Value chain analysis and value chain management are closely related, but still distinct. The overarching reason to implement either of these is to optimize your business operations and maximize profits. But that’s the generalized version.
Many people think of the value chain as the future of the supply chain, but what does that look like in practice?
Think of it as R&D—but instead of researching and developing a final product, you are researching and developing better business operations for your manufacturing process entirely.
It’s like this:
Value chain analysis goes beyond simply assessing supply chain performance; it’s understanding where your operations stand today, collecting relevant real-time data, such as inventory levels, internalizing weak points and strong points along the supply chain, and organizing all of that information in order to properly analyze the predictive value of each step in the production of your products. It’s about creating a seamless ecosystem for every touchpoint along your product thread—all the way to the customer.
Value chain management is the development; it’s taking the information you gathered in value chain analysis and putting it to work.
Value chain management is the process of creating and executing an initiative that makes a good business process a great one; it invests in high-value decisions, and it implements better, faster, quicker decision-making - increasing margins and putting money in your pocket.
Your business will be more competitive, and more efficient in several ways because of value chain management.
What is a Value Chain?
The official definition of “value chain” from Oxford Dictionary is worded like this, “the process or activities by which a company adds value to an article, including production, marketing, and the provision of after-sales service.”
The working definition feels a little more like: “a set of business activities involving the creation, commercialization, and correction of products or services.” Essentially—the aspects of your company’s operation before product development, during the manufacturing process, and after the creation of the finished goods.
The value chain is separated into two categories, or value chain activities: primary activities and support activities.
These include things like the supply chain activities, like logistics of raw materials, the physical space to manufacture the goods, the business hierarchy involved in running the company, the sales & marketing, and so on and so forth.
We will explain the two categories and all of the parts within them soon. But to do that, we need to take a look at value chain management and value chain analysis first.
What is Value Chain Management?
Value chain management is the pragmatic manner in which you take what you’ve learned about your manufacturing operations and implement measurable action to optimize the value in one, several, or all of your operations.
Businesses invest in value chain management in order to understand how they can lower costs or increase product differentiation. The end results in value chain management. If it’s done right, it should be a working plan to increase margins by optimization of any phases in the value chain.
But margins are tricky, or else every business in history would still be operating. Essentially, growth is a factor of market economics and business execution across the whole value chain.
But growth and sustained growth are not one and the same. Sustained growth reflects how well a company can adapt and manage risk over the long term - so it makes sense to prioritize value chain phases that impact margins the most when implementing value chain management. It also operates as a form of risk management in the growth of your company.
What is Value Chain Analysis?
It’s getting your ducks in a row.
Value chain analysis is the study and organization of your business operations with the end goal of creating higher value for the company through lowering cost or product differentiation. It takes into account your individual relationships with all facts of the primary activities and support activities in your value chain and prepares you to act in an effort to maximize the value at each one of these activities.
Good value chain management starts with good value chain analysis. Value chain analysis is like strategically lining up your letters in a game of Scrabble, before deciding how to play them.
How Value Chain Management Can Improve Your Business
Value chain management doesn’t just optimize your company’s processes - it optimizes that of your vendors and your customers as well.
When you effectively manage the flow of production and sales (through phases like ideation, research, operations, global supply chain planning, inbound logistics, outbound logistics, manufacturing, sales, marketing, and service) then you create pockets of value that you, your vendors, and your customers did not have before.
The benefits of value chain management aren’t limited to these, but the following are the highlights of how you can operate at maximum efficiency:
Improved Bids and Proposals
Capturing, tracking, and managing marketing requirements and customer requirements is a benefit of value chain management. More accurate estimates of marketing and customer needs enable the most accurate cost estimates in the phases of design, plan, procurement, production, and post-sale service. And the best part is there’s complete traceability in these estimates.
Better Product Planning, Research, and Development
Coordination is key. Developing a cross-functional game plan with your team is a cornerstone of good value chain management. This coordinated effort to planning, creating, delivering, and servicing products based on overall performance, cost reduction, and product quality allows you to properly plan and implement multiple projects while at the same time better manage resource allocation, scheduling, costs, and deliverables as efficiently as possible. Long story short: a cross-functional, coordinated, team effort as a part of your value chain management strategy will maximize your business processes and minimize disruption.
Measurable, repeatable business processes to more effectively manage master data on your product, guarantee consumer expectations and alternative commitments are met. These standardized processes are a crucial aspect of value chain management. Automation could play a key role here. Because they are standard, repeatable, and ideally reliable - these processes contribute to minimizing operational inefficiencies and waste which only paves the way to increase margins.
Improved Vendor Management
Inbound logistics and outbound logistics are major functions of the value chain. Synchronizing all your internal teams and processes to your surrounding supply chain ensures anything external is managed and meets all necessary requirements (performance, quality, schedule, cost) while simultaneously avoiding waste, excesses of inventory, and any design or developmental flaws.
Post-Sales Service and Support
After enacting value chain management, your company will better understand how to manage and track in-service configuration changes of your product that are coordinated with customer support, field service, and engineering resources. This improves the visual of your brand with increased customer satisfaction as well as efficiency in the value chain.
Hey, this is why we do almost anything in business, right? To reduce costs. But with a good value chain management plan, you are able to significantly reduce the end-to-end costs due to standardized, streamlined processes, accurate inventory management, lowered inefficiencies and waste, and of course, a better overall product.
This is the ultimate goal here. A comprehensive value chain management plan raises profit margins and raises profitability. Customer demand is met, but not exceeded to the point of excess.
What are the Parts of the Value Chain?
Two categories make up the components of a value chain - primary activities and support activities.
Primary activities in your business are essential in order to create a competitive advantage and create value. Five components make up the primary activities.
- Inbound Logistics - this is anything related to receiving inputs. Any receiving, storing, warehousing, moving, etc. of inputs internally is a part of inbound logistics. Relationships with your providers are crucial in assessing and creating value in this step.
- Operations - this is the process in which you transform inputs into outputs, which are then sold to customers. Value is found in optimizing your operational systems and business model in this step.
- Outbound Logistics - this is all of the processes involved with delivering your product to your customer. Sharp logistics, a robust supply chain management process, and efficient movement create value in this step.
- Marketing and Sales (Commercialization) - this is anything your business does to persuade a consumer to buy your product and not a competitor’s. Social media is now a huge play here. The communication of your pricing and benefits creates value in this step.
- Service - this effort is dedicated to maintaining the value of what that consumer just bought from you. Consistency and communication create value in this step.
Support activities in your business are essential in making the primary activities function more efficiently. Four components make up the support activities - when you improve any of these, you improve one of the five primary activities.
- Procurement - this is anything involved with purchasing and sourcing. However, your company acquires necessary resources, such as negotiating prices or locating vendors. Smart decision-makers and good relationships create value in this step.
- Technological Development - this is the manner in which you process and manage information. Things like updating legacy systems, securing your databases, assessing information technology costs are included in this component. Staying up-to-date with technological innovations as it relates to your processes creates value in this step.
- Human Resource Management - this is everything regarding your people. How you hire, where you hire, training, retaining, compensating, and so on and so forth is a part of this step. Choosing the right people and keeping them working with you and not the competitor creates value here. This requires strategic management.
- Infrastructure - this is anything with your support systems. Any function that maintains your business’ ability to operate daily — legal, janitorial, administrative, etc. — are a part of the infrastructure. Closing any gaps in excess waste, or overlap, create value here.
The History of Value Chain Management
Porter’s Value Chain Management
Michael E. Porter is a pioneer, a genius, an academic, and a Harvard Business School professor. He established the model for the value chain and parsed it out for the rest of us to internalize it easily. His understanding of value chains is unparalleled and is still the basis by which we operate within them today.
In a groundbreaking book that has now become de facto law, Competitive Advantage: Creating and Sustaining Superior Performance, Michael Porter describes the value chain like this: "...competitive advantage cannot be understood by looking at a firm as a whole. It stems from the many discrete activities a firm performs in designing, producing, marketing, delivering, and supporting its product."
Examples of Good Value Chain Management
It’s a bulky process, this value chain management. But the great news is that there are plenty of businesses that are getting it right and we can turn to for ideas and structure. These case studies are important in understanding the process in real life. The following companies have done a great job of targeting value chain components to improve upon:
Medtronic is a worldwide company with over 68,000 suppliers helping them get what they need to run their businesses. It makes sense then, that Medtronic places a huge imperative on the quality of their suppliers, supply chain management, and supply chain technology. Not just of the quality of service or product they provide, but the ethical and moral quality as well.
Medtronic requires its suppliers to uphold environmental protocols, human rights practices, and meet minimum product quality standards. They do this through their in-depth, outlined Global Supplier Standards. These standards are upheld in the vendor selection policy, and Medtronic maintains a solid reputation for quality of all kinds because of this stance to optimize inbound logistics and outbound logistics.
This is the most prominent company in the adhesives market in the world. Their value chain is undoubtedly huge, but one small part of it is the procurement of palm oil. Procurement is a support activity, but as we mentioned: any improvement of a support activity is a direct improvement of a primary activity.
So by setting and upholding standards to source only palm oil grown in sustainable, renewable fashion, Henkel maximizes their procurement efforts. Which in turn maximizes a fraction of their primary activities.
Cisco operates on a hybrid production model, where about 95 percent of its efforts are outsourced. This is possible due to their massive global network of supply chain management partnerships. Cisco and its suppliers produce and transport over 35,000 components, which include: designing, fabricating, delivering, and managing roughly 225 hardware product facilities. The inventory control from their SCM is impressive. In short: it’s a massive operation and what could be an organizational nightmare of a supply chain.
Their value chain is so intricate - they’ve put together a group dedicated to maintaining it. The Customer Value Chain Management Group has the sole job of running Cisco’s value chain. This is a great example of optimizing your value chain as a primary activity of the business. By dedicating employees to the efficiency of their value chain, Cisco is able to coordinate directly with hundreds of suppliers across the world to ensure the best practices are observed.
They operate in the world of “mobile equipment, machinery, fuel and lubricants, and explosives, and a range of other products and services that support large-scale mining and refining operations.” They are a thorough company with an excellent stance on operational sustainability and ethics, and they hold their suppliers to a specific, high standard. Their supply chain management processes are solid.
Any supplier they do business with is required to register and maintain an account with the business’ supplier database in good standing. The suppliers’ practices of ethics, health and safety, anti-corruption, environmental management, and human rights protocol are put into question and must be accounted for. Additionally, each on-site supplier must attend site-specific training and orientation lasting 30 days. This ensures quality control.
Teck’s commitment to a quality supply chain and inbound logistics through specific, consistent standards is a great example of optimization of a primary activity.
How to Implement Value Chain Management
You get the general idea of value chain management by now. So...what do you do?
Value Chain Mapping
Good value chain management begins with good value chain analysis. We’ve said it before and we’ll say it again. You need a value chain map.
Begin by grouping your prominent supplier groups with customer groups that represent key inputs and outputs. Then, gather a list of your key stakeholders and a map of any locations you have. Once you’ve mapped your value chain according to the important inputs and outputs, you begin researching the primary needs and impacts for each section in the value chain. This gets the ball rolling in your direction and starts the process of deeply understanding your entire value chain.
The value chain map will help you gather your primary activities and your support activities, and help you discern which from which.
Conducting Value Chain Analysis
Viewing this through the idea that there are two main reasons for value chain management (cost and product differentiation), it’s fair to assume there are two approaches to value chain analysis. Also, it's worthwhile to note the problems facing value chain management.
Your business should identify cost drivers for each primary and support activity. Anything that affects the cost of an activity is a cost driver. This includes things like work hours, machine use, wage rates, materials, shipping, etc.
Identifying the communication, vertical integration, and links between all of these activities will allow you to hone in on inconsistencies, and areas to reduce cost. By targeting one area to reduce cost, that then snowballs into the next area to reduce cost.
Understanding what your customer wants and what brings them value is a priority here. You need to identify the activities that drive value. This includes things like marketing strategies, product knowledge, response and communication time, meeting and exceeding customer expectations, and backing the life cycle of your product.
Digging deep into your strategies that surround the customer experience is the first step in understanding how to offer differentiation and fill an entirely new need. This could make you a pioneer in your industry, and maximize profits.
Evaluating Market Differentiators
If the market differentiator you’re after is cost, then there’s a whole host of options. Starting at the inbound logistics, you can implement new technology to coordinate supply schedules in the most efficient manner possible which reduces man-hours, turns your product around faster, and makes the other primary activities more efficient. With the money you save, you can pass that along to the customer and add value to your business by being a cost leader. That’s just one small example in a world of opportunities.
If the market differentiator you’re after is product differentiation, then there are also a myriad of options. Say, for instance, you choose to hone in on the primary activity of service. One option would be to dominate the competition at post-sales service in every way. Make the end-user appreciate your product design more than other retailers. Whether this means no-questions-asked returns, lifetime warranties, or just the absolute best call centers and people-persons out there, by maximizing your service, you can offer a different product and lead the market.
Value Chain Management Outcomes and Goals
The goal is to get better, every day. That’s broad - but it’s true. The reason you’re embarking on a value chain management adventure is because there are ways in which your business can grow that will absolutely affect your bottom line. Forecasting your success is a good choice.
Every value chain analysis should render a set of goals, both specific and general. Your specific goals target the primary and support activities, and your general goals increase margins, profitability, and customer experience. These two are intertwined, so it’s important to lay out the proper goals for your business before getting started.
How Can Propel Help You
Coordination and communication are the most important tools when implementing a value chain management strategy. This isn’t just a job for ERP or PLM alone, it’s a job for every product solution and information system combined into a single, seamless, common platform with full data visibility and cohesive collaboration.
Propel Software is the market leader in providing your business the tools to collaborate across departments using their revolutionary new approach, product value management (PVM). Learn how it all works in the PVM Handbook, the ultimate guide to value creation and capture.