VALUE-DRIVING POCKETSEvery business has select activities that are highly productive and fulfilling. These value-driving pockets are often only discoverable when mapped in their business value chain. These activities can become “levers of value” that drive customers’ willingness to pay for the products or services. Not all customers perceive value and price for a product or service in the same way. In my experience over the years, whether with clients in agribusiness, pharma, information technology-enabled services, or elsewhere, each customer’s price is aligned to his or her expected outcome of the purchase. Similarly, some activities motivate suppliers to sell their products and services to the company and thus strengthen interdependencies for the benefit of all stakeholders.
A PRACTICAL APPROACHBefore implementing VSM, it’s key to ask a few essential questions. How does your small business get data from external sources up and down the value streams? What benchmarks do you use to identify the hidden opportunities and areas for improvement? What is your organization’s ability to analyze the data—insights to look for, benchmarks to compare with, and what success looks like. And finally, what is the organization’s ability to collaborate with third-party stakeholders up and down the supply chain? Once the small business leadership has a handle on these integral issues, you can begin the VSM process. Step 1. Calculate the profit margin for each segment through transaction-level profit analytics. The profit and loss (P&L) statement is the landscape for this analysis. Companies can create an all-in P&L for every sales invoice and quickly examine each customer and product segment. Step 2. Conduct a deep dive into the segment data. Why is a particular segment high or low in terms of profit drains? VSM provides actionable insights on customers’ willingness to pay and creates real opportunity to focus on those customers who matter most to the small business bottom line. The outcome of such initiatives can include discontinuing a service to the loss-making customers or converting them to profit-generating ones. Step 3. Identify the specific activities and processes that are driving value up and down the value streams and recognize the opportunities for value migration. Step 4. Reallocate the available resources only to value-creating activities and continue to measure value, price, and cost.
VSM IN ACTIONA public limited paints and varnishes company identified the opportunity for value migration from point of production to point of sale by installing paint-mixing machines at a retailer’s shop to enable the end consumer to have a choice of color and blend at the time of purchase. To incentivize the painters hired by customers, the company supplied personal protective equipment and trained the painters on the retailer’s paint-mixing machines. This initiative generated savings for the company by way of increasing the ready-to-mix general paints as well as savings to the retailers in terms of reduced stock keeping units. The consumer enjoyed a choice in product, and the painter was provided with a skill-building opportunity in a scenario that still required his or her expertise for consumer satisfaction. The initiative resulted in a reduction of total transaction costs by more than five percentage points, shared by all the stakeholders in the chain. Also as a result of VSM, a small business supplying fresh fruits and vegetables to an urban retail customer modified its procurement process. The farmers began to grade produce immediately after harvest in the field into three broad categories: premium quality, average quality, and other. The premium quality produce commanded a higher price per unit ranging from 15% to 20% more than the average quality produce, and the lower- quality produce (other) had the price reduced by 5% from average quality price. The business invested in training the farmers and their crew in the field and supplied durable and easy-to-handle crates to bring the produce from the field to the company’s buying location. Supplying crates eliminated the cost of bagging at the field and unbagging at the buying location. Training enabled the farmer and crew to grade the produce as per the quality and realize a higher overall return to the farmer. This is another instance of an initiative that created value to all stakeholders in the chain: higher returns to the farmer, lower overall transaction cost to the consumer, capability building for the farmer and workers in the field, fresh and superior quality produce to consumers, and an increased willingness to pay for the produce.
BENEFITS OF VSMThe advantages of VSM for the small business are both immediate and long lasting, and can touch every part of the business. VSM provides a beginning-to-end view of business value-chain operations. It strengthens collaboration and interdependencies with suppliers, service providers, and partners up and down the value streams to reduce the total cost of the transaction to the end consumer. VSM enables innovation in new products and services, and keeps the business future-ready in the marketplace. It also helps transform business processes, often revealing underlying value drivers in the consolidated supply chain, which otherwise can be a prohibitively complex process. Management accountants have the necessary competencies to understand business dynamics and to map the activities up and down the value streams, identify the underlying drivers for value creation, track the value migration opportunities, and develop the required process to effectively manage with analysis and decision making. The process stands not only to identify appropriate processes to capture an expanded share of value created but to also develop new value streams.