Value Chain and Supply Chain Concepts¶
1. Introduction to Value Chain¶
In his 1985 book Competitive Advantage, Michael Porter explains that a value chain is a collection of processes that a company performs to create value for its consumers. The concept is directly linked to competitive advantage, as it focuses on the activities that add value to the product or service. Porter’s Value Chain Model is a strategic management tool that analyzes a company’s value chain, which is defined as the combination of processes the company uses to make money.
1.1 Porter's Value Chain Model¶
Porter’s Value Chain Model divides activities into two categories:
- Primary Activities: These are the core activities involved in creating a product or service.
- Inbound Logistics: Involves receiving, storing, and distributing raw materials.
- Operations: The processes that transform inputs into finished products.
- Outbound Logistics: Activities that deliver the product to the customer.
- Marketing and Sales: Processes that inform buyers about products and encourage purchases.
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Services: After-sales services provided to maintain and enhance the product's value.
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Support Activities: These activities assist the primary activities and each other by providing infrastructure, technology, human resources, and procurement services.
- Procurement: The process of obtaining raw materials and resources.
- Human Resource Management: Recruiting, hiring, training, and retaining employees.
- Technology Development: Activities related to the research and development of new technologies that support the value chain.
- Firm Infrastructure: The company's organizational structure, management, finance, and legal systems that support the value chain.
2. Understanding the Value Chain¶
A value chain is a business model that describes the full range of activities needed to create a product or service. The concept emphasizes not only the supply chain, which is the system and resources required to move a product or service from supplier to customer, but also how value is added at each step of the chain, both to the product or service and to the actors involved.
3. The Best Value Supply Chain¶
A best value supply chain seeks to optimize the total costs of all buffers used within the supply chain. Buffers refer to safety stock, lead times, and flexibility that are used to absorb variations in demand and supply. The cost of deploying each buffer differs across industries, so no one-size-fits-all solution can be directly applied across different industries without adaptation. The goal is to balance cost, speed, quality, and flexibility to create the best value for both the company and the customer.
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