Value chain is a business model that describes the process or activities required by companies in order to add value to a product or service. It includes a range of activities required to bring a product to the customer starting from idea generation to distribution and anything in between. Here you can think of raw materials, manufacturing, operations, logistics and sales and marketing activities.
As discussed before, value chain refers to all business activities which increases the value of the finished product or service in the eyes of the customer. Where, supply chain represents the activities required to procure, produce and deliver the final product or service to the customer.
The value chain tends to be traced in the opposite direction to the supply chain. That is, from the customer back through the supply chain activities (distribution, storage, production and procurement of raw material). The value chain also includes activities which are not associated with typical supply chain. For instance: product development, marketing and after sales service.
Often people relate supply chain to value chain. This is because supply chain activities such as inbound logistics, manufacturing/production and outbound logistics, offers many direct opportunities to add value for customers.
More importantly, a successful value chain is dependent on how well supply chain activities are carried out. Below example explains how basic value offered by traditional supply chain can have added value by performing value chain.
Value chain increases the efficiency of the business so that customers can receive the product with most value added at lowest possible cost. The end goal of value chain management (VCM) is to create a competitive advantage for the company by increasing the overall margin.
Nonetheless, value chain management brings various benefits. These include improved flow of materials and products, reducing waste in the supply chain process, seamless flow of information and enhancing the overall customer experience.
Value chain analysis (VCA) is a continuous process of identifying and evaluating the primary and supporting activities required to add value at each step the product flows to create value for customers. The purpose of VCA is to deliver maximum value at least possible cost by increasing the overall efficiency.
Porter laid down the concept of value chain by splitting the value chain analysis into two activities that is primary and secondary. These are further divided into five primary and four supporting activities.
The five primary activities of Porter’s value chain are inbound logistics, operations, outbound logistics, marketing and sales, and service. The purpose of these activities is to create value that exceeds the cost of creating this value, therefore generating higher profit margins.
Whereas, the value chain supporting activities are there to support primary activities in order to achieve its competitive advantage. The four main areas of supporting activities are: procurement, technology development (including R&D), human resource management, and infrastructure (systems for planning, finance, quality, information management etc.). The picture below provides more detail about Porter’s value chain.
Our business simulation, The Fresh Connection, has a clear focus on the value chain and the flow of materials from upstream suppliers to downstream customers. The decisions to be made are split into the clear functional areas of sales, purchasing, production and supply chain. With a different team member responsible for each area, the experience gets very close to real corporate life, in which a functional split of responsibilities is the norm, rather than the exception. Besides our business simulation games, you can read more on subjects such as supply chain management, supply chain risk management or trade-offs in end-to-end supply chain management.