The Hindu Business Line : The value chain metaphor

The consumer is no longer going to revert to a state of total trust and ignorance. She is wiser, discerning and demanding, and will check and verify every claim.

The jargon we use reflects our unconscious mental models. Though much management jargon is a passing fad and will disappear soon to be replaced by newer words and phrases that don't really add much to one's edification, it is also true that many concepts, analytical tools and practices have endured for fifty years and are still relevant.

Management, essentially a post-World War II discipline, came to India with the establishment of the Administrative Staff College and later the Indian Institutes of Management, in the early 1960s. It is still a young, evolving discipline.

As we all live increasingly in a world of organisations, which provide us with all sorts of services and products, which are growing in their variety by the day. Our concerns about their being better managed must converge. After all, we are all interested in not getting short changed or given poor service. Hence, a wider understanding of the thinking that drives management action is of interest to all of us.

We propose to outline in brief the enduring concepts and tools, strip them of their complications, and make them simpler and easily accessible so as to make sense to any average reader as well as the practising manager and student.

We shall start with the Value Chain and its relationship to cost and value in this issue. The dominant metaphor for a business for two decades, it is customary to speak of it, thanks to Michael Porter of Harvard, as a description of how value gets added on to what is brought into a business. This is a natural for essentially factory type processes, which are additive and sequential.

You start from the inputs of raw material and components bought-in and twist them and turn them, cut and slice, burn or bake them and then add on several other bits and pieces to make a car or a chair or anything fairly substantial; this goes equally although in miniature for electronic parts assembly as well.

Costs are added with every movement of the part-processed material, and with the passage of time, most of which our Japanese friends call muda or wasted time and material. So, this chain metaphor leads on to a good way of looking at cost elements to see how we can reduce only those costs that are not adding value. Of course, the most obvious one is needles waiting as work-in-progress inventory. This was taken as inevitable, until the Japanese manufacturing people came along and showed us that it all depends on how smart we are in the machine lay out and the way we do the machine operations.

The Japanese approach

The Japanese brought in the concept of a `batch size of one', reducing the delay of set-up time and exploding all the old industrial engineering notions, which had been the Gospel in America in the post-war years.

This approach to costs brings about a new way of looking at the business itself: if the specific action, including moving and storing something in a bin or a barrow can be avoided then you have an opportunity of either making a better profit or giving the customer better value by reducing the price.

Costing of manufacturing in this way then yielded the idea of Activity-Based Costing which attributes, or at least tries, only those costs that are directly related to the work done for the manufacture of the particular component or finished product.

The basic philosophy behind this is that if you were a customer would you be willing to pay for costs that do not make the product that you buy better in some way -- more efficient, stylish, attractive, economical or convenient to install use, and apply? If the cost doesn't contribute to such a benefit then it does no good to the business.

Soon some smart competitor will find a way to make the product without such wastes and offer the customer better value for her money. That would undermine the very basis of our business altogether. This way of looking at the very raison d'etre is a relatively recent development in managerial thinking. But it is no passing fad.

For certainly the consumer is no longer going to revert to a state of total trust and ignorance: A wiser, discerning and demanding customer, she will check and verify every claim and complain loudly because the media, the prevalence of open markets and access to better practices and rising expectations all round have raised her standards.

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