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Integrating the Value Chain
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ROUGH-CUT VALUE MANAGEMENT

The idea of rough-cut value management was introduced by the au­thors at the 1998 APICS International Conference held in Nashville, Tennessee, in November. This concept was to quantify the value of the demand that the business chooses to serve. The selection and value of that demand is measured against the business strategy. How would your business value its demand? Value could be found in the largest customers, which provide a high variable profit margin, or those cus­tomers with a total high gross profit margin are valued. Customers that are growing should be treated specially since there are good potentials for increasing value that can be generated from sales made to them. New strategic geographic customers are also valued. Customers that also buy from a subsidiary business would be valued. The list can grow—all customers have value. In this case, what criteria should be used in choosing which customers to serve? If there is a production shortfall, which customer's orders will not be met or will be reduced? These are common problems that occur in all businesses.

Typically businesses want to meet all the customer demand. They also rank their customers according to the revenue generated from them. A typical distribution of customers' revenue and their ranking is shown in figure 2. In this figure, Customer A has the largest revenue and Customer J has the smallest revenue. Many businesses conclude that Customer A is their best customer.

In contrast, rough-cut value management uses a more refined ap­proach. It defines a quantitative value measure for each customer. Ba­sically, it is

     an integrated tool for extracting the most value from today's pro­
duction asset capability and for determining the value of additional
capacity for the future expansions

     a tool to provide a "sanity check" for determination of most value-
adding customers and product-mix

•    a simple analysis for differentiating the top value-generating busi­nesses from the bottom ones based on the criteria that the business chooses to define value so that proper differentiation is made in order not to lose value in the current offering. There are many criteria that can be used to determine the "value" generated from a customer. For this example, the following criteria have been selected:

      total revenue

      gross variable margin

      variable margin

      potential for growth.

Each of these important factors should be assigned a weight with the total being 1.00. This example assumed the percentage contribu­tion of each factor in the total "value" to be net revenue 20 percent, gross margin 50 percent, variable margin 20 percent, and potential for growth 10 percent. For each customer the demand value would then be calculated as:

(Demand Value) 1 = [0.20(%TR) 1 + 0.50(%GVM) 1 + 0.20(%VM) 1+0.10(%PG) ! ] x 100

This is done for each customer, and the result is a relative value by customer for what that customer is typically purchasing over the given time frame.

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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