1. Author: Tom Macina Reviewers: Scott Bender, Peter Fisher, Cyrus Villa, Ammar Maraqa bc Value Chain March 1998 Copyright© 1998 Bain & Company, Inc.

2. bc CHI Copyright© 1998 Bain & Company, Inc. Value Chain Analysis 2valuechainValue Chain Agenda The concept Value Chain methodology Example

3. bc CHI Copyright© 1998 Bain & Company, Inc. Value Chain Analysis 3valuechainValue Chain The Concept Value chain analysis is a systematic method for disaggregating a firm or industry into its major discrete activities to understand sources of competitive advantage Value chain analysis can be used to identify opportunities to – gain cost advantage/improve performance – increase competitive differentiation Value chain analysis is an analytical tool which can help provide clarity to consultants and clients – allows distinct boundaries to be drawn across business (or industry) process – allows consultant to clearly evaluate and prioritize activities on which to focus – facilitates client understanding

4. bc CHI Copyright© 1998 Bain & Company, Inc. Value Chain Analysis 4valuechainValue Chain Generic Value Chain Successively finer disaggregations of activities are made to expose differences important to competitive advantage The generic value chain consists of six general activities. Tech., R&D Purchasing/ Inbound Logistics Manufact- uring/ Operations Marketing & Sales Distribution/ Outbound Logistics Service

5. bc CHI Copyright© 1998 Bain & Company, Inc. Value Chain Analysis 5valuechainValue Chain Common Uses Value chain analysis can be used as an analytical tool in two general situations. Value Chain Analysis as a tool for Competitive Advantage Cost Analysis/Performance Improvement Competitive Positioning RCP Re-engineering Business definition VMR/Industry collaboration Competitive differentiation Drawing business boundaries

6. bc CHI Copyright© 1998 Bain & Company, Inc. Value Chain Analysis 6valuechainValue Chain Distribu- tion/ Outbound Logistics Service Value Chain Scope The scope of the value chain depends largely on the purpose for which the tool is being used. System or Industry Value Chain: Firm Value Chain: Major Activity Value Chain: Tech., R&D Purchas- ing/ Inbound Logistics Manu- facturing/ Operations Marketing & Sales Material Preparation Conversion Final Assembly Quality Assurance Packaging Inputs (Supplier) Conversion (Manufacturer) Distribution (Distributor/ Retailer) Consumption (End-User) VMR Cost Analysis Process Re-engineering Cost Analysis Sample Use

7. bc CHI Copyright© 1998 Bain & Company, Inc. Value Chain Analysis 7valuechainValue Chain When to Use Value Chain Analysis Cost Analysis/RCP Process Re-Engineering Business Definition VMR/Industry Collaboration Competitive Positioning Map Major ActivitiesMap Sub-Activities Always Sometimes Unlikely

8. bc CHI Copyright© 1998 Bain & Company, Inc. Value Chain Analysis 8valuechainValue Chain Agenda The concept Value Chain methodology Example

9. bc CHI Copyright© 1998 Bain & Company, Inc. Value Chain Analysis 9valuechainValue Chain Value Chain Methodology (1 of 2) 1. What are the activities? 2. Which activities are most critical? 3. Which critical activities provide the most opportunity? (Where is the most leverage?) Tech., R&D Purchas- ing/ Inbound Logistics Manu- facturing/ Opera- tions Marketing & Sales Distri- bution/ Outbound Logistics Service Tech., R&D Purcha- sing/ Inbound Logistics Marketing & Sales Distri- bution/ Outbound Logistics Manu- facturing/ Operations Service ? There are three steps in doing value chain analysis.

10. bc CHI Copyright© 1998 Bain & Company, Inc. Value Chain Analysis 10valuechainValue Chain Value Chain Methodology (2 of 2) 1. What are the activities? ? Step one is determining the appropriate activities to map. Determine key steps in designing, producing, marketing, delivering and supporting a product or service Activities can be separated and grouped based on –different economics –processes using different people/equipment/technology –high or growing percentage of total cost –distinction in mind of customer Helpful methodology in mapping out activities: –product flow –order flow –paper flow

11. bc CHI Copyright© 1998 Bain & Company, Inc. Value Chain Analysis 11valuechainValue Chain Sanding/ Dusting Manu- facturing Cutting Packaging CookingFormingWrapping Bulk Containers Major Activities: Sub-Activities: Wrapping individual candies Bagging individually wrapped candies for retail sale Placing individually wrapped candies in bulk containers for delivery to retail outlets that sell loose candy Find “break points” in the process flow – cooking through sanding all one continuous line – product conveyed to wrapping line Packaging was actually separated into two activities, as there are two different product paths following wrapping – most process steps similar, however, suggesting a “packaging” grouping Bagging Drawing Activity Boundaries (Candy Co. Example)

12. bc CHI Copyright© 1998 Bain & Company, Inc. Value Chain Analysis 12valuechainValue Chain Value Chain Methodology (1 of 3) 2. Which activities are most critical? Step two is determining which activities are most critical. Cost Analysis Case Tech., R&D Purch- asing/ Inbound Logistics Manu- facturing/ Opera- tions Market- ing & Sales Distri- bution/ Outbound Logistics Service 5%35%30%15%10%5% What are cost drivers? Explanation: Percent of total cost: Allocate costs to each major activity Determine which activities account for the greatest portion of total cost

13. bc CHI Copyright© 1998 Bain & Company, Inc. Value Chain Analysis 13valuechainValue Chain Value Chain Methodology (2 of 3) Competitive Positioning Case Tech., R&D Purch- asing/ Inbound Logistics Manu- facturing/ Opera- tions Marketing & Sales Distri- bution/ Outbound Logistics Service Which criteria drive customer decisions? Customer importance scale (1=low, 7=high) Product Innovation Reliability Brand Image Speed of Delivery Responsiveness Explanation: Determine relative importance of each activity in mind of customer Determine which activities drive purchase decision Price 4.0 6.3 4.8 6.05.14.7

14. bc CHI Copyright© 1998 Bain & Company, Inc. Value Chain Analysis 14valuechainValue Chain Manu- facturing/ Operations Value Chain Methodology (3 of 3) Step three is determining which activities provide the most opportunity. 3. Which critical activities provide the most opportunity? Tech., R&D Purch- asing/ Inbound Logistics Market- ing & Sales Distribu- tion/ Outbound Logistics Manu- facturing/ Operations Cost Analysis Case Competitive Positioning Case Where is greatest relative opportunity to improve cost structure? Where is greatest relative opportunity to improve performance/create gap relative to competitors? Tech., R&D Purcha- sing/ Inbound Logistics Distribu- tion/ Outbound Logistics Market- ing & Sales Service Explanation: Determine which costs are most controllable – e.g., raw materials costs may be largely commodity Determine where largest relative performance gap lies – relative to competitors – relative to internal comparables Determine where largest relative performance gap lies – relative to customer expectations – relative to competitors

15. bc CHI Copyright© 1998 Bain & Company, Inc. Value Chain Analysis 15valuechainValue Chain Agenda The concept Value Chain methodology Example

16. bc CHI Copyright© 1998 Bain & Company, Inc. Value Chain Analysis 16valuechainValue Chain Ace Consumer Products Background: Ace Consumer Products was a weak number three in the U.S. Ketchup market Division losing money, losses accelerating Complication: Business interlinked with other operations - can't be closed or divested Question: What cost reductions can be done to restore profitability?

17. bc CHI Copyright© 1998 Bain & Company, Inc. Value Chain Analysis 17valuechainValue Chain Value Chain Methodology 1. What are the activities? 2. Which activities are most critical? 3. Which critical activities provide the most opportunity? Tech., R&D Purch- asing/ Inbound Logistics Manu- facturing/ Opera- tions Market- ing & Sales Distribu- tion/ Outbound Logistics Service Tech., R&D Purch- asing/ Inbound Logistics Market- ing & Sales Distri- bution/ Outbound Logistics Manu- facturing/ Operations Service ?

18. bc CHI Copyright© 1998 Bain & Company, Inc. Value Chain Analysis 18valuechainValue Chain Service Ketchup Value Chain Actual Value Chain Purchasing/ Inbound Logistics Manu- facturing PackagingMarketingSales Distribution/ Outbound Logistics Generic Value Chain Tech., R&D Purchasing/ Inbound Logistics Manu- facturing/ Operations Marketing & Sales Distribution Outbound Logistics In this consumer products example, R&D and service were removed as major activities, packaging was broken out separately, and marketing & sales were separated. Very little investment in product formulation –not a major activity Raw materials substantial, but largely commodity –major activity Packaging critical for consumer products –packaging broken out separately Brand building through marketing and sales force very discrete –marketing and sales separated Captive fleet distributes to customer warehouses –major activity Product support (800#) minimal and handled centrally with other product lines –not a major activity

19. bc CHI Copyright© 1998 Bain & Company, Inc. Value Chain Analysis 19valuechainValue Chain Value Chain Methodology 1. What are the activities? 2. Which activities are most critical? 3. Which critical activities provide the most opportunity? Tech., R&D Purch- asing/ Inbound Logistics Manu- facturing/ Operations Market- ing & Sales Distribu- tion/ Outbound Logistics Service Tech., R&D Purcha- sing/ Inbound Logistics Market- ing & Sales Distribu- tion/ Outbound Logistics Manu- facturing/ Operations Service ?

20. bc CHI Copyright© 1998 Bain & Company, Inc. Value Chain Analysis 20valuechainValue Chain Ace Consumer Products 100% 80% 60% 40% 20% 0% Percent of Total Other Vinegar Propylene glycol Sugar Onions Tomato Other Variable manufacturing Depreciation Mainten- ance Labor overhead Direct labor Other Labels Bottle Group administration R&D Division admin. HQ and systems Operating margin Other operating and administrative Wages Variable Fixed $0.20$0.40$0.60$0.80$1.00$1.24 Cost per Eight Ounce Bottle Price to consumer ($1.08) Raw Packaging Other Overhead Promotion Consumer Media Marketing ProfitRetailerDeals Outbound freight Period distribution Warehousing Redistribution Distribution Manufacturing Allocations Raw materials, manufacturing, packaging and marketing drive total cost. Sales

21. bc CHI Copyright© 1998 Bain & Company, Inc. Value Chain Analysis 21valuechainValue Chain Value Chain Methodology 1. What are the activities? 2. What activities are most critical 3. Which critical activities provide the most opportunity? Tech., R&D Purcha- sing/ Inbound Logistics Manu- facturing/ Operations Market- ing & Sales Distribu- tion/ Outbound Logistics Service Tech., R&D Purcha- sing/ Inbound Logistics Market- ing & Sales Distribu- tion/ Outbound Logistics Manu- facturing/ Operations Service ?

22. bc CHI Copyright© 1998 Bain & Company, Inc. Value Chain Analysis 22valuechainValue Chain Relative Cost Position - Methodology Drivers Competitive Cost Sources BAR/LNA Leemis Alumni interviews Benchmarking was critical to understanding where the largest opportunities were. Material usage OH structure Advertising Promotion Wage rates Benefit structure Productivity Reverse engineering Plant surveys Alumni interviews Client plant reports Commodity markets 63.2¢ per 8oz. Allocations Sales Marketing Distribution Packaging Manufacturing Raw $0.00 $0.10 $0.20 $0.30 $0.40 $0.50 $0.60 $0.70 Cost to Land 8oz. Bottle in Retailer Warehouse (Cents) Client product reports

23. bc CHI Copyright© 1998 Bain & Company, Inc. Value Chain Analysis 23valuechainValue Chain Cost Variance 5.5¢ 5.0¢ 18.4¢ Manufacturing turned out to be the activity with the greatest relative cost disadvantage.

24. bc CHI Copyright© 1998 Bain & Company, Inc. Value Chain Analysis 24valuechainValue Chain Ketchup 133% 120% 100% 80% 60% 40% 20% 0% 20%40%60%80% 100% = 830MM pounds Total Ketchup Capacity Product Type It was the low level of capacity utilization that created sizable manufacturing cost disadvantages. Average annual utilization 13 week Peak period utilization Average capacity 7 day 20 hours per day

25. bc CHI Copyright© 1998 Bain & Company, Inc. Value Chain Analysis 25valuechainValue Chain Consolidation Savings Consolidating from six plants to four would save $3.9MM annually. $3.9MM Consolidating two plants has on-going savings impact of $3.9MM