4 (a) The value chain was introduced by Michael Porter as a way of examining all the activities a firm performs and how these
activities interact. By understanding the value chain the analyst can understand costs and identify existing and potential
sources of differentiation. The value chain of the organisation is concerned with creating value for customers. A firm is
profitable if the value it commands from the customer exceeds the costs involved in creating the product or service that
delivers that value.
The primary activities of the value chain are the activities required to physically produce the product, get it to the customer
and provide that customer with after-sales service and assistance. Support activities provide organisation-wide functions (such
as procurement and technology) to support the primary activities. In general, they support the whole value chain.
In the context of Jayne Cox Direct, the primary activities and their problems are:
Inbound logistics – activities associated with receiving, storing and distributing inputs to the product. This includes
warehousing, inventory control and raw materials. At Jayne Cox Direct this concerns wood, upholstery, textiles and other raw
materials. It concerns the storage of these raw materials before they are used in production. At Jayne Cox Direct there are
documented problems with the e-mail purchase ordering system, which has led to the non-delivery of an expected order. High
inventory levels are also commented on in the scenario and these need further investigation.
Operations – activities concerned with transforming the inputs into their final form; machining, packaging, assembly and
testing. At Jayne Cox Direct this is the production process of furniture manufacture. Despite high inventory levels and a
relatively slow production process, almost half of the promised delivery dates are not achieved. The reasons for this again
need further investigation. Perhaps the method for estimating the delivery date is too optimistic. Alternatively, there may be
inefficiencies in the production process which need addressing. As well as disappointing customers, failure to meet the
proposed delivery date causes increased administrative costs, as a member of the sales team has to contact the customer
and rearrange the delivery date.
Outbound logistics – activities associated with storing finished goods and physically distributing these to the customer. At
Jayne Cox Direct this is the storage of completed furniture and the delivery of furniture, using their vans, to customers. The
cost of storing of finished goods is exacerbated by the need to store them longer than is necessary. There are two reasons for
this. The first is concerned with customers not being able to meet revised delivery dates and so deferring delivery. The second
reason is the return and storage of goods where delivery cannot be made because the customer is not at home to sign for
them. Storage of finished goods increases inventory holding costs. Failed deliveries increase administrative costs (a member
of the sales team has to telephone customers to re-arrange the delivery) and distribution costs (the delivery has to be made
again).
Marketing and sales – activities that allow a buyer to become aware of a product, induces them to purchase this product and
supports the actual purchase of the product. At Jayne Cox Direct this is achieved largely by display advertising in quality
magazines and through a web-based ordering system. The sequence of the web-based ordering system may repay
investigation and amendment. The estimated delivery time is given after the order has been placed and this causes some
customers to immediately cancel their orders. It is perhaps unlikely that such customers will return to place orders with Jayne
Cox Direct.
Servicing – activities that enhance or maintain the value of the product, including repair, parts supply and product adjustment.
At Jayne Cox Direct this would concern replacement of faulty or spoilt goods, complaints handling and product care
information. Customers are critical of after-sales service at Jayne Cox Direct and the managing director believes that this
contributes to low customer retention.
The value chain also considers a number of secondary or support activities. Only one of these is specifically relevant in the
context of the Jayne Cox Direct scenario.
Procurement refers to the function of purchasing inputs used in the organisation’s value chain. It does not refer to the
purchase inputs themselves. The cost of the procurement function may be relatively small, but their practices greatly affect
the quality and cost of the final product. At Jayne Cox Direct, the cost of wood, upholstery and textiles will be an important
determinant of the product cost. The long-term arrangement with suppliers needs investigating. Three timber suppliers provide
95% of the wood. Such arrangements may lead to suppliers becoming comfortable and progressively uncompetitive.
(b) This question is primarily concerned with re-examining the upstream and downstream supply chains to explore opportunities
for reducing cost, improving order-to-delivery time, improving delivery practices and enhancing customer service. Clearly there
are many possibilities. Candidates, however, will only be given credit for suggestions that use technology (rather than
organisational changes) and that are clearly relevant to the case study scenario and the products it concerns.
21Upstream supply chain solutions
The upstream activities concern selecting suppliers (procurement), placing orders (procurement) and storing raw material
inventory (inbound logistics). Dave Chaffey identifies six main challenges in the supply chain. Three of these six are relevant
to Jayne Cox Direct.
– Reduce order-to-delivery time
– Manage inventory more effectively
– Improve demand forecasting
Suggestions for improvement might include:
As mentioned in the answer to the first part of this question, procurement continually uses the same long-established suppliers
(for example, 95% of timber comes from three established suppliers). These suppliers may have become complacent and
uncompetitive. The company might consider using e-procurement websites to identify a wider range of suppliers and then
select between these suppliers on the basis of cost and quality when placing individual orders. Such an approach should help
drive down raw material costs and re-focus the costs and service offered by the established suppliers.
Although the purchase orders are placed through email, the ordering process is relatively cumbersome with suppliers
occasionally failing to respond to emails or, when an expected delivery is not received, claiming they did not receive them in
the first place. The payment system (operated by accounts) sometimes fails to match purchase orders with supplier invoices,
leading to delayed supplier payment and discontent. The company might consider a new system to administer purchasing
and payment, linked electronically (through EDI) to the suppliers, so that orders are automatically entered into the supplier’s
system and all invoice reconciliation and payment is performed electronically. This may require the company to continue to
trade with a selected number of small suppliers, but it should help avoid non-delivery, reduce administrative costs and
improve supplier relationships.
To avoid delays through inventory shortages, linkage with supplier systems might be increased by allowing suppliers to see
the demand for certain products so that suppliers can, to some extent, anticipate demand and so should be able to supply
more quickly. This would require further investigation and it seems likely that it would work better for certain raw materials
than others. For example, the textile suppliers would be able to see the relative demand for different patterns and adjust their
production accordingly. This should lead to Jayne Cox Direct achieving a higher percentage of planned customer order dates,
as well as reducing delivery lead time.
Increased integration also brings the promise of better inventory management, with the opportunity of suppliers effectively
producing to order rather than to stock, which is, in effect, an extension of what Jayne Cox Direct is doing. Closer integration
of customer and supplier systems also provides the opportunity for ‘just in time’ manufacture where raw materials arrive just
before they are needed in the production process. Although this transfers inventory costs to suppliers, more understanding of
demand should mean that suppliers’ inventory management is also more effective. Reduced inventory costs for the supplier
might also be passed on to Jayne Cox Direct, resulting in lower input costs. An understanding of demand and the relative
costs of storage and ordering should also allow Jayne Cox Direct to implement systems that optimise order quantities (the
EOQ model).
Downstream supply chain solutions
Downstream supply to customers is relatively simple as there are no intermediaries, as the company supplies directly to the
consumer. However, evidence suggests that some consumers are relatively disaffected. A further challenge cited by Dave
Chaffey is relevant here, the need to improve aftersales/post-sales operations (service on the value chain). The company also
needs to consider the costs of finished goods storage (outbound logistics), distribution to customers (outbound logistics).
Furthermore, although processing orders is relatively effective, customers feel uninformed in the period between order
placement and order fulfilment.
Some technological solutions here might include:
To introduce technology to support the planning and co-ordinating of deliveries so that delivery vans are used more efficiently
and effectively. This might simultaneously increase the likelihood of customers being at home to receive deliveries. The
products being delivered are bulky and valuable and so it is vital that someone is available at the delivery address to receive
them. Failed deliveries are running at 30%, and this leads to increased inventory holding costs associated with storing the
returned item at the warehouse, higher administrative costs of arranging a re-delivery and extra costs of actually making that
re-delivery. Technology could be used to improve van utilisation (route planning software) as well as increasing the chance
of a customer being at home (automated emails to the customer, automated text messages confirming delivery that day,
perhaps confirming likely delivery time).
Part of the delivery problem is caused by the failure to continually inform customers about the progress of their order. The
processing and payment for the goods appears to go quite smoothly and an estimated delivery date is given to the customer
at the time of order. However, the customer receives no further information until an actual delivery date is confirmed by
telephone less than one week before the planned delivery. Many actual delivery dates are not the same as the original
estimated delivery date because of procurement issues. Some customers cannot make this new date (often after keeping the
original date free) and so a new date has to be negotiated (an administration cost) and this often leads to the finished product
being stored for longer (increasing inventory cost). An IT system that allows the customer to track their orders; updates likely
delivery dates as they become available and gives the customer some feeling of progress and involvement would increase
customer satisfaction and, by increasing the chance of achieving target delivery dates, reduce inventory cost and other
expenses.
