Global Value Chain Explained

• Global Value Chain explained.

Global Value Chain

• A global value chain (GVC) involves the full range of activities required to bring a product or service from conception to delivery.
• This includes design, production, distribution, and support.
• Companies optimize operations by outsourcing or offshoring tasks to specialized firms in different countries.
• This strategy leverages cost efficiencies, technological expertise, and resource availability in different locations.

Supply Chain

• The supply chain encompasses the flow of raw materials, components, and finished goods from suppliers to manufacturers and, ultimately, to consumers.

Value Chain vs. Supply Chain

• Global Value Chain scope covers the entire lifecycle of a product or service, including R&D, branding, customer support and disposal/recycling.
• Supply chain scope is narrower, mainly concerning sourcing, production, and distribution.
• GVC includes intangible activities like innovation, marketing and knowledge transfer.
• Supply chain primarily involves physical processes, like procurement, manufacturing, transportation, and warehousing.
• A GVC geographically emphasizes cross-border collaboration and the geographical dispersion of different production stages.
• A supply Chain can be local or global, focusing on logistics and operational efficiency
• GVC objective is maximizing value creation across different functions of a business.
• Supply Chain objective is ensuring efficient material flow and cost-effective logistics.

Supply Chain Definition

• The supply chain is a sequence of events in a goods flow that adds value to that good.
• These events include conversion, assembling/disassembling, movements and placements.
• A global supply chain crosses international boundaries.
• It links the producer/manufacturer/supplier with the distributor/consumer, involving a dedicated service.

Value Chain Activities

• Primary activities include inbound and outbound logistics, operations, marketing, sales, and after-sales services.
• Secondary activities include infrastructure, human resources management, technological development, and procurement.

History of Global Value Chain (1783-1929)

• Early developments involved hot air balloons and kites in China; notably, the Kongming lantern, a proto hot air balloon.
• In 1783, Jean-Francois Pilatre de Rozier and Francois Laurent d'Arlandes made the first acknowledged human flight in Paris using a hot air balloon invented by the Montgolfier brothers, traveling 5 miles.
• Sir George Cayley initiated the first rigorous study on the physics of flight in the late 18th century.
• Otto Lilienthal made over 2,500 flights and produced a series of good gliders by 1896 death.
• In 1903, the Wright brothers had the first sustained flight with a powered controlled aircraft

Political Development (1929-1944)

• Aircraft evolved from primarily wood and canvas structures to almost entirely aluminum construction.
• Engine development advanced to rotary and radial air-cooled engines, increasing propulsive power.
• Development of the jet engine started in Germany and England in the 1930s.
• World War II sped up aircraft development and production.
• The Chicago Convention on International Civil Aviation was reached in 1944.

Development of Quality and Cost (1945–1973)

• Post-World War II, heavy bomber airframes like the B-29 and Lancaster were converted into commercial aircraft.
• Many airlines and flight routes emerged in North America, Europe, and other parts of the world.
• In September 1949, the Avro C102 Jetliner, was the first North American commercial jet airliner.
• By 1952, the British state airline BOAC had introduced the De Havilland Comet into scheduled service.
• Aeroflot was the first airline to operate sustained regular jet services with the Tupolev Tu-104 in September 1956.
• After World War II Chuck Yeager flew past the speed of sound in the Bell X-1 in 1947.
• In 1961, Yuri Gagarin became the first person orbit the planet in 108 minutes.
• In 1969 there was the landing of men on the moon by Neil Armstrong.
• The X-15 set the air speed record for an aircraft at 4,534 mph (Mach 6.1) in 1967.

Characteristics of Global Value Chain

• Production stages take place in multiple countries geographically.
• Companies outsource to lower costs, gain expertise, and access resources.
• Boeing aircraft example: parts come from the USA, France, Japan, and the UK
• China specializes in manufacturing, Germany in engineering, and India in IT services.

Multi-Tier Supplier Networks :

• Tier 1 being Direct Suppliers (engine manufacturers for aircraft).
• Tier 2 Indirect Suppliers (electronics, specialized materials).
• Raw Material Suppliers metals and composites).
• Strong coordination is required among manufacturers, suppliers, and logistics providers.
• Companies now use digital tools, Al, and IoT for real-time monitoring and efficiency.
• Airbus uses digital twins and blockchain for supply chain transparency.
• Large corporations control and orchestrate the value chain.
• They set standards, negotiate prices, and manage risks.
• Example: Apple (USA) and Samsung (South Korea) dictate terms for suppliers in the electronics GVC.

Regulation and Compliance

• GVCs must comply with international laws, trade policies, and industry standards.
• Compliance includes safety regulations (FAA, EASA for aerospace), labor laws, and environmental policies.
• Vulnerable to global shocks, including pandemics, geopolitical conflicts, and natural disasters.
• Sustainability and ESG Compliance has an increasing focus on green supply chains and reducing carbon footprints.
• Emissions are tracked, circular economy practices are being used and labor conditions are being improved.
• Companies invest in sustainable battery production for electric vehicles.

High Level of Interdependence

• No single country can produce everything independently in today's economy
• Taiwan (TSMC), the USA (Nvidia, Intel), and the Netherlands (ASML) are depended on for semiconductor industry Factors driving logistics are companies striving for competitiveness and increased customer value. Complex, demanding global market environment different from familiar local domestic markets.

Global Challenges

• Supply Chain Disruptions
• Complex Supplier Networks
• Cybersecurity Threats
• Long Lead Times
• Regulatory and Trade Restrictions
• Shortage of Skilled Labor
• Fluctuating Raw Material Prices
• Environmental Regulations

Supply Chain Disruptions

• Airbus and Boeing faced bottlenecks due to COVID lockdowns, factory closures, and workforce shortages.
• Aircraft production lines stalled, delaying deliveries.

Complex Supplier Networks

• The Boeing 787 relies on global suppliers.
• Issues in coordination caused assembly delays and quality concerns.

Cybersecurity Threats

• Rolls-Royce and Airbus suffered cyberattacks in 2019.
• Security breaches targeted design and supplier data.

Long Lead Times

• Airlines experienced delays with Pratt & Whitney's GTF engines for the Airbus A320neo.
• Airlines were forced to ground aircraft due to lack of spare engines.

Regulatory and Trade Restrictions

• Export restrictions on aerospace technology resulted from the U.S.-China trade war.
• Boeing lost contracts, and Chinese airlines struggled to secure U.S.-made components.

Shortage of Skilled Labor

• Airlines worldwide faced maintenance delays due to a lack of skilled technicians and engineers.

Fluctuating Raw Material Prices

• Because of the Ukraine war titanium supplies suffered and export bans caused costlier aerospace manufacturing

Environmental Regulations

• Airlines committed to Sustainable Aviation Fuel (SAF) face limited supply and high costs.

Multiple Interconnected Elements of the Aviation Value Chain

• Ensures smooth operation in the global aviation industry.

Aviation Value can be structured into different industries

• Manufacturers produce aircrafts
• Lessors buy aircraft and lease them to airlines
• Airport ground services provide catering and baggage handling
• Airlines provide air flight services
• Computer reservation systems organize distribution
• Travel agents represent the industry to customers
• Freight forwarders provide service in the airfreight sector
• Lufthansa and British Airways are traditional airlines

Elements of the Aviation Value Chain

• Aircraft Manufacturers & Aerospace Suppliers (e.g., Boeing, Airbus, Rolls-Royce)
• Airlines (Passenger & Cargo Carriers) (e.g., Delta, Lufthansa, FedEx)
• Airports & Terminal Services (e.g., Heathrow, Dubai Airports).
• Air Navigation Service Providers (ANSPs) & Air Traffic Control (ATC) (e.g., FAA, EUROCONTROL).
• Ground Handling & MRO (Maintenance, Repair, Overhaul) (e.g., Swissport).
• Aviation Fuel Supply & Jet Fuel Distribution (e.g., Shell Aviation, Air BP).
• Aerospace & Defense Sector (e.g., Lockheed Martin, Raytheon).
• Regulatory Authorities & Industry Associations (e.g., FAA, IATA).
• Travel & Distribution (Global Distribution Systems & OTAs) (e.g., Expedia, Skyscanner).
• Aircraft Leasing Companies (e.g., AerCap, Avolon).

Airline Strategy

• Static (protecting existing market positions)
• Dynamic (market development through learning)

There are two basic strategies for air transportation Networks

• hub-and-spoke system (single-hub or multi-hub)
• point-to-point network.

Hub-and-Spoke Definition

• a concentration of air traffic through the hub.
• airlines control a high number of slots at individual airports

Point-to-Point Traffic Definition

• relies on strong and stable individual markets with less airline dependence
• low complexity

Airline Formation Limitations

• Airline industry's efforts to develop its global networked structure within the limits imposed by government regulations
• formation of airline alliances has gathered momentum to remain competitive and to gain access to a global market
• Most airlines are involved in alliance (e.g Star Alliance, Oneworld, and SkyTeam)

Pricing

• Steering Demand is a function for revenue generation and positioning
• an important strategic component
• Pricing is considered to be a core function of airlines
• prices adapted according to the reservation carve
• prices are set according to service and booking categories.

Hub Dominance

• Hub must have a minimal size and number of frequencies to be attractive and increase passenger shares.
• Dominant airlines offer the best connections making it attractive to other airlines with connecting flights

Distribution Channels

• Direct and Indirect
• Indirect off-line sales (corporate client programs, travel agencies)
• and online sales.

Competitive advantage can be achieved focusing on resources

• Protecting the brand
• Dominant position at hub airport are static approaches.
• Customer loyalty programs

Brand Image

• Elements of trust and helps to reduce customer perceived risk

Service Level

• allows for skimming a price premium and for a differentiation from competition and customer perceived barriers

Elements of customer relationship management

• customer loyalty leads to more frequent purchases, has reduced price sensitivity
• operation of reward systems.
• Frequent flyer programs [FFP] transforming monetary value into a new currency