Value, Value Streams and Value Propositions

A recent question posed on Six Sigma IQ on value stream mapping raised an important issue for Six Sigma Black Belts, Sponsors and Champions: What are value streams, and how do you manage them? More importantly, how do you manage them in such a way as to maximize the value delivered to your customers? Conventional wisdom has it that value streams constitute the flow of products or services to customers—and that definition is OK so far as it goes. The problem lies in whose perspective it is that defines the value stream. And, all too often, that perspective is an internal one, driven by an emphasis on cost reductions and efficiencies, rather than focusing on value creation and delivery from a customer perspective.

There is certainly nothing wrong with eliminating non-value-adding costs. In fact, most executives would argue that this is precisely the right emphasis in the current economic climate. The problem arises when those cost reductions actually impede the organization’s ability to create and deliver superior value. And this is frequently the case when it is the Voice of the Business (VOB) driving the value stream analysis rather than the Voice of the Market (VOM).

What is a Value Stream?

Value streams begin with a customer need for a product or service and end when the customer has received and paid for that product or service. They consist of the interactions among your people, processes and the products or services that are designed to provide value. Of course the value received, like beauty, is in the eye of the beholder—and that’s the only perspective on the value delivered that really matters.

Most businesses have only two or three value streams from a market perspective.

Value Stream 1: Order to Delivery of a Primary Product or Service

This might be a manufactured product like an automobile or an agricultural tractor, or it might be an insurance policy or even electricity. The customer makes an inquiry (whether by phone, fax, Internet or in person). The inquiry moves through the system to the appropriate area, a credit check might be initiated, the product or service is prepped for delivery and shipped. Finally an invoice is sent and payment received.

Value Stream 2: Repair, Servicing or Changes to a Product or Service

Automobiles require repairs; computers acquire viruses; beneficiaries of an insurance policy get changed. The customer contacts the provider to request the service, the problem or situation is evaluated or diagnosed, the service is provided, the customer is invoiced and payment is made.

Value Stream 3: Parts Supply for Self-Service

Customers choose to service their own equipment but need to order parts. The order is placed, parts are picked and shipped along with an invoice, and the bill is paid.

Of course, value streams will differ from one industry to another. And some types of business—such as a nail salon, a barber or a fast food restaurant—may have only one value stream. The point is that each value stream begins and ends with the customer—and that customer is the one who pays the bills!

Value Streams and Processes

Value streams are typically comprised of many processes, but individual processes are rarely value streams in and of themselves. For example, there may be an interdepartmental transfer process, a process for IT requests or an inventory replenishment process, but none of these are value streams in and of themselves. The confusion between value streams and processes arises when managers confuse so-called "internal customers" with the only customer who matters—and that’s the one who pays the bills. We have often seen instances where an individual process was made as Lean and efficient as possible, only to have a negative impact on the effectiveness of the overall value stream in delivering value to the customer.

Value Streams and Value Propositions

Value streams have a direct impact on the organization’s competitive value propositions. Those value propositions constitute the markets’ current perspectives on the value your organization delivers versus that of competing suppliers. Your competitive value proposition is not necessarily the same as a sales proposition or a positioning statement. Rather, your organizations value proposition already exists in the collective mind of the market as a result of its experience with your value streams, and it determines who will win or lose in a dynamic marketplace. A company’s value proposition is simply the most important asset it owns because it impacts all aspects of market share—the acquisition of new customers, the retention of existing customers and the willingness of current customers to buy more or more frequently. Accordingly, this is the one asset that needs to be managed more effectively than any other. And the key to the effective management of your value proposition lies in effectively managing your value streams.

Managing Your Value Propositions Requires Managing Your Value Streams

Managing the organization’s competitive value proposition begins with understanding how the market defines value. Value is defined in terms of the trade-off between quality and price. Market reactions to price are pretty easily measured. The challenge lies in understanding how the market defines the components of quality (the CTQs), and in understanding the relative importance of each of those CTQs. The metrics of market value provide the answer to that challenge and will be the subject of future columns.

Value Stream Mapping and Market Strength

Value stream mapping is an essential tool for honing and polishing an organization’s competitive value proposition. Driven by an evaluation of the organization’s performance on important CTQs, value stream mapping identifies the way value is currently being delivered to the market and then, based on market information, improvements can be made.

Recent advances in the management of value propositions include Six Sigma Marketing (SSM). SSM features a modified DMAIC process focused on growing sales and market share. A significant aspect of SSM is that it is not limited to fixing problems (i.e., cost reductions), but includes the leveraging of advantages on important CTQs to sustain and grow both market share and profitability. This makes SSM a powerful force in transitioning from Generation 2 to Generation 3 of Six Sigma.