Category Management Toolkit

Supply Value Chain Analysis

Supply Value Chain Analysis Summary

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What is Supply / Value Chain Analysis?

Supply / value chain analysis is the systematic mapping and analysis of the physical commercial and cost linkages that exist in supply chains; aiming to identify the value added components of these inter-relationships that can exist in a supply matrix. Use of this analysis will assist in identifying leverage points in the supply chain and help to identify where the areas of risk in the supply chain exist. Addressing these areas will ensure maximisation of value for mony

Where does it fit in with Category Management?

Internal & External Data Gathering Identification of opportunities and options generation Strategy development

What is included in this guide?

Application of Supply / Value Chain Analysis How to create a Supply / Value Chain What is the Purchasing Value Chain?

Which processes does the tool apply to?

Demand Management, SRM and Strategic Sourcing

Which other tools link to this guide?

Supply Market Analysis Value Stream Analysis Activity Analysis

Supply Value Chain Analysis

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Application of Supply / Value Chain Analysis

Supply and Value Chain Analysis enables you to identify critical points of commercial leverage in a supply chain. From this understanding of these control or influence points, you can then identify opportunities for introducing greater control and management into both upstream and downstream supply chains, aiming to introduce strategic purchasing management into supply markets.This is important because the heart of strategic procurement is the notion of creating competitive advantage for your own organisation by proactively managing suppliers and supply markets. Supply and Value Chain Analysis is one of the key analysis tools which facilitates a better understanding of the dynamics of supply markets to ensure that you identify opportunities to control them.

How to create a Supply / Value Chain

Every team responsible for the creation of a category or commodity strategy and source plan should create a Supply and Value Chain Analysis as part of the information gathering process. Here is a simple process to create such an analysis: Step 1: Construct a simple linear supply chain Use your own knowledge of each link in the chain and create a flow diagram Construct it for a major area of responsibility/product or supplier

Raw material supplier

Component supplier

Your organisation

Customer

Step 2: Create a detailed Value Chain and add costs for each stage. Components of the Chain Comment and Opportunity

1. Natural Crop

Grown locally: wild and cultivated.

2. Local Collectors

Can it be cultivated elsewhere under more controlled conditions?

Picked locally, dried, loose baled.

3. Local Buyer

Bought for market and shipped.

4. Local Trader 5. Local Stockist Bought as the agent or on behalf of the export trader. Can this stage in the chain be bypassed? Little value added; tends to speculate in the market. Responsible for buying, cleaning, baling, shipping. Prime contact: how can he be managed more effectively, and/or replaced?

6. Export Trader 7. Sub Contract Stores 8. Sub Contract Transport 9. Sub Contract Baling

Often poor conditions and little control.

Used as required.

Vulnerability since often restricted sources available.

10. Banks

11. Government Depts

Must approve, cost and issue licences.

Moves material sporadically.

12. Shipping Line 13. European Intermediary

Steps 7 12 all provide opportunities for improvement. Takes a percentage for little effort or added value.
Takes a percentage for little effort or added value.

14. Agent 15. Buyer 16. Local Transport 17. Factory Operations

Steps 13 and 14 could be scrapped.

Traditionally, has only been involved from Step14. Scope for renegotiation of transport rates? Scope for improvement in factory utilisation?

Step 3: Construct a full matrix of the supply market Answer the question, what is supplied to who throughout the market place and at what cost/price?

Customer Supplier Upstream supplier Supplier equity interest Div 1 Channel 1 Div 3 Div 2 Channel 2

Hints and tips

As you build your analysis, look for control points (e.g. one supplier with monopoly control over one part of the chain) or important sources of competitive advantage within the chain; Look for evidence of oligopolies or dependencies; You should construct a value model charting the change in value at each stage of the chain; Many suppliers are conglomerates, therefore look literally for other supply chains to influence;

Important Note:
It is impractical to fully chart all the influences of a supply chain However, it is important to note the nature of the relationship between key players especially those which go beyond the ordinary

In what important ways does the matrix change as products or commodities change?

Step 4: Analysis The key questions to ask are: What are the obvious control points - are they commercial? technical? physical? Do any suppliers have a dominating position? What are the value changes - upstream and downstream?

If I wanted to change the nature of a relationship with one of the players in the supply chain, where would I go and what leverage opportunity would I apply? Are there any lateral linkages to exploit? Steps which add cost can be assessed for process improvement, elimination, outsourcing etc. Step 5: Take forward into Purchasing Strategy From the analysis, take forward targeted opportunity areas into the procurement strategy creation process - for discussion, evaluation and action planning. Where possible, quantify the opportunity.

What is the Purchasing Value Chain?

The purchasing value chain refers to the number of stages or links that can exist in the supply process from primary manufacture, creation of a service or generation of a creative concept, through to its delivery to an organisation. It is an analytical tool, which examines the number of elements within a value chain. The rationale behind the approach is that since the price we pay and the quality of the product or service we obtain is determined by the number of previous transactions that there have been in the chain, the scope for cost and value improvement at each stage can be considerable. Here are some important points to consider: What is the number of individual steps or transactions in the value chain and the value added, cost and margin for each transaction? What opportunities are there for reducing or containing costs at each stage of the value chain? What scope is there for increasing the value and benefits for us at each stage: better quality improved delivery lower stockholding greater speed of response more creativity and innovation improved cash flow exclusivity and confidentiality who owns these values at each stage?

Added Value Steps:

The only steps you need to keep are those which add value i.e. when a transformation takes place from one state to another

is it possible to enter the chain at a different point, thereby reducing cost and increasing control? are there opportunities for examining each stage of the chain with a view to maximising efficiency and operational effectiveness?

where does risk occur across the chain with a view to maximising efficiency and operational effectiveness? what level of technical support and management commitment will we need to secure the benefits from value chain purchasing?

Step One Understand the key issues Step Two Analyse each linkage in the value chain Step Three Determines a tactical short term strategy Assess at first hand Begin to change the relationships Reduce any vulnerabilities Step Four Build support for more fundamental change Secure internal business support Conduct technical feasibility studies Changing the value chain Step Five Consider the longer range options and possibilities

Is this a cost reduction exercise? Or, is it driven by improving quality, reducing vulnerability or securing exclusivity? Has this been done in the past? Is there any understanding of the role, cost or contribution to cost, value or vulnerability of each element in the value chain? What must be achieved in the short term to meet immediate operational pressures? How can you build you leverage and influence, both in-house, collaboratively and with suppliers across the chain? How will you build understanding of the stages and elements in the chain? If there is resistance to this being done on the ground, how will you determine ways around the blockers? How will you meet key people and build the required relationships throughout the supply chain? What organisational policy decisions may be needed to minimise or remove short-term vulnerabilities? What options are available for fundamentally impacting or restructuring the value chain? What additional data, ideas or insight will you need to determine these options? How will you present the options to achieve the greatest persuasive effect? Have you built up the necessary technical support for the preferred options? What is the task and timing plan for your key interventions? What innovative options are available in the much longer term? How will you allocate time and resources to researching and developing these possibilities?

Key questions to ask when building your understanding of the chain are: Do you really understand each link in the value chain, together with its role, costs and alternatives? Have you physically followed each stage in the chain to evaluate what is happening in cost and quality terms? Have you conducted a Purchase Price Analysis (PPA) across each stage of the chain? What links in the chain are you buying from, and why? What link in the chain should you be buying from, and why? What is the performance level at each stage in the chain? What are the cost and value improvement possibilities? How can the risks associated with the chain be kept to a minimum?

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