What is the main purpose of the value chain?

A value chain describes a company as a series of processes or activities that improve a final product or service. Businesses can learn about the nature and purpose of each activity in order to identify areas where they might create a competitive advantage. In other words, it refers to a set of processes that firms in a particular industry perform to deliver a valuable product or service to the market. Here is the Value Chain definition: “A high-level model of how businesses receive raw materials as input, add value to the raw materials through various processes, and sell finished products to customers”. Porter’s Value Chain represents a system that explains how inputs are changed into outputs.

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What is Value Chain?

The value chain concept is important because it helps companies understand the different activities that they can use to create value for their customers. It also provides a framework for assessing the relative costs and benefits of different activities. Companies can make decisions about how to optimize their activities in order to create the most value for their customers. It can be divided into two main categories: primary activities and support activities. Primary activities are directly involved in the production and sale of the product or service, while support activities help to enable and improve the primary activities.

This lecture is a part of logistics certification and also the online MBA in logistics and supply chain management. The MBA program is internationally accredited, and it also leads to the PhD in supply chain management program.

Primary Activities:

Primary activities are directly involved in creating and delivering the product or service. In the case of a manufacturing company, primary activities would include activities such as research and development, production, and marketing and sales. Here are some of the primary activities:

1. INBOUND LOGISTICS:

This activity includes all of the activities necessary to receive and store raw materials. This process is related to receiving, storing, and distributing inputs.

2. OPERATIONS:

This activity transforms the raw materials into the finished product or the activities that change inputs into outputs. Here, operational systems create value.

3. OUTBOUND LOGISTICS:

This activity includes all of the activities necessary to get the finished product to the customer, including shipping, warehousing, and distribution. These activities deliver your product or service to your customer.

4. MARKETING AND SALES:

This activity is responsible for creating demand for the product and then selling it to customers. These processes are used to persuade clients to purchase from you instead of your competitors.

5. SERVICES:

This activity provides post-sales support, such as customer service and technical support. These activities are related to after-sales service.

Support Activities

They support the primary activities. Each support activity in Porter’s value chain plays a role in each primary activity. For example, procurement supports operations with certain activities, but it also supports marketing and sales with other activities. Support activities, on the other hand, provide indirect assistance to the primary activities. Examples of support activities include human resources, accounting, and information technology. Some support activities of the value chain are explained below:

1. PROCUREMENT:

This activity is responsible for purchasing the raw materials needed for production. It is what the organization does to get the resources it needs to operate. This includes finding vendors and negotiating the best prices.

2. TECHNOLOGY DEVELOPMENT:

This activity creates and improves the technology used in the production process. These development activities are related to managing and processing information.

3. HUMAN RESOURCES MANAGEMENT:

This activity manages the company’s workforce, including recruitment, training, and development. It is how well a company recruits, trains, motivates and rewards its workers.

4. INFRASTRUCTURE:

Is the company’s support systems, and the functions that allow it to maintain daily operations. For example, Accounting, legal, administrative, and general management.

Value Chain Management:

Supply chain management is defined as “the design, planning, execution, control, and monitoring of supply chain management systems with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand, and measuring performance globally.” (Globally, in this case, can mean either worldwide or applying to the chain as a whole rather than to a particular entity within the chain).

Importance of Value Chain:

It seems fairly solid when you consider the chain as linked organizations—supplier, producer, and customer connected by product, information, and payment flows. But the supply chain is more accurately viewed as a set of linked processes that take place in the extraction of materials for transformation into products (or perhaps services) for distribution to customers. Those processes are carried out by the various functional areas within the organizations that constitute the supply chain. When considered as a set of processes rather than a succession of companies, the supply chain becomes just a little more difficult to identify – let alone manage.

Value Chain Analysis:

Value chain analysis is a strategic tool used to examine the different components that make up a company’s operations in order to identify areas where the company can create additional value for its customers.

Porter’s Value Chain:

Porter’s Value Chain is a model of a company that examines the value that can be extracted from an organization’s assets. The model looks at the value that can be created by each stage of a company’s value chain, from the raw materials used to build products to the revenue generated from selling those products. Starting with the end in mind, Porter’s VC shows how each stage of a business’ VC contributes to the business value.

Value Chain Framework:

Although it is most often used in reference to operational strategy, it can also be used as a framework for identifying opportunities and challenges within an organization. Knowing where value is being created in your organization can help you spot areas where improvement is needed or opportunities for growth. This knowledge can help you make smarter decisions about investments and resources required to support future growth.

The second part of Porter’s Value Chain looks at how companies are organized along their VC and how they can benefit from focusing on a specific stage or segment of the chain.

Example:

For example, using a centralized supply chain management system can enable suppliers to ship more efficiently and reduce inventory levels, which will improve cash flow and profitability. Finally, Porter’s Value Chain addresses issues that are unique to each organization, such as hierarchical structure or processes. By understanding these issues, organizations can determine how best to adapt their structure and process to maximize performance within their particular context.

Value Chain VS Supply Chain:

Creating Value:

Supply chain management is about creating net value. Early efforts at managing chains often focused only on cost reduction – on making the chain leaner. Unfortunately, these efforts sometimes reduced the ability to create value more than they reduced costs, for a net negative effect. As we’ll see, there’s more to creating value through intelligent management than simply squeezing costs out of one or another activity in the chain.

Channel Master:

There should be value-creating activities in the supply chain that transcend the activities of particular entities in the chain. Supply chains are generally organized by one strong firm called a channel master or nucleus firm—often a manufacturer, sometimes a powerful retailer, which often manages those activities. Nevertheless, the chain has to produce value for more than one stakeholder in addition to generating value for the consumers or investors.

Challenges:

Managing supply chains requires a balancing act among competing interests. Given the complicated nature of group dynamics, this can be a challenging task, especially in “worldwide” chains. Consider the rivalries that arise among and between the 50 American states, the 25 nations in the European Union, the various sects of any world religion, and the divergent cultures around the globe.

Value Chain Examples:

A value chain is a simple way to visualize how your business creates value for its customers. It shows the activities that take place from product development to distribution. When you first begin a business, it can be difficult to determine if your product is truly viable. Along the way, it’s important to learn how to identify and measure success. By understanding the value chain of your business, you can identify key metrics that can help you gauge how successful your product is.

When you start with the raw materials, you can see how those materials travel through the value chain until they reach your customers. The value chain starts with raw materials like wood, oil, and steel. Raw materials are then refined into products like oil and steel. These products are then shipped to stores or warehouses where they are sold to customers. When a company uses a value chain model, it can visualize how it creates value for its customers.

Example of Fashion Company:

In this example, we’re using a hypothetical fashion company that makes high-end clothing for women. To start, the company must choose a product category and determine the types of customers it wants to attract. Next, they need to figure out what production process works best for their particular product line. Once these factors are identified, you can begin building your value chain by identifying suppliers and distribution channels. By monitoring these metrics regularly, you can ensure that you’re on track to meet your goals.

Example of an Oil Company:

An oil company could use a value chain model to show where it gets raw materials, how it processes them into products like gasoline, and where these products are sold. By understanding the whole process, a company can better identify and prioritize problems that may be slowing down its operations.

The figures mentioned below show a flow chart of the supply chain management system or process.

Value Chain Mapping:

Although many would assume that a supply chain is, in fact, a VC at least it is if well managed — others may draw a distinction between the two. It is a string of collaborating players who work together to satisfy market demands for specific products or services. The VC is made up of “the functions within a company that add value to the goods or services that the organization Bells to customers and for which it receives payment.”

VC integrates a variety of supply chain activities throughout the product/service life cycle, from the determination of customer, needs through product/service development, production/operations, and distribution. The intent of a value chain is to increase the value of a product or service as it passes through stages of development and distribution before reaching the end user.

Value Chain Role in Supply Chain:

Not all VC activities are technically part of the supply chain, and those engaged in them may not understand their role in supporting the supply chain. Those activities might include engineering, marketing, finance, accounting, information technology, human resources, and legal. For example, managers from outside the supply chain often don’t understand the requirements of supply chain management, can’t distinguish it from a supply chain with or without SCOR, and consequently don’t provide the SCM support required from their areas.

Value Stream:

Two closely related terms are value stream and value stream mapping.

What is Value Stream?

A value stream is a process of creating, producing, and delivering a good or service to the market. For a good, the value stream encompasses the raw material supplier, the manufacture and assembly of the good, and the distribution network. For a service, the value stream consists of suppliers, support personnel and technology, the service “producer,” and the distribution channel. The value stream may be controlled by a single business or a network of several businesses.

A value stream encompasses all the primary actions required to bring a product or service from concept to placing it in the hands of the end user. It also includes timing. Mapping the stream aids in process improvement.

Summary:

The value chain is a concept from business management that was first described by Michael Porter in his 1985 book, Competitive Advantage: Creating and Sustaining Superior Performance. A value chain is a tool for analyzing how businesses create value for themselves and for their customers. It is a way of thinking about all of the activities that a business undertakes in order to produce a product or service, from start to finish.

The value chain includes all of the activities that are necessary to bring a product or service from conception to delivery, including research and development, production, marketing, sales, and customer service. The idea behind the value chain is that businesses can create more value by understanding all of the steps involved in creating a product or service, and by finding ways to improve those steps.

Porter’s value chain is a framework that can be used to help businesses understand their own activities, and find ways to create more value. The value chain is not a static concept; it is constantly evolving as businesses find new ways to create value for themselves and for their customers.

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