Value Chains

Introduction to Value Chains

A value chain is a series of consecutive steps to create a product. These steps are performed by different companies, starting from raw materials all the way up to the consumer of the final product. Each company adds value to the product by combining, transforming, assembling, and upgrading from raw materials to semi-finished to finished goods in such a way that it is cost effective and meets or exceeds agreed quality standards.

Value chain management is the centralized control and cooperation over the complete supply chain to deliver the agreed value by sharing information across the different companies, react quickly to events that might disturb the supply chain and reduce costs and wastage.

You might ask: what is the difference between a value chain and a supply chain?

Picture: Supply Chain versus Value Chain

A supply chain comprises all the necessary steps to create and deliver a product to a customer. From sourcing to manufacturing to logistics, all steps are needed to create the product and deliver it to the consumer. A value chain is a business management perspective where it looks for opportunities to add value for the business and the customer. It considers the same activities as for the supply chain, but the value chain looks closer at the value added per activity and for opportunities where it can be increased. Think of less waste, less energy consumption in the operations activity, and better service for the customer.

Porter’s Value Chain is Outdated

The pioneer of the value chain is Michael Porter, who coined the term value chain in 1985 in his book ‘Competitive Advantage: Creating and Sustaining Superior Performance‘. The picture that many of us will recognize is accepted as the default for the value chain.

Picture: Michael Porter’s Value Chain (source: Inchainge)

This picture consists of two main parts:

• Primary activities: activities that directly add value to the product, like operations and marketing & sales
• Support activities: activities that indirectly add value to the product, like HR and IT

The flow of the goods is from left to right, each step adding more value to the product in the end resulting in a sale by the consumer and leaving a margin for the company to invest. But this value chain overview is outdated and needs revision. Our main criticism is that this model is inward-looking, consisting of the activities for the production organization. It does not consider the suppliers or even the suppliers of your suppliers (downstream) as well as added activities upstream, like the customer of your customer. This view is too narrow and needs expansion.

Why a new definition of Value Chain is needed

Looking at a part of your supply chain from a value chain perspective was enough in the old days, but times have changed. From an inside-out perspective we need to shift to a more outside-in perspective. This outside-in perspective is much needed due to:

• Globalization (much easier to connect between global suppliers & customers)
• Competition is not between companies, but between value chains
• The need to respond to external events in an agile/ resilient way
• Creating a competitive advantage by creating a value chain based on cooperation
• Way to become more relevant by increase value for the customer
• Maximize efficiency and value, minimize costs
• Speed of operation
• Making the shift from optimizing your own supply chain (inside-out) to value chain optimization (outside-in)

We need to broaden the horizon of the value chain to keep adding value, to become more resilient, to increase the value for the consumer, to beat the competition. The value chain could be something like the below picture.

Picture: The new value chain (source: Planadigm)

As you can see, this version of the value chain is an extended version of the one Michael Porter promoted. It considers the suppliers of your suppliers and the customers of your customers. To collect the benefits for this value chain, it is especially important that all parties involved act according to the same vision, the same strategy. A company’s strategy is not enough. Together, a value chain strategy needs to be created and adhered to. That comes with more transparency, the sharing of the required information in a timely matter. That is not an easy task, we encounter many companies that struggle with this innovative approach. Establishing trust and sharing relevant information along the value chain is a big hurdle to take…and it might take some time before that trust is established.

Conclusion

The good news is that if all parties in the value chain align and agree on the value chain strategy, the rewards will increase. Each party will benefit and take its fair share. And the most beneficial will be the consumer, the value add in the extended value chain will increase, resulting in less costs and wastage and more sales.

As mentioned above, competition is not between companies anymore, but between value chains. The better the alignment, cooperation and sharing of information across the value chain, the greater the rewards. Is it that simple? No, several hurdles need to be taken, like:

• The sharing of information
• The building of trust
• The division of the value add (who takes what part of the created value?)

Broaden the horizon, seek closer collaboration downstream, have a better understanding of the needs and requirements downstream. Align across the value chain by sharing information and increase the value. Value chains increase your competitive advantage, if implemented well.