Your Globalized Value Chains

Cost, Value and Your Value Chains

Jera LogoAs a manufacturer, your products’ value chains begin with raw materials, usually as they are extracted from the natural world. The value chain continues, step by step, until each product reaches the end of its useful life. At each step, both value and cost accumulate. Your task is to accumulate and capture more value than accumulated costs. Keep in mind that accumulated cost is of an objective nature – cash irretrievably spent. Accumulated value, on the other hand, is subjective. Accumulated value is determined by the highest available bidder at any given time. Accumulated value is often highly dependent on circumstance. In a globalized economy, as we are, there are lots of uncertainties on the cost side and on the value side.

Value Chain Events, an essay posted to this blog over three years ago, explains what value chain is and how events entirely outside your control can disrupt your products’ value chains. Value Chain Events reproduced below. It is worth reading (or re-reading, as the case may be).


Value Chain Events

From 8 March 2012

For any business, Sustainability implies “thriving in perpetuity”[1]. Perpetuity, of course, starts right now, in today’s globalized, rapidly changing and innovation – driven economy. Thriving in perpetuity requires new dimensions of strategic thinking, as well as new levels of operational efficiency and agility.

For smaller manufacturers especially, confronting this can be a daunting task. Making time to attend to working on the business means taking time from working in the business. America has lost nearly six million manufacturing jobs and over 42,000 factories in the last decade, primarily due to globalization and the recent recession. Many surviving manufacturing firms have slashed staff and focused remaining resources, human and financial, on working in the business – generating the revenues necessary to stay afloat in a truly awful business climate. Unfortunately, neglecting the bigger picture, regardless of the necessity for doing so, does have consequences.

Happily, “zoom lens” thinking[2] can be applied to working on the business, as well as to working in the business.

To illustrate this, start with your Value Chain[3]:

Value Chain Diagram

The Value Chain begins with the entire business unit and provides a convenient map for disaggregating by “zooming in” on the various steps in the overall manufacturing process. This line of thinking can be extended by recognizing that the Value Chain represents a dynamic situation – each of the links in the Value Chain is constantly changing. Further, the relationships among the links in the chain may be as significant as the condition of the links themselves.

Because of the rapid pace of change in this globalizing economy, it is important to constantly “zoom out”, to recognize Value Chain events as they occur, and then to “zoom in” appropriately, in order to manage the effects of such events. Value Chain events are news events, which may be specific to your industry or locations. On the other hand, many Value Chain events make the six o’clock news.

Here are some recent examples of Value Chain events:

>> Airbus Industries and the Boeing Corporation each introduced innovative new commercial aircraft in the last several years. The Airbus 380 jumbo jet and the Boeing 787 Dreamliner both encountered severe technical difficulties in integrating their supply chains. In both cases, delivery delays were measured in years. Customers were not amused.

Point: Integration between Value Chain links cannot be taken lightly.

>> The application of hydraulic fracturing (“fracking”) to natural gas drilling has tremendously increased the supply of natural gas in the U.S. and elsewhere. In the past, natural gas pricing was effectively linked to crude oil prices on an energy equivalence basis. Now, the supply / demand balance in natural gas has broken that linkage: natural gas is much cheaper. In 2010, petroleum and natural gas each provided about 40% of America’s industrial fuel (mostly for boiler fuel). Clearly, those firms that use natural gas have a significant new – found competitive edge.

The same applies to chemical process feedstocks. For example, firms that produce ethylene from natural gas liquids now have a huge competitive advantage over those that produce ethylene from naphtha (petroleum). Almost all familiar plastics, and many other products, are derived from ethylene.

Point: Innovations upstream, like “fracking”, can dramatically affect competitive posture.

>> In February 2012, U.S. automobile sales surprised everybody by increasing by about 14% compared to last year. Consequently, auto suppliers now find it difficult to keep cars on dealer lots.

Point: Low inventory strategies are important for manufacturers, sometimes even crucial. However, low inventory levels at several links in a supply chain can severely affect manufacturers’ agility – their ability to respond to a favorable change in customer demand.

>> Many high tech products rely on “rare earth” elements to achieve critical technical characteristics. “Rare earths”, to beg the obvious, are hard to find. Today, most “rare earths” are mined and, more importantly, refined in China. Some months ago, China threatened to disrupt supply of “rare earths” to Japan over some unrelated squabble.

Point: Be constantly aware of your suppliers, and of your suppliers’ suppliers. It’s your business to understand their business.

>> Last year, a Richter 9.0 earthquake followed by a tsunami disabled a nuclear power plant in northern Japan. Although these natural disasters occurred in a region that is not particularly industrialized, some automobile parts manufacturing is clustered there. Result: critical parts shortages for Japanese automobile manufacturers.

Point: Be constantly aware of your suppliers, and of your suppliers’ suppliers. It’s your business to understand their business.

These are just a few of the recent Value Chain events that have affected many manufacturers. Many involve environmental issues. Take a moment to share some of the recent Value Chain events that have affected your industry or location.

Chuck on Wilson Mtn.Your thoughtful comments and Value Chain events experience reports will be appreciated.

…  Chuck Harrington (Chuck@JeraSustainableDevelopment.com)

P.S: Contact me when your organization is serious about pursuing Sustainability … CH

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome. New blog posts are published weekly.


 

[1] Werbach, Adam, Strategy for Sustainability, Harvard Business Press, Boston (2009), pg. 9

[2] See Green and the Zoom Lens Mind, an earlier post to this blog: http://blog.jerasustainabledevelopment.com/2012/02/22/green-and-the-zoom-lens-mind.aspx

[3] The term “Value Chain”, as used here, has as much in common with the Lean Manufacturing “Value Stream” concept as with “Value Chain” as Harvard’s Professor Michael Porter introduced it in his business classic, Competitive Advantage. Those interested can learn more on the distinction between “Value Chain” and “Value Stream” at: http://www.bptrends.com/publicationfiles/FOUR%2004-009-ART-Value%20Chains-Brown.pdf