VALUE-FOCUSED SUPPLY: Why it matters and how to implement it
Before the 1950s, purchasing companies were tasked with ensuring the availability of supplies, and today, creating value throughout the supply chain, in addition to reducing costs and reducing delivery times, is a high priority.
Porter’s Value Chain
In 1985, Michael Porter, professor of economics and management at the Harvard School of Economics, created the value chain model. Porter’s value chain, as it is also known, is a model for structuring the activities developed by companies.
The premise is that if the value a company was offering its customers exceeded the cost of production, the result would be greater profit.
To create customer value, Porter defined three competitive business strategies, calling them generic. They are:
- cost leadership;
- focus or niche strategy.
This model focuses on production systems and how inputs are transformed into outputs purchased by consumers. From this point of view, Porter defined a chain of activities, common to all businesses, and divided them into primary and support activities.
The creation of the value chain results in the improvement of the company’s revenue, cost reduction, optimization of tangible assets and realization of intangible assets, achieved by eliminating leakage of values, increasing current value, creating future value and extent of added value.
In 1993, Ellram and Cooper added that value chain management is “an integrative philosophy for managing the total flow of a distribution channel from supplier to end customer.”
In other words, for the value chain to materialize, it is necessary to monitor all the elements as they travel throughout the network, whether they are information, materials or finances.
It is necessary to define values before we go deeper into the subject of value-focused supply strategies.
Consumers and end users assess the value they receive from a product or service in terms of the set of benefits they gain from securing or using it compared to the cost of obtaining or consuming it.
What is a Value-Focused Supply Strategy?
The Value-Focused Supply Strategy concept was first presented in 2010 at the Supply Management Institute’s International Supply Management Conference
The research initiated by the CAPS (Center for Advanced Purchasing Studies) and the A.T. Kearney, Inc, entitled Value Focused Supply – Linking Supply to Competitive Business Strategies defines Value-Focused Supply, in its essence, as an approach to creating and implementing long-term strategies for the main purchasing categories and their suppliers that goes beyond the traditional sourcing.
Keep in mind that we call sourcing the acquisition of products or raw materials from third parties, that is, it is about looking for ways to meet the material needs of the business.
Therefore, by linking supplies to the organization’s competitive strategies, the objective is to increase the attractiveness and competitiveness of the company’s final products and services, thus increasing the value both for customers and for the corporation.
Value-Focused Supply Strategies
VFS (Value-Focused Supply) strategies are based on mapping the customer’s needs and what the customer values most, and then aligning and applying company and supplier resources to create value for them. The effectiveness of these strategies is often evaluated in terms of meeting business unit and/or production line goals as a whole and the financial return on investment.
We can cite as examples of VFS strategies:
- the elimination of value leakage to ensure the company is not losing value from a key category along the supply chain;
- the increase in current value;
- creating tomorrow’s value;
- extension for additional value
These VFS strategies require a global set of actions and incentives to be successful, and are significantly related to the organization’s overall success versus traditional price improvement actions and performance expectations typical of supply offerings.
VFS allows the company to focus on shaping and using the capabilities of the supply base to complement and supplement its own capabilities and, in turn, create more value for the customer and for the company itself.
The role of sourcing has shifted from great leader to participant in the development and execution of the VFS strategy. Obviously the supply offer could not create and lead every effort, but it must play an “appropriate” and influential role based on the situation.
However, many companies remain stuck in an outdated approach to value creation, considering it to be backward and limited. In doing so, they optimize short-term financial performance in a bubble, ignoring the most important customer needs and other larger factors that determine their long-term success. Factors such as investment in collection technology, data processing and business ethics.
This approach, however, is no longer sufficient in the contemporary world. There is a growing search among managers for the need to respect and implement codes of ethics, compliance policies and total transparency.
It is undeniable that a proper ethical posture can result in great competitive advantages in the long term. After all, improving the performance of a company’s employees, combined with a positive image of the company in its community and increased customer satisfaction can be the determining factors for the sustainable success of an organization in the market.
To achieve value-focused supply strategy management, an organization must go beyond the traditional supply approach, which is driven by negotiations between buyer and seller, in which the buyer has a limited number of sellers, hoping to get the price, the preferred quality and on-time delivery.
The Soluparts team is on hand to help you transition from a traditional sourcing approach to a more strategic and more value chain.
We choose the best suppliers around the world for any replacement part, offering the best prices and lead times and other benefits. Contact us.