September 3rd, 2020
When it comes to optimizing business processes, there’s a lot of talk about the supply chain. But is there a significant difference between the value chain and the supply chain? If so, where does the value chain come into play?
The Supply Chain
Let’s start with the more familiar concept of a supply chain. If 2020 has proven anything, it’s that a flexible and resilient supply chain might very well be the most valuable asset a business can have. In sum, a supply chain inherently consists of the operational and logistics processes necessary in the creation of an end product and its delivery to the customer. Ideally, a supply chain is managed in a way that ensures the product gets from point A to point B with minimal hiccups. This includes, but is certainly not limited to, reliable inventory levels, just-in-time delivery, rapid responsiveness to change, and a healthy cash flow.
The Value Chain
Moving on to the value chain, the idea was introduced by an American scholar named Michael Porter in 1985. His book, “Competitive Advantage: Creating and Sustaining Superior Performance,” explains that, although overlap with the supply chain exists, a value chain more so consists of all the activities that increase a product’s actual and perceived value. This extends well beyond the notion of logistics presented in typical supply chain discourse.
To elaborate, Porter’s value chain is composed of five primary activities: 1.) inbound logistics, 2.) operations, 3.) outbound logistics, 4.) marketing and sales, and 5.) services. It is further broken down into four secondary, or supporting, activities: procurement, human resource management, infrastructure, and technological development. If you’d like to know the specific details of each activity in Porter’s value chain, you can read that here.
Supply Chain Analysis vs. Value Chain Analysis
Even without an in depth explanation of each activity, it’s relatively easy to identify that, although interrelated with the supply chain, the value chain provides a framework to analyze everything that truly makes a product what it is. In contrast, a supply chain analysis doesn’t cover a wide range of activities outside of trading partner relations. But even though a value chain analysis is the most effective way to see the product as a whole, a thorough supply chain analysis is helpful in many situations and, therefore, shouldn’t be thought of as less superior.
Achieving a Competitive Advantage
Both a value chain analysis and a supply chain analysis are useful for their intended purpose. The goal of a value chain analysis is to help a business achieve a competitive advantage in their industry, while the goal of a supply chain analysis (and supply chain management in general) is to determine the quickest and most efficient way to deliver the product to the customers, which, in many cases, leads to a competitive advantage.
For example, although a value chain analysis would provide some insight, it wouldn’t be the best way to decide how your business should approach supply chain automation. To identify the best automation strategy, it’s more important to look closely at the operational and logistics processes of your supply chain to see where there’s room for improvement. This analysis most often results in the need to eliminate manual processes associated with document exchange, which then frees up time to focus on other aspects of the business that are more fairly represented in a value chain analysis.