In business, there are certain processes that need to be done if anyone is to see any profits. One such process is implementing an effective value chain. It’s sometimes easy to confuse the value chain with the supply chain. There is a difference between the two, though seemingly subtle, but a big difference. We are going to take an in-depth look at what a value chain is and we’ll also review some similarities and mostly the differences between that and a supply chain.
Michael E. Porter’s definition of Value Chain
Simply put, a value chain is the set of input activities that a company carries out in order to create value for its valued customers. Sounds like a mouthful but it’s really simple. In order for companies to make money, they have to create a product. This often involves finding the raw material for manufacturers or just simply packaging and marketing for retailers.
What you need to ask yourself is how your company takes whatever business input it has and transforms that into outputs to be presented to its customers. The trick is doing this in such a way that the outcome of the whole process is having an output that is of higher value than the whole process of creating it.
Some examples to help clarify this include: Manufacturing companies. They take raw materials and use this to produce a product that is useful to the general population. After that, it’s the retailer’s turn. They take these products, package them in such a way that when presented to the end-user, it will create and add value to the lives but most importantly, it will be convenient for them to buy. The best example is an insurance company. They offer insurance policies to individual clients at an affordable rate. What most people don’t realize is that these insurance companies have to get insurance as well. They do so by signing much larger re-insurance policies thus ensuring that the policies their clients buy are underwritten by someone better equipped to cover the necessary charges. If an individual were to take out a re-insurance policy, the cost would be way too high. So what your insurance company has done, is taken the cost, broken it down to an affordable figure, and presented it to you in a convenient manner. That way, you get your much-needed insurance and the insurance company gets its much-needed business, everybody wins. This is the essence of creating a value chain.
How much profit a business makes is determined by the quality of the value it creates. The reason every high-end store charges considerably more for their goods and services is because they have created better value for their customers. Either that or they just simply target wealthier clients who can spend more. But with wealth comes higher standards and expectations, which means the store has to be able to provide better and more suited products to satisfy their clients’ demands and expectations. Simply put:
The value a business creates and captures
– the cost of creating and capturing that value
= their profit margin
Porter proposed a general-purpose viewpoint of the value chain. He says that the way a company creates value for its customers determines costs and thus affects profits. He said that there are several factions or elements involved in the value chain:
The Primary Elements involve the physical creation of a product, packaging, marketing, sale, and maintenance. The Support Activities on the other hand involve a process and departments that help the Primary Elements come into play. Things like the procurement office, human resources department, technical department, and the business’s infrastructure. All these factions go into play when the value chain is concerned.
The Differences Between Value Chain and Supply Chain.
In layman’s terms, a supply chain is what ensures that the products you value so much actually get to you. Some of the things we use are manufactured halfway across the world from your local convenience store. A supply chain, therefore, involves bulk storage and transportation. The major difference between a supply chain and a value chain is the simple fact that within a supply chain, there is no value-added. In a supply chain, all that is being done is a conveyance. One product or material is taken from one company or from one end and transported to the other. Of course, there are procedures involved such as proper storage and careful transportation but that is about it. In value chains, as much as there is the transportation and some storage involved, the main purpose of a value chain is to add value to the product so as to make it presentable to the client. This is often achieved via packaging, marketing, and sales.
That being said, a supply chain is as important to the business world as a value chain. Without one or the other, we would simply be mired in a logistically impossible nightmare. Supply chains are the one thing that connects the world. A product produced or manufactured on a continent you have only heard of in your Geography lessons is essential for your daily consumption. The reason you always find this product on the shelves at your convenience store is that supply chains never rest. Otherwise, you would have to wait months before you can get the product you need. That is a very simplistic way of looking at supply chains but it brings out the essence of the whole concept. That is how our world runs. The two are difficult to separate in that most of their functions overlap. Both supply and value chains need transportation and storage. The major difference as mentioned earlier is that with a supply chain, there is no need for some functions like packaging or marketing the product. At least not directly to the customer. Supply chains only market themselves to other companies. It is more a B2B function as opposed to value chains which are absolutely customer/ end-use oriented in order to give the business a better bottom line.
Our goal in working with supply chains is to find ways to increase efficiencies through accuracy and automation. This focus allows us to see a rapid ROI for our customers as well as increases the value to the end consumer in the form of excellent customer service.
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