Imagine yourself at an airport as you are about to go on a trip. Think about all the steps that you have to go through between entering the airport of departure and exiting the destination airport. At each stage of this elaborate process, you find yourself surrounded by numerous people, and yet the element of chaos is well-contained. The system is also fast, the degree of quickness varying by airport. The harmony and speed of this system are achieved by optimization of the value chain. In simple terms, all the individual elements of the workflow come together in a particular way. And the implication? An intricate clockwork resulting in cost-cutting and revenue maximization.
Value chain refers to the cycle raw products go through to ‘become’ finished goods. The distinct yet interrelated components of the value chain include inbound logistics, outbound logistics, operations, marketing, sales and services. The underlying thread that connects these components is synchronization. Merely trying to maximize each component without regards for the others can be fatal for the business. Instead, a cautious approach should be increasing overall efficiency by adjusting each variable while taking their sensitivity and resultant impact on the system into account.
Such adjustments may sound abstract, but they are actually executed through concrete decision variables such as how much inventory to keep, which distribution method to choose, when to collect orders etc. Each individual component is rather simple, but the synchronization aspect creates a complex system. This thinking can be applied across virtually any industry. For instance, we can consider the case of the dairy industry in Bangladesh and demonstrate how value chain synchronization can lead to better business performance by optimizing individual factors.
Fueled by economic growth and demographic shifts, the formal dairy industry of Bangladesh has maintained an annual growth rate of 25% for the last 5 years. Retention of this growth rate at the current productivity level, however, poses to be an uphill battle. The reason behind this is twofold. For starters, most dairy products naturally have very low shelf lives, so factories need to maintain a stringent value chain and ensure strict adherence to production plans. Secondly, the dairy farming industry of Bangladesh is comprised of numerous ‘cells’ concentrated in the Northwest region. This geographical confinement makes it challenging to even deliver fresh products to major markets in distant areas such as Chittagong. Value chain optimization is therefore a key to sustained growth.
The following model analyzes the dairy industry in Bangladesh particularly from the perspective of efficiency. Each individual component is measured through a series of mathematical analyses and then combined to find the resultant overall efficiency of the system. A concise version of the model is presented as follows:
We have field-tested the full-blown version of this formula during an engagement in the dairy sector. The model was able to provide fairly strong estimates on production levels and informed investments in processing equipment that could result in the optimum return on investment, given the market conditions.
While this formula is not necessarily a slim fit for every entity in the dairy value chain, the key principles still hold true. The model can serve as a working baseline for improving the dairy industry
This case demonstrates both the need for value chain optimization in this particular industry, as well as the practicality in designing a model to help improve it. From workflow in an airport to the supply chain of an agrobased venture such as a dairy firm, Multi-Component Synchronization can be adapted by any industry. And this is not a luxury, but has rather become a necessity to generate a model that can help plug leakages in the current systems and identify new growth opportunities.
This article was written in 2018.
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