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6.4 Net value flow analysis of a value activity

Figure 6.4 shows two value activities of the Railway company. We can generate value flow sheets for each activity to check if they each have a positive net value flow in a market scenario. This is important to make the decision whether or not to outsource the activity. There are two cases.

(1) If the net value flow of a value activity is positive, it is profitable to continue it. It may be outsourced, but then the outsourcing party must be able to do it cheaper than the internal activity does it.

(2) If the net value flow of a value activity is negative, then it is not a profit center and should be removed from the model. The cost of the activity may appear as an increased fixed expense. Alternatively, it may be moved to another actor, who may be able to perform the activity in a profitable way. The price for the activity should be lower than the fixed expenses incurred if done in-house.

To generate a value flow sheet for a value activity, we must find the valuations of the value activity. We do this by distinguishing reciprocal transfers from forwarding transfers. A reciprocal transfer is part of a transaction and connects ports with opposite roles, i.e. it connects an out-port and an in-port. A forwarding transfer connects ports with the same role.

The interface of a value activity may be connected by a forwarding transfer to the interface of a higher-level entity (a market segment, actor of higher-level value activity). In that case the interface of the value activity inherits its valuations from this higher-level entity.

Alternatively, the interface of a value activity may be connected by a reciprocal transfer to the interface of another value activity. In that case the valuation must be specified as discussed above for actor interfaces. An example will make this clear.

In figure 6.4, the Transporting activity is connected by forwarding transfers to the interface of the Railway company. It inherits its valuations from those of the Railway company. So the Transporting activity receives f200 for providing a Train trip.

Transporting is connected to Catering by reciprocal transfers. So it pays f5 for Food to the Catering activity.

Transporting incurs f30 variable expense for providing a Tain trip, and Catering incurs f4 for providing Food.

Tables 6.6 and 6.7 show the net value flow sheets of the activities, including fixed and variable expenses. The Travelers market segment consists of 50 000 passengers who on the average make 10 trips each for f200, so the interface of the Railway company is triggered 500 000 times and the total value flowing in is f100M. By implication, this is also the total value flowing through the corresponding interface into the Transporting activity. The variable expense to generate this inflow is 15M, so the net value flow across this activity interface is f85M.

Following the dependency path, we derive that the catering interface is triggered 500K times and the total value flowing into that activity is f2.5M. Fixed expenses are high, and the margin of f430K is rather small compared to that of transporting.

Table 6.5 shows the consolidated net value flow sheet of the Railway company. The fixed expenses in the net value flow sheet of the Railway company consist of

• the fixed expenses of the Railway company,
• the fixed expenses of all value activities, and
• the variable expenses of all value activities.

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