Success of value chains: Lessons from ASEAN

The concept of 'Value Chain' was first introduced by Michael E. Porter of Harvard Business School. Porter, who also developed the 'Five Forces Model' that enabled many businesses and companies to figure out how well they can compete in the current marketplace, first discussed the value chain concept in his book 'Competitive Advantage: Creating and Sustaining Superior Performance'.
It relates to interlinked value-adding activities that convert inputs into outputs, which, in turn, add to the bottom line of a company and help create competitive advantage for its products. A value chain typically consists of inbound logistics, manufacturing operations, outbound logistics, marketing operations, and after-sales services. These activities are supported by procurement, research and development, human resource development and corporate infrastructure development.
The most important tool for an enterprise to gain an edge over its competitors is 'value chain analysis'. Value chain analysis relies on the basic economic principle of advantage. Interests of companies are best served by operating in sectors where they have a relative production advantage compared to their competitors. Simultaneously, companies should also introspect as to how they can deliver the best value to their customers.
Value chain analysis encompasses a full range of activities including design, production, marketing and distribution operations to go through to bring a product or service from its inception to delivery stage. For companies that produce goods, the value chain starts with procurement of raw materials used for manufacturing their products, and consists of everything that is added to it before they reach the consumers. Ideally, value chain analysis helps a company identify the areas that can be optimised for maximum efficiency and profitability.
The process of actually organising these activities in a manner so that they can be properly analysed, is called value chain management. The objective of value chain management is to ensure that those in charge of each stage of the value chain are communicating with each another to make sure that a product is reaching the hands of customers as seamlessly and as quickly as possible.
To conduct a value chain analysis, an entity has to begin with identification of each part of its production process and steps which can be eliminated or improvements that can be made thereon. Outsourcing of certain inputs and services should also be taken into consideration for a hassle-free and cost-effective production.
Such improvements can result in either cost savings or improved production capacity. As a result, the production cost would go down significantly and customers would derive benefit because of cheap price, which would help improve the company's bottom line in the long run.
It is critical to properly understand and implement suggestions arising out of the result of a value chain analysis. One common misconception is that every constraint identified in a value chain analysis must be addressed. According to Ruth Campbell, "Value chain analysis should be used to prioritise the most binding constraints - the ones that, if addressed, will produce the most beneficial impact - and/or those constraints that can be addressed relatively quickly and easily to create momentum for change among value chain actors."
In the manufacturing sector, there is a large number of small and medium-sized enterprises (SMEs) which provide specialty manufacturing and support services to large corporations.  SMEs form the biggest group of manufacturing entities in many newly industrialised economies. The needs and operational requirements of these SMEs are very different from those of large companies.
A lot of research has been carried out in the area of mechanisms, techniques, designs, modelling, and usage of fuzzy logic in production planning, scheduling and production control. However, most of the researches address only a particular area of the enterprise planning process.  
In addition, the majority of the large-scale Enterprise Resources Planning (ERP) systems created to cater the needs of large manufacturers are sometimes ineffective in SMEs. Organisational, structural, operational and supply chain-related interdependencies impacting planning and management of internal supply chains of SMEs in Southeast Asia region need to be emphasised.  
Similar to the deployment of management and manufacturing information systems, the need to fully comprehend the operational dynamics of SMEs is crucial for successful implementation of ERP systems to manage the internal supply chain. The deployment of ERP systems in SMEs is simpler in some aspects compared to large corporations, but can be more complicated in others.
In recent years, several big and medium-size manufacturing enterprises of ASEAN member-states, especially in - Thailand, Malaysia, Singapore and Vietnam have achieved exceptional economic growth by pursuing 'value chain' method of production management. As the markets of these countries expand and income levels rise, and as ASEAN moves towards its goal of economic integration by 2015, the role of value chain is expected to become ever more important.
For large manufacturers, in order to maintain competitive edge, it is imperative to establish supply chains based on value consideration. To this end, creation of 'industry clusters' in the vicinity of large manufacturing units has proved successful in many developed and developing countries. Renowned large and medium corporations of ASEAN member-countries bear testimony in this regard.    
In this era of liberalisation and globalisation, creation of demands depends on the ability of SMEs to improve their efficiency and productivity and to adapt to and be flexible as regards market, product, technology, management, and organisation. As the era generates larger market opportunities, individual SMEs are often unable to capture these opportunities that require (1) internal and external networks and (2) horizontal and vertical inter-firm cooperation.
SMEs in 'industry clusters' act as supply chains for outsourcing of cheaper inputs including human resources by large manufacturing units. It is not necessary that such clusters are created to benefit large industries of any particular country within its geographical boundary; rather their presence in the neighbouring countries of the region could be beneficial for all stakeholders irrespective of the industry's geographical locations as has been proved fruitful in countries of ASEAN and other regional blocs. In this regard, SAARC countries could learn from ASEAN.
However, for the purpose and in order to lift the level of total intra- SAARC trade from current dismal state of 5 per cent to at least 30 per cent, it is imperative on the part of the governments of the region to put in place appropriate policy frameworks addressing following key issues:
n Facilitating regional connectivity encompassing road, rail, water and air transportation for speedy and seamless movement of goods and services between countries of the region;
n Improvement of transportation infrastructure to match with the needs of the day;
n Improvement of infrastructure and efficiency of ports and customs stations;
n Elimination of bureaucratic hassles in the process of trade and investment;
n Establishment of regional power and energy grids;
n Stable fiscal and monetary regime and
n Seamless travel facilities for citizens    
Recent signing of an agreement on coastal shipping between Bangladesh and India during Prime Minister Narendra Modi's Dhaka visit is a good example of inter-governmental cooperation for facilitating cheaper and faster transportation of goods between the two countries. When the agreement comes into force, Indian vessels would be able to anchor in any inland river port of Bangladesh without having to be routed via Colombo or Singapore.   
Another good example is the proposed tri-national (Myanmar-Bangladesh-India) gas pipeline initiated by IBCCI member company Mohona Holdings, which, if implemented, would facilitate speedy and cost effective supply of gas to Bangladesh and India.
BASIC CONCEPT OF INDUSTRY CLUSTER: Clustering is a common economic phenomenon. The United Nations Industrial Development Organisation (UNIDO) defines a cluster as a local agglomeration of enterprises producing and selling a range of related or complementary products within a particular industrial sector or sub-sector. One example is a localised knitwear and garment industry that includes knitting firms within a small geographical area having fabric finishing, dyeing, and printing facilities. Business-friendly fiscal and monetary policies of the government are sine quo non for development of industry clusters by private entrepreneurs.
Experiences in many ASEAN and European countries show that clusters can be a powerful means to overcome the constraints and succeed in creation of more competitive market environment. Through clustering, individual enterprises can address their current problems regarding their size, production process, marketing, procurement of inputs, risks associated with demand fluctuations, and market information for improvement of their competitiveness.
Through mutual cooperation among enterprises in a cluster, entrepreneurs may take advantage of external economic factors, i.e., presence of suppliers of raw materials, components, machinery and spare parts, workers with sector specific skills; and workshops which make or service the machinery and production tools.
Also, with clustering of enterprises, it becomes easier for the government, universities, and other development supporting agencies to provide services. The services and facilities would be very costly for the providers if given to individual enterprises in dispersed locations.
The writer is Secretary and CEO, India-Bangladesh Chamber of Commerce and Industry. The article is based on a paper he presented at the South Asia Economic Conclave held in Delhi on September 28-30, 2015 and organised by the Confederation of Indian Industry, CII.
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