McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 1 Foundations of Value

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 2 Module Objectives Identify and understand value and its various elements including quality, timeliness, and total cost Understand the basic value-adding functions a firm can provide Explain the differences between value through execution and value through design Understand the relationship of value to waste Understand the meaning of the value chain and its various components

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 3 Value Value is defined as: the customer’s subjective evaluation, adjusted for cost, of how well a product meets or exceeds his or her expectations.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 4 Sources of Value Value is delivered by firms that possess key capabilities. These capabilities derive from knowledge and other assets Processes and their managers People skills, motivation, creativity Technology and systems Organizational relationships Company values and norms

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 5 Basic Example Type Technology of Value-added What is changed or exchanged in the value process Tangible ItemInformationCustomer Transformation Changes in physical form or orientation Changes in physical location Changes in time and availability Changes in status, experience, and/or knowledge Problem Solving Technical support Decision support and consulting Mediation/ Networking Pooling of risks or resources Enhanced communication / transactions / ownership transfer

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 6 Value Equation Customer’s evaluation of : ___Benefits___ Total Cost - where Benefits are related to product quality and timeliness

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 7 Points to make about value: Value is determined by customers using subjective and objective criteria Value is judged according to expectations and according to need Thus, “good value” for one person, at one time, may not be equally valued by another person, or by the same person at another time.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 8 Quality Product Conformance Process Information Process Support Timeliness Speed Reliability Flexibility Cost Productivity Efficiency Quality Design Specifications Product Information Marketing Communications Timeliness Delivery Specifications Development Speed Development Reliability Cost Pricing Development Productivity Sales Productivity Total Quality- Related Benefits Total Time- Related Benefits Total Cost = EXECUTIONDESIGNVALUE +

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 9 Fundamental Value-adding Interfaces Execution Activities R&D - Marketing Interface Operations Marketing Interface R&D - Operations Interface Customer Expectations Value Design Activities Value Imperative

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 10 Defining Product Quality Quality – how fit a product is for customer use. This includes how well the designed functionality and performance of the entire product consumption experience meets the customer’s specific needs and expectations, and how well the actual functionality and performance of the product matches its design specifications.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 11 Dimensions of Product Quality Performance Features Reliability Conformance Durability Support Aesthetics Perceived quality (image)

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 12 Defining Product Timeliness Timeliness – availability of the product. This describes the degree to which a product is delivered where the customer needs it exactly when the customer needs it, not before or after the customer needs it. Includes aspects of speed and reliability

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 13 Lead Time Categories Product design and development lead time Order lead time Procurement lead time Production lead time (throughput time) Delivery lead time

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 14 Market Orientations Engineer to order (ETO) Make to order (MTO) Assemble to order (ATO) Make to stock (MTS)

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 15 Market Orientation and Customer Experienced Lead Time

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 16 Defining Total Product Cost Total Cost – the sum of all costs incurred by the customer during the consumption experience. This includes all costs associated with the product, beginning with its acquisition and including its use, maintenance and disposal.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 17 Dimensions of Total Cost Acquisition costs Repair costs Maintenance costs Operating costs Salvage/resale costs Disposal costs

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 18 Defining Flexibility Ability of a system to respond to changes with little cost or time penalty. Changes in: –What is demanded or supplied –When it is demanded or supplied –How much is demanded or supplied

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 19 Dimensions of Flexibility Range Mobility Uniformity or performance

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 20 Basic Activities in the Value Chain SourceMakeDeliver Product, Service, and Process Design Marketing Communications Financial Management and Accounting Human Resource Management Information Systems Management Planning and Relationship Management Flows of products, information, money, resources, and knowledge Support Activities Customer Relationship Management Supplier Relationship Management

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 21 Physical Value Chain for a Manufactured Product Design & Development Distribution Finished Goods Manufacturing Materials Supply Components Supply WarehousingRetailing After-Sales Support Service Centers CUSTOMERSCUSTOMERS Promotion & Sales Flows of material, information, money, and knowledge RAWMATLSRAWMATLS