Value-Adding Supply Chain Activities – Value Chain Management

Value chain management is the process of organizing all activities within the supply chain so that they add value in the most efficient and effective way while keeping costs down. The goal is to improve profitability through communication between the suppliers at each stage to make sure the product is placed in the customers' hands as seamlessly as possible.

The value chain represents all the value adding activities within the supply chain of your product and for which your organisation is just a part. Your organisation is a stage in the value adding process as it creates the products and services you have agreed to supply to your customers.

Value chain analysis is a process tool with which an organisation can identify activities that contribute and add value to the final product or service as well as any activities that are needed to reduce costs or to increase the differences between your products/services  and those of your competitors.

The purpose is to identify which added value activities are most valuable and make sure that these are managed effectively. This may mean making a choice between how you add value as an organisation and which stages in the supply chain you decide to do yourself.

Cost drivers that determine activity values include:

Value chain management can improve profitability and net value for customers by adopting a lifecycle system approach, where every element of a product (from initial inception of the product idea to its disposal) is considered within the wider supply chain system and business environment.

Value chain analysis reveals where an organisation’s competitive advantages or disadvantages are. Value-added can be created in one of two ways:

1. Differentiation: Organisations can focus on activities closely associated with their competitive advantage. Investing in activities identified to give competitive advantage allows the organisation to improve the quality of its products and services and sell them for higher prices. An organisation that tries to compete through differentiation aims to perform its activities better than its competitors. Strong brands are one example of how businesses differentiate themselves from their competitors.

2. Cost advantage: Organisations can reduce the costs of activities wherever possible and either reduce the price of their final products or services or increase profit. When an organisation competes through cost advantage it tries to perform internal activities at lower costs than its competitors. Cost advantage or cost leadership means that their competitive advantage is by providing a very good quality, functional standardised product at the best price in the market place.

Many different supply chains are interconnected so as to form a complex network of added value activities. Deciding which added value activities to do yourself and which to buy in is part of your manufacturing and supply chain strategy. This is sometimes referred to as make or buy.