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Supply Chain and Value Chain

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Supply Chain and Value Chain

Posted on March 2019

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​What’s the difference between the supply chain and the value chain? It’s best not to think of the two concepts as mutually exclusive. The supply chain is concrete. The value chain is more conceptual. One of them is necessary for running a business, while the other allows that business to outperform its competitors.

The supply chain comprises every step a business takes to turn raw materials into a product, and deliver that product to the customer. The value chain, on the other hand, is a lens businesses can use to look at their supply chain from a wider perspective in order to gain a competitive advantage over their industry peers. The value chain analyses every link in the chain and adds value wherever it can be applied.

The concepts of supply chain and value chain work in tandem to cut costs, satisfy customers, and increase profits. When value chain thinking is appropriately integrated into the supply chain, the business wins and the customer wins.

Today’s businesses are increasingly incorporating value chain knowledge to their existing infrastructures. The value chain doesn’t replace the supply chain. It simply works within the supply chain to identify key places where the business can add value for the costumer, and gain a competitive advantage.

The supply chain encompasses every step a product takes before reaching its destination. Raw material, procurement, production, storage, wholesaling, distribution, retail, and – finally – the customer are all links in the supply chain.

The value chain, on the other hand, flows in the opposite direction: from the customer to the producer. The value chain identifies places in the supply chain where value can be added to each step. In essence, the supply chain seeks to cut costs and improve efficiency, whereas the value chain seeks to add value to the existing framework.

How does the supply chain work?

The supply chain starts with turning raw material into a product and ends when that product reaches its destination – the customer. Every step between those two points, including manufacturing, storage, transport, sale, and customer service, comprises a link in the supply chain.

The supply chain also includes everything that goes into receiving and fulfilling the customer’s request. So, really everything a business does is inexorably tied to their supply chain. Innovation, marketing, and research & development are effectively parts of the supply chain, too. The supply chain creates links between all the partners involved, including, suppliers, manufacturers, wholesalers, distributors, retailers, and the customer.

Every team in a company – product development, sales and marketing, management, distribution, finance, and customer service – is in some way involved in the supply chain.

Supply chain management

Supply chain management is the process that controls the operations of the links in the supply chain and ensures their effective coordination.

Supply chain management is a crucial process requiring a lot of knowledge and skill. Supply chain managers coordinate the logistics of procurement, manufacturing and transportation, and all their associated costs and contingencies. Their main goal is reducing the cost of procuring materials and ensuring efficiency in logistics, manufacturing, transportation, storage and delivery.

Successful supply chain managers increase profits for manufacturers and reduce costs for consumers, all while maintaining the quality of the product.

What’s the value chain?

The value chain functions along the same sequence as the supply chain, but instead of dealing with the product itself, it focuses on adding value at each step to gain a competitive advantage over industry peers. One way to look at it is to think of the value chain running in the opposite direction of the supply chain. Instead of flowing from the factory to the customer, it originates from the customer and moves back up through the chain, adding value to each link.

The idea of a value chain was first coined by American academic Michael Porter in his 1985 book “Competitive Advantage: Creating and Sustaining Superior Performance.” Porter argued that companies which analyse the value added to each activity they perform can gain an advantage over industry competitors.

Porter breaks the value chain down into five steps:

  • Inbound logistics: receiving, inventory management, and sourcing

  • Operations: the transformation of materials into products, i.e. assembly and/or manufacturing

  • Outbound logistics: getting the product to the costumer, including shipping, packaging, and delivery

  • Sales and marketing: convincing customers to buy the product.

  • Support and service: maintaining and enhancing the product’s value, with added services like customer support and warranties

These are essentially the same steps as the supply chain, but at every step, value chain thinking injects extra benefits. For instance, at the procurement stage, the raw material supplier can be convinced to do inventory on behalf of the manufacturer. At the production stage, quality control, additional features and customisation can be added. At the outbound logistics stage, removal of the customer’s old product can be provided upon delivery of the new one. At every step, new value is added.

Value chain management

Streamlining and improving any one of the five steps in the value chain can lead to a competitive advantage over industry rivals. Value chain managers emphasise marketing, product testing, innovation, and research & development.

At every step, value chain managers seek to increase value for the customer and increase the company’s competitive advantage in the marketplace.

Two chains

Every business has a supply chain and supply chain managers. But the most successful supply chain managers of today don’t limit their thinking to just the supply chain. They extend their line of sight and consider the opportunities hidden within the value chain.

Successful supply chain managers cut costs, streamline production, and effectively coordinate every step that turns raw materials into a product and delivers that product to the customer. The best supply chain managers also analyse every link in the supply chain and inject value wherever they can.

Constant consideration of the value chain results in the strengthening of the supply chain. When value chain thinking is appropriately integrated into the supply chain, the business wins and the customer wins.