Optimising across the value chain

Most businesses operate in one or more parts of what is a complex value chain involving multiple other players both upstream and downstream. Over several decades there has been a global shift towards players becoming more integrated – expanding to operate in more upstream and downstream parts of the value chain – in order to extract efficiencies and synergies that are often both clearly available and material in terms of potential value impact.

However, operating across different parts of a value chain and capturing real synergies in operating across different parts of a value chain are two very different things. Internally, each area of such a business is usually, appropriately, managed as a separate business unit, since each part of the whole needs to be value creating in its own right, and efficient vs. competitors in that part of the value chain. An equipment hire business, for example, needs to be value creating and ‘stand on its own two feet’ whether it is a standalone business, or a business unit within an integrated infrastructure construction business.

Further, optimising for value within a part of the value chain is often at odds with optimising the value of the entire multidivisional integrated business. Managing this dynamic value optimisation requires periodic review of the balance of the value of the integrated strategy versus the value of the component parts. For example, a large manufacturing asset might optimise its own value by minimising SKUs, only producing products in its ‘sweet spot’ and producing those at high volume. However, that same asset in an integrated business might optimise value for the whole by producing a wider range of products to ensure the downstream business has a portfolio to service core customer needs and avoid the need for the downstream business to buy from competitors or import at a higher cost.

Most businesses today face these challenges on a daily basis. Which part of the business is in control of strategic, financial and operational decisions across points A, B and C in the value chain? Do sales to the end consumer have primacy and potentially create inefficiency through A and B? Does most cost come in at point A and therefore efficiency at A needs to drive downstream business models at B and C? Does the business at B have the strongest market position and therefore A should optimise for efficiency to B, and C should optimise to maximise pull-through? In reality, of course, truly optimising across the whole involves a myriad of key value drivers, and balancing these to make the most value creating decisions is a constant challenge – from daily operational planning all the way through to structural strategic decision making.

Mainsheet has recently been assisting clients to optimise these kinds of decisions across the value chain. In our experience, clients already sense that the business is not optimised across the whole, but lack clarity on how to identify and optimise for the most important value drivers. Business units are managed and measured individually, and generally, experts in the business are experts within one part of the value chain – and seldom experts in determining how to maximise the value of the whole.

One such client is a leading agribusiness. They operate in growing > primary processing > secondary processing > further value-adding, and they sell into a range of channels including retail, food service and export. Mainsheet was engaged to undertake a strategic review and identify key performance improvement opportunities, and one of the key findings was that the delivery of animals for primary processing – i.e. the interface between growing and primary processing – was driving downstream processing and creating significant inefficiency and customer service level issues. Changing the integrated business model, developing strong data capability and maximising economic yield throughout the end-to-end value chain is key to their strategy moving forward.

Another such client is a major player in fibre packaging. They participate in fibre sourcing > pulp & paper > corrugated packaging > distribution. Mainsheet has been involved in assessing key strategic decisions both within and across each of these business units. In this example, taking a segmented approach to customer needs (optimising right to left) and effective transfer pricing that accurately captures true economic cost (optimising left to right) have been key areas where the business has been making progress and capturing significant value.

At Mainsheet we do not claim to be experts in our clients’ businesses – our clients are! But we do claim to be experts in understanding and optimising for complex drivers of value, both at a strategic level in terms of market attractiveness and competitive position, and at an operational level to drive performance improvement.

If you would like to discuss this or any of your other strategic needs or priorities, please contact us here.