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OM 5 Chapter 2: Value Chains
Discussion Questions
(1) Provide an example where you have compared a good or service by its value and
compared perceived benefits and price. How did your assessment of value led to a purchase (or
non-purchase) decision?
Students should easily be able to provide examples from their personal experience, such
as computers, automobiles, iPods, pizza delivery, and cell phones. This question helps
(2) What implications have the three waves of outsourcing had on the U.S. economy?
Outsourcing is the process of having suppliers provide goods and services that were
previously provided internally. Vertical integration is essentially the opposite. The three
waves of outsourcing – moving goods-producing jobs abroad, then moving simple
service work, and finally moving skilled knowledge work – has certainly improved the
(3) One study that focused on the impact of China trade on the U.S. textile industry noted that 19
U.S. textile factories were closed and 26,000 jobs lost in 2004 and 2005. If these factories had
not closed, it would have cost U.S. consumers $6 billion more in higher textile prices. Assuming
these facts are true, offer an argument for or against off-shoring U.S. jobs.
This is a difficult issue with economic, social, and political consequences. How does one
trade off the loss of domestic jobs with global economics? This question can trigger a
robust class debate, and students will most likely have strong opinions in either direction.
(4) Explain why it is important for operations managers to understand the local culture and
practices of the countries in which a firm does business. What are some of the potential
consequences if they don’t?
Culture defines the unique lifestyle for a nation or region. Since businesses locate their
factories, call centers, warehouses, and offices around the world, operations managers
(5) Explain Apple’s value proposition and why they can charge more than competitors for
similar products.
Value is perceived benefits divided by price (See Chapter 2 Section 2). Apple customers
Apple’s stock price hovers around $600 per share in early 2012. They recently
announced a large quarterly dividend and a $10 billion share buyback plan. The dividend
"We have used some of our cash to make great investments in our business through
increased research and development, acquisitions, new retail store openings, strategic
Problems and Activities
(Note: an asterisk denotes problems for which an Excel spreadsheet template on the CourseMate
Web site may be used.)
1. What is the best way to increase value the most given the information below for one customer?
Base Case: Perceived benefits = $50 and Price = $10.00
Using the equation Value = Perceived Benefits/Price we have ratios of
Base Case: Perceived benefits = $50 and Price = $10.00 Value Ratio = 5.0
Option B with a price of perceived benefit of $65 and a price of $12.50 is the best option
to maximize value. Then ask, “How do we achieve this increase in value?” Answer:
2. Describe a value chain based upon your work experience, summer job, or as a customer.
Sketch a picture of it (as best you can). List suppliers, inputs, resources, outputs,
customers, and target markets similar to Exhibits 2.1 or using the pre- and
post-production paradigm similar to Exhibit 2.3.
This is a good exercise for students to apply the ideas to an organization with which they
are familiar. Three to six major stages of the value chain are the focus here. Make sure
3. Research current articles relating to offshoring or outsourcing and focus on business,
operations, and political issues. Summarize your findings in a one- to two-page page
typed paper.
4. Research and write a short paper on companies that have recently reshored their
operations back to the United States or another host country.
A Google search reveals about 17,000 hits on the word “reshoring” including the Reshore
Initiative (www.reshorenow.org). Many articles cite the reasons for bringing work
The Bison Gear & Engineering Corp. in Chicago had workers inserted copper wires,
tested the assembly and then readied them for the next step, the addition of a gearbox.
5. Select two organizations and provide examples of their value chains
using the framework in Exhibit 2.2.
6.* Marine International manufactures an aquarium pump and is trying to decide whether to
produce the filter system in-house or sign an outsourcing contract with Bayfront
Manufacturing to make the filter system. Marine’s expertise is producing the pumps
themselves but they are considering producing the filter systems also. To establish a filter
system production area at Marine International, the fixed costs is $400,000 per year and
they estimate their variable cost of production in-house at $12.25 per filter system. If
Marine outsources the production of the filter system to Bayfront, Bayfront will charge
Marine $30 per filter system. Should Marine International outsource the production of
the filter system to Bayfront if marine sells 25,000 pumps a year?
The total cost of in-house production is $400,000 + 25,000*($12.25) = $706,250
Using Equation 2.1 we compute
If demand is greater than 22,535, then produce in-house (make)
Using the Break-Even spreadsheet template:
7.* A firm is evaluating the alternative of manufacturing a part that is currently being
outsourced from a supplier. The relevant information is provided below:
For in-house manufacturing:
a. Using this information, find the best decision if the demand is 4,000.
b. Determine the break-even quantity for which the firm would be indifferent between
manufacturing the part in-house or outsourcing it.
Using Equation 2.1 we compute
If demand is greater than 5,000, then produce in-house (manufacture)
If demand is less than or equal to 5,000, then outsource
We may also use the Break-Even spreadsheet template to identify the break-even
8.* Refer to the information provided in question 7 to answer the following:
a. If demand is forecast to be 5,500 parts, should the firm make the part in-house or
purchase it from a supplier?
b. The marketing department forecasts that the upcoming year’s demand will be
5,500 parts. A new supplier offers to make the parts for $156 each. Should the
company accept the offer?
c. What is the maximum price per part the manufacturer should be willing to pay to
the supplier if the forecast is 5,500 parts, using the information in the original
problem (Question #7).
a. If demand is greater than 5,000, then produce in-house (manufacture). In this case,
b. The marketing department forecasts that the upcoming year’s demand will be 5,500
units. A new supplier offers to make the parts for $158 each. Should the company
accept the offer? If so, how much can they save?
The new break-even point is
Whenever the anticipated demand (volume) is less than Q*, the firm should outsource
c. What is the maximum price per part the manufacturer should be willing to pay to the
supplier if the forecast is 5,500 parts using the information in the original problem
(Question #7)?
Q(VC2 - VC1) = FC or
This may also be solved using the spreadsheet template and Excel’s Goal Seek tool:
