Computation Of Closing Stock Of Finished Goods And WIP | What Is Value Chain? Essay.

Part 2

What Is Value Chain?

A series of activities that creates and adds value to the business at every step of activity is known as Value Chain. The sum total value created in the business is the total value which can be delivered to the company. It is a set of interlinked activities which adds values by converting the inputs into outputs by giving the company a competitive advantage.

A value chain consists of the following:

• Manufacturing operations
• Logistics (inbound and outbound) and distributions
• Selling and marketing
• After sales services
• Purchases and procurement
• Research and development
• Corporate infrastructure

The advantage and significance of value chain is to distinguish the useful activities from the waste activities. A company should focus on the value chains and gain advantage from it. The overall goal f a value chain service is to provide maximum value at the least possible cost and as a result providing a competitive edge to the organization. It breaks the organizations’ flow of production into various categories. Each category focuses on maximization of efficiency. The aim of any organization is maximization of profits and value chain helps in the same.

Value chain is made up of two types of activities that is primary and support activities. Primary activities covers inbound logistics, operations, outbound logistics, marketing and sales, and after sales services.  On the other hand support services cover corporate infrastructure, human resources, technology and quality.

Inbound logistics involves the getting of materials for the processing to add value to it. Operations mean the processing and manufacturing of the materials. Outbound logistics involve the distributions to the location where the product will be sold. Marketing and sales mean selling, branding and promoting of the goods. Lastly, after sales services involves the selling of the products to maintain the functionality.

The support functions are all the auxiliary functions which help in the functioning of the primary activities. Corporate infrastructure helps in the management and monitoring of the business environment. Human resources are the most vital part of any organization and through their skills a company can develop and create better value chains.

How Value Chain Is Used To Estimate Costs?

Value chain analysis contains the estimation of costs and hence providing a cost advantage to the organization. The main advantage of any organization as discussed earlier is to maximize the profits by reducing the costs. The reduction of costs can be done by first of all estimating the costs. The cost advantages approach is used by the organizations to compete on the costs and to understand the sources of their costs along with the factors that drive the costs.

Computation Of Closing Stock Of Finished Goods

The steps to be taken by the company to gain cost advantages are the following:

1. Identification Of The Primary Activities And Support Activities:

All the activities of the organization need to be identified and separated from one another. The value chain is not organized in the same way as the company hence this leads to the requirement of proper and adequate knowledge of the operations of the company. The management needs to take into account how the activities are classified and also how the work is performed to deliver value to the customers.

2. Establishment Of Relative Importance Of Each Identified Activity In The Total Cost Of The Product:

The total costs for a product is bifurcated and assigned to each category of activity. The calculation of cost for each process is done using the technique of Activity based Costing. The activities which are major sources for the costs needs o be identified first. Along with this, the activities which are conducted in an inefficient manner should also be identified in a priority.

3. Identification Of Cost Drivers For The Company:

The management needs to understand the factors for driving the costs and the methods of improving them. For example, for a labour intensive activity the cost driver will be hours worked, or wage rate depending upon the organization. The different types of activities have different types of cost drivers.

4. Creation And Identification Of Links Between The Activities

All the activities in an organization are interlinked to each other. The reduction of costs on one activity can lead to the reduction of cost in the other due to the link amongst the various activities. The management must therefore identify the link between the activities and thus this will help in a better understanding as to how to carry out the cost improvements that affects the value chain in a company. On the contrary, a cost reduction in one activity may also lead to an cost increment in other activities which should also be taken into account.

5. Identification Of Opportunities For The Reduction Of Costs

The last step after identification of activities and cot drivers is the plan on the improvement of the costs. The aim of the company is to reduce the costs and maximize the profits. Hence steps must be taken towards the same.

What Are The Segments Of The Value Chain?

The value chain must be created for the business unit as a whole and not for a particular division or for a particulars corporate level. The finished goods are created by processing the raw material through a chain of activities and at each chain of activity there is value addition to the raw material. The value chain in a firm contains the stream of activities that flow in the business organization and this is known as Value System by Porter. The value system starts with the supply of inputs which is necessary to create the finished product. The finished products are then sent to the distributors so that it reaches the consumers. A firm must take note of every component of a value chain system so as to achieve and sustain in a competitive environment.

Computation Of Closing Stock Of WIP

The various segments of the value chain are the following:

1. Primary Activities

1. Inbound Logistics:

The movement of raw materials, parts, finished goods etc to the various departments of the firm from its suppliers is known as inbound logistics.

1. Operations:

The process of converting the input which is available in form of raw materials, labors, overheads, power, fuel,  and energy into outputs which form of goods and services is known as Operations.

1. Outbound Logistics:

The process of storage and distribution of final goods after the completion of production to the end consumers is known as outbound logistics.

1. Marketing and Sales:

The process of selling of a finished good or service along with creation, delivery, communication, and providing offers which provide value for customers and the society as a whole is known as marketing and sales.

1. After sales Services:

The services provided by the firm even after the product is sold to keep the product working in a good condition and also to maintain a proper customer relationship is known as after sales services.

2. Support Activities

1. Corporate Infrastructure:

It consists of various activities in a corporate environment namely finance, accounts, legal, strategic management, quality assurance etc.

1. Technological Developments:

The technical knowledge that is used to transform the inputs into the output is known as the technological developments.

1. Human Resource Management:

Human Resource Management consists of recruiting, training, dismissing, hiring or developing of personnel in an organization.

1. Procurement:

The term procurement means the process of acquiring of goods and services from an external source.

What Is The Purpose Of Value Chain In An Organization?

The main purpose of creating a value chain is to perform all the activities of the organization in an efficient manner and at the lowest possible costs. The focus is to provide maximum consumer satisfaction. Value chain is applicable to all raw materials, finished goods and even work in progress. It helps to identify the link between the various segments in an organization. It helps the managers of the organization to understand and identify the cost and other management problems.

We are trying to understand the creation, implementation and the purpose of value chain by taking up the example of Apple Inc.

The value chain analysis of Apple Inc consists of the various defined segments of a value chain.

Apple Inc uses its inbound logistics to purchase goods from the suppliers. Goods are purchased from a limited number of suppliers from US, China, Europe and other Asian Countries. The goods so purchased are then processed and assembled in China. The warehousing is done via Fedex and/or UPS. Then the goods are distributed to the consumers through online stores, retail stores, and direct sales and through wholesalers. Lastly, after sales services are provided in form of warranty, return, recycle or reuse programs. Thus, by the maintenance of value chain Apple Inc is able to maintain its quality and provide the best consumer satisfaction.

References

Production Cost: Formula. Website. Retrieved from

https://www.readyratios.com/reference/accounting/production_cost.html

Cost Sheet: Format. Website. Retrieved from

https://download.nos.org/srsec320newE/320EL29a.pdf

Value Chain analysis: Apple inc. Website. Retrieved from

https://research-methodology.net/apple-value-chain-analysis/

Value Chain: meaning. Website. Retrieved from

https://www.civilserviceindia.com/subject/Management/notes/concept-of-value-chain.html

Value Chain: Segments. Website. Retrieved from

https://en.wikipedia.org/wiki/Value_chain

Value Chain: Segments. Website. Retrieved from

https://ashridgeonoperatingmodels.com/2016/02/02/how-to-segment-for-value-chain-analysis/

Value Chain: Importance. Website. Retrieved from

https://www.supplychainopz.com/2013/06/what-is-value-chain-analysis.html

Value Chain: All about value chain. Website. Retrieved from

https://maaw.info/ArticleSummaries/ArtSumDonelanKaplan98.htm

Value Chain: Definition. Website. Retrieved from

https://economictimes.indiatimes.com/definition/value-chain

Value Chain: Segments. Website. Retrieved from

https://www.mindtools.com/pages/article/newSTR_66.htm