognizes where to place their focus. The present report would be providing the useful framework of value chain and how the concept of value chain is utilised to determine costs (Langfield-Smith et al. 2017). The report would be describing each segments of value chain and would provide explanation regarding costs in numerous segment of the value chain that are useful for managers. Additionally, BHP has been selected to explain the main purpose of value chain in the manufacturing companies.
Value chain is defined as the complete range of activities together with the design, production, distribution and marketing conducted by the business to bring into the existence the product and service from the concept to the delivery (Chak and Fung 2015). For corporate firms that manufacture goods, the value chain beings with the use of raw materials to manufacture their products and comprises of everything that is added prior to selling the product to customers.
The value chain management is referred as the procedure of organizing the activities to properly assess them. The purpose is to facilitate communication between the leaders of every stage to make sure that the product is placed in the hands of the customers flawlessly as possible.
The value chain offers the business with the basic tool for analysing cost. The tool of value chain is regarded as the procedure where the firms recognizes its main and provision that adds value to the final product and then assess the activities so that it can reduce or increase the cost differentiation. Value chain analysis is regarded tool that is used to assess the firm’s internal activities (Eldenburg et al. 2016). The main purpose of value chain is to identify which activities fetches higher valuable sources of cost or differentiation advantages to the companies and which activities can be used to recognize the competitive advantage. The initial point for analysing cost is to understand the value of the company’s value chain and to allocate operational costs and assets to the value activities.
Two different approaches are involved in performing the analysis that is reliant on the form of competitive advantage sought by the company to create cost or differentiation advantage (Wouters et al. 2018). A business may use the cost advantage approach when it tries to compete on costs and wants to understand the source of cost advantage or disadvantage and factors that ascertain the costs. Cost advantage is used by the business by identifying the primary and secondary supporting activities. A business usually establishes the relative significance of every activity in the total cost of product by recognizing cost drivers for every activity.
The tool of value chain is used to measure cost by producing the products or service that must be broken down and allocated to every activity. The activities that comprises of major activities of costs or performed ineffectively are addressed initially (Gereffi and Fernandez-Stark 2016). The concept of value chain is used to determine costs by understanding what factors drives the costs and managers can place their emphasis on improving them. Cost for labour intensive activities are driven by the working hours, rate of wages and work speed.
The companies use the tool of value chain to identify the links between the activities. It generally reduces the costs of one activity that might result in further reducing the cost in subsequent activities (Mudambi and Puck 2016). For instance, lesser components in the design of the product might result in lesser faulty parts and reduced cost of service. As a result, recognizing the links between the activities would result in better understanding of improving the costs improvements that would impact the entire value chain.
Alternatively, companies also use the differentiation advantage that strives to create the superior products and services. The business uses the tool by identifying the customers that create value activities. The value chain tool is useful in recognizing the strategies for enhancing the customer value (Simatupang, Piboonrungroj and Williams 2017). The value chain analysis is performed in a different manner when the firm competes on the differentiation strategy instead of costs. The main reason is that the differentiation advantage originates from creating superior products, adding more features and meeting the needs of customers that leads to higher cost structure.
Recognizing the cost drivers and quantifying their impact on cost might not be easy and numerous process can be engaged. However, at times the cost drivers of the value activity would be intuitively clear for assessing the basic economics.
The segments of value chain are as follows;
The primary activities comprise of the following;
Inbound logistics: Under the activities inbound material movements are arranged or finished inventory from the suppliers to the manufacturing or assembly plants are carried out.
Operations: This is related with managing the procedure that transforms the inputs into outputs.
Outbound logistics: This process is associated to storage and movement of final products and the associated flow of information from the end of production line to ultimate user.
Marketing and sales: This segment involves selling product and service for creating, delivering, communicating and exchange offerings that creates value for customers.
Service: This comprises of the activities that is required to keep the product and service working effectively for the buyers following the goods are sold and delivered.
Infrastructure: This comprises of activities particularly, accounting, finance, legal and general management.
Technological development: This comprise of equipment, hardware, software, process and techniques that resulted in transformation of inputs into outputs.
Human resource management: This comprises of activities such as recruiting, selecting, training and compensating the personnel.
Procurement: This consists of acquiring goods and services from the external source.
As evident from the above explained segment the purpose of the value chain is to create value for each segments in order to exceed the total value against the total cost related with the product. A business can benefit from the competitive advantage for each segment in its value chain (Robson 2015). For example, creating an outbound logistics which is highly effective helps in lowering the shipping costs and allows a firm to either realise more profits or pass on the savings to consumers through lower price.
The supporting activities on the other hand also facilitate effectiveness of the primary activities in value chain. Increasing the effectiveness of the four supporting activities helps in increasing the benefit to at least one of the primary activities (Lundvall, Jurowetzki and Lema 2015). The value chain management system helps in reducing the cost and complexity of the manufactured process especially for the managers that uses several parts.
The commercial value chain of BHP connects with all the commercial activities inside the single function and locating them to its key markets that has the strategic view of its whole value chain. This enables BHP to function on both the sides of the commercial coin. It helps in creating the effective partnership with its communities through local procurement that deepens its relation with BHP customers and suppliers internationally (Bhp.com 2018). The value chain of BHP expands the view of company on how the markets may evolve. This enables BHP to adapt strategy to take action in the ever changing market, together with optimising its supply chains. The combined function enables BHP enabled the company to quickly replicate the good practice and share the market insights across the teams.
The major purpose of value chain at BHP is to make sure that the long term sustainability of its value chain is maintained in the global economy (Bhp.com 2018). BHP continues to integrate and automate its value chain to unlock the resources and drive a step towards change in volume and cost. BHP uses its value chain to work closely with its stakeholders and to understand the opportunities that would make positive contribution towards the business. The company sets minimum level of requirement for its suppliers and relevant contracts through its value and remains committed to work with its suppliers and business partners in order to adopt the principles and standards that are similar to BHP.
Conclusion:
With the ever increasing competition for the invincible prices, excellent products and customer loyalty, a business should constantly assess the value that is created by the managers. On a conclusive note, value chain is the valuable tool and provides the business with the advantage over their competitors. BHP uses value chain for sustainable and ethical supply chain that considers both the human rights and environmental risks.
References:
Bhp.com. (2018). www.bhp.com. [online] Available at: https://www.bhp.com/-/media/documents/investors/annual-reports/2018/bhpannualreport2018.pdf [Accessed 9 Nov. 2018].
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