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Integrating the Value Chain
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Revenue has often been called the lifeblood of a business. Many corre­late the direction of change of this important metric with the business" overall health. Reaction of Wall Street to changes to expected revenue increases or decreases the market valuation of a business overnight. This relationship raises a number of questions:

     Since increasing revenue is the main driver for market valuation, is it possible to have too much revenue growth?

     How would a business react to changes in revenues?

     Is it appropriate to rely on only one metric to determine the level of health of a business?

     Does increased revenue bring in increased stockholder revenue all the time? Is there a connection between supply chain management and revenue?

     Does the supply chain drive revenue or does revenue drive the supply chain?

These are just a few of the questions that this paper will address. This paper, introducing the concept of value chain management, will provide a plan for how today's companies could become the best in business by realizing that current lack of business functional integra­tion is rewarding many non-value-adding activities that are preventing them from becoming the best that they can be.

Value chain management is the main process in realigning a company's resources with customer and financial requirements and expectations. The proposed model will have a business strategy, a demand chain, and a supply chain. These three components will be reconciled at the sales and operations planning meeting. Figure 1 illustrates the interactions of those components. Business strategy by incorporating strategic and fi­nancial plans outlines the framework for the business plan with which the business must be run. The demand chain identifies the customers and compiles the quantity and the timing of the demand. The supply chain designs a process, which optimizes the production and delivery of the products to the customers. In the past the majority of the attention was given to supply chain management with little recognition of managing the demand chain. It was assumed that there will always be some cus­tomers and the business must do whatever they want. However, this pa­per shows that the demand chain should, in fact, be the engine that will drive the supply chain. The old paradigm assumed that all revenue was good. All revenue must be met. It typically assumed that supply was infinite. Thus the process of increasing revenue was erroneously believed to be a prescription for continuous business improvement. Given the typical lack of a rigorous business integration process, this prescription would lead to trouble.

Naturally, since in order to improve a process one must measure it, metrics will play an important role. There is a strong relationship among recognition, rewards, and behavior with business metrics. Typically, sales revenue increases that exceeded forecast were rewarded, and were per­ceived as favorable. Moving units of product became a single dominate measure, and single measures will never by themselves indicate a metric to be favorable or unfavorable for the overall health of the business. Make "more and more" and sell "more and more"—this form of a rela­tionship is missing a value component. In this case the main question becomes how to measure the holistic business value of this approach. In an environment where sales are always increasing, the production center will soon reach its constraint level and additional facilities would be required to meet the demand. Most new facilities start up at 40 to 50 percent of capacity. Underutilized capital investment would then create the drive for more revenue by increasing sales. How does a company increase its sales? Does this new demand come in at above or below the current average selling price? In most such cases this increase in sales bring in less value to the business than the previous levels of sales.

Market share is another measure of the health of the business as the value chain is analyzed. Most businesses correlate larger market share with higher market valuation. The result is a "volume-focused" rather than "value-focused" approach. In their best selling book, The Profit Zone, A.J. Slywotzky and D.J. Morrison point out, "The vigorous pur­suit of market share and the rise in customer power have driven profit from many activities and products, and even from entire industries" (p. 7). High market share in a losing segment should be avoided. To en­sure this, a process must be developed so that the business is not spend­ing energy in capturing unwanted share. The factory may very well be working overtime to drive market value down.

To Be Continued

For balance of this article, click on the below link:

Lean Manufacturing Articles and click on Series 11


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