The primary business objective for most companies is to increase corporate value.
The surest path to doing this? Sustained margin growth.
But, that is often much simpler said than actually done.
Which is why we are breaking down a few ways to optimize your company’s value chain to increase your margins.
1. Run a value chain analysis
Value chain analysis was first outlined in Michael Porter’s 1985 best-selling book Competitive Advantage: Creating and Sustaining Superior Performance. Porter’s value chain framework is a model by which businesses can track specific metrics and build better work processes in order to create a firm infrastructure that generates high-quality new products every time.
Since the value chain model is a combination of business activities—including primary activities and support activities—that lead to the production of a final product, a value chain analysis is the process of analyzing your value chain for opportunities to improve.
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Businesses conduct a value chain analysis when they want to understand how they can lower costs or increase product differentiation. The final result in a value chain analysis should be recommendations to optimize each phase or step of the value chain to create higher margins. Margin is an outcome of the whole value chain.
The expense side of margin has a floor; the revenue side of margin has no ceiling. This means growth is a function of market economics and company execution across the value chain.
Sustained growth is dependent on how well the company adapts and manages risk over the long term. Prioritize value chain activities that have the greatest impact on margin when conducting your value chain analysis.
You’ll find that it will likely point to customer-forward interactions that place the company closer to revenue, including:
Custom projects include responding to bids, quoting, custom engineering, and order fulfillment.
This product differentiation play drives higher margins because your business is collaborating closely with the customer and providing a very tailored solution. Plus, if the business has delivered similar solutions in the past, they'll gain efficiency from data reuse and not having to start from zero.
Case complaint management takes a customer issue on a fielded product, interrogates the problem, identifies the root cause, and resolves the problem for the specific instance where it happened—and for all potential instances before they happen.
This is a customer satisfaction play. It is key to securing current and future revenue streams from customers.
In some cases, like in medical device manufacturing, you have a bar to clear before you can even see revenue. For example, global product registration requires your quality assurance and quality control standards to comply with international regulatory requirements before you are even allowed to sell to the specific counties and the specific distributors you are targeting.
Getting a handle on table stakes processes like this—and doing them better and faster than your competition—will have a positive impact on revenue and ultimately impact margin.
Here are the steps in a value chain analysis.
Value chain analysis steps
1. Understand each of the primary and secondary activities in the business
From procuring raw materials and shipping them to factories, to delivering a final product to the end consumer, there are dozens of steps in the value chain process. This is the hardest step, as it requires a deep investigatory look at each of the primary and secondary activities.
For example, you may want to analyze your inbound logistics process (procurement) in addition to your outbound logistics. This would involve analyzing everything from raw materials pricing to landed cost. The deeper you go in your value chain analysis, the more results you’ll be able to yield.
2. Analyze the cost and value of each activity
When creating your value chain analysis, you must look at the cost drivers of each step of your business model. Do you have steps in the process of building your finished product that are low value, high cost? Are you putting in more resources to our inputs without analyzing whether the outputs are adding value? Every business strategy should be scrutinized closely to make sure they’re contributing the most value.
For instance, human resource management can’t be overlooked. How much does it cost to post on job boards? How much time is involved in interviewing candidates on average? What is the average cost of that time? Or, if you want to take the example to manufacturing explicitly, how much does a certain material cost? Are you focused on sourcing the most sustainable materials or the cheapest?
Then, those conducting the value chain analysis should analyze the value that each step brings. Do a majority of top candidates come from one channel? Does checking references really make a difference in the job interview process?
In manufacturing specifically, does outsourcing sustainably add value to the organization? Does it bring about product differentiation?
By analyzing both the cost advantages and profit margins of each activity and the value it provides to the organization, you can holistically understand how to optimize each activity.
3. Identify competitive advantage opportunities
Now that you’ve broken down each process - from procuring raw materials to hiring employees or acquiring new technology - it’s time to optimize your value chain. This is why having a focus on either product differentiation or cost advantages is critical.
Whoever is developing the value chain analysis should make recommendations based on how the company wants to improve margins. Companies should first focus on optimizing high cost, low value processes regardless of their focus on differentiation or cost reduction.
The overall goal of any value chain analysis is to increase profit margins while providing customers with a satisfactory final product that meets their expectations.
Learn more about conducting a value chain analysis.
2. Invest in Industry 4.0 technology
Industry 4.0, also known as the fourth industrial revolution, uses advanced technologies to blur the lines between the physical, digital and biological world.
The fourth industrial revolution was first introduced by Klaus Schwab back in 2015. It is differentiated from the Third Industrial Revolution by the fusing of technology development and business.
There are many types of industry 4.0 technologies, including:
- 3D Printing - An additive manufacturing process
- 5G - Broadband cellular reception that enables other technologies
- Artificial intelligence - Often referred to as “smart manufacturing,” this is a domain of computer science that aims to mimic human intellect and decision-making
- Automation - The substitution or augmentation of human labor with machines
- Big data - Large data sets that cannot be analyzed with traditional data-processing software
- Blockchain - A system in which a record of transactions are maintained across several computers that are linked in a peer-to-peer network
- Internet of Things - Computing devices embedded into products that can send and receive data
After your value chain analysis, consider optimizing the opportunities discovered through industry 4.0 technologies. You want to stay ahead of competition and adopting new technologies can help you optimize outdated processes.
3. Consider contract manufacturing
Contract manufacturing is the use of outsourced manufacturers to build or complete a product.
By letting a contract manufacturer handle the production process, the hiring company can reduce costs and streamline their supply chain management by not having to manage the whole lifecycle of the manufacturing process. Without having to worry about overseeing specific activities like warehousing, they can then focus their attention on the things that expand their competitive edge and add to their product’s value, like selling to new distribution channels, marketing, and customer service—ultimately driving a differentiation advantage.
A contract manufacturer might help you with the entire manufacturing process or a company might just use their equipment. Every contract manufacturing relationship is different.
4. Establish connection and communication between all parties
Sales and engineering alignment is critical for manufacturing success. It’s even more important for engineer-to-order or custom-order manufacturers. If teams don’t understand capabilities or timelines, you can end up with a disgruntled customer.
That’s why leading manufacturers use Propel Software to keep everyone on the same page. Propel gives Formlabs the much-needed unified platform for all of their product information, incorporating their third-party data from third-party systems and engineering tools like Solidworks and Altium. Propel is the hub for all of their product data with dashboards, reporting, approvals, workflows, change orders, contextual collaboration, supplier portals, and more.