Sunday, September 23, 2012

Value Chain Analysis - A Base for Total Cost Industrial Engineering

Michael Porter proposed value chain analysis as a tool for strategy analysis. The enterprise is modeled as a set of activities and each of these activities is designed for providing competitive advantage either in differentiating or in providing cost leadership.

The proponents of strategic management accounting and strategic cost management have developed the cost orientation of value chain analysis further.

An article on strategic cost management described value chain analysis in the following manner.

Value chain analysis involves the process of decomposing the processes from suppliers to final customers into strategically relevant activities as a way of managing costs. Each activity, or segment or link along the value chain is expected to add value. It means, the revenue earned by the activity has to be more than its cost. Once the distinct segments of the value chain or the strategically relevant activities have been identified, the role of finance professionals is to contribute to the assignment of costs to these activities. Assigning revenues  and  costs facilitates process value analysis, which involves comparing these costs against the revenue generated by the activities. The aim of process value analysis is to ensure that each segment of the chain is not only relevant, but that it is also generating value - that is revenue higher than the costs it consumes. 

From industrial engineering perspective, this concept of value chain cost analysis is a good beginning point. Industrial engineering takes up processes, methods and activities for productivity improvement or cost reduction. Industrial engineers may need to define the processes that they would like include in the IE view of the functioning of the total organization. Even though the value chain analysis as a concept was well accepted, in the literature one does not find good examples of company level value chain analysis put to productive use. Industrial engineering profession has the need and opportunity to operationalize the value chain analysis concept from the perspective of industrial engineering activity and create an enterprise cost map in terms of processes of the organization meaningful to carry out continuous improvement activities as well as IE projects.

Further reading

Proposal for  Developing Total Cost Industrial Engineering

No comments:

Post a Comment