The concept of value chain

Value chain

The entire series of organizational work activities that add value at each step beginning with the processing of raw materials and ending with finished product in the hands of end users.

The concept of the value was popularized by Michael Porter in his book Competitive advantage: “Creating and sustaining Superior Performance”. He wanted managers to understand the sequence of organizational activities that created value of customers. Although he primarily focused on what was happening within a single organization, he did emphasize that managers must understand how their organization’s value chain fits into the industry’s overall creation of value. In some cases, that’s difficult to do. For example, organizations can do a number of things that create no value to the customer. It may please management of appease labor onions, but it doesn’t do anything to make the customer happy Consider, or instance the movie industry. A lot of film producers spend significant amounts of money on things that do little to make a movie better. Money well spent in this case is that which is up on the screen where customers can see it. The money spent however, for catering booking exorbitantly hotel rooms and chartering aircraft for stars doesn’t add value because those things don’t end up on the screen. As much, it doesn’t create value. A similar claim could be about management. As one noted management writer pointed out. Managers are not value added. A customer never buys a product because of the caliber of management. Management is, by definition, indirect. So if possible less is better. One of the goals of reengineering [work process engineering] is to minimize the necessary amount of the management. Value chain management is the process of managing the entire sequence of integrated activities and information about product flows along the entire value chain. In contrast to supply chain management which is internally oriented and focuses on the efficient flow of incoming materials to the organizations value chain management is externally oriented and focuses on both incoming materials and outgoing products and services, and although supply chain management is efficiency oriented (its goal is to reduce costs and make the organization more productive) value chain management is effectiveness oriented and aims to create the highest value of customers.

What are the goals of value chain management?

Who has the power in the value chain? Is it the supplier providing needed resources and materials? After all, suppliers have the ability to dictate prices and quality. Is it the manufacturer that assembles those resources into a valuable product or service? A manufacturer’s contribution in creating a product or service is quite obvious. Is it distributor that makes sure the product or service is available where and when the customer needs it? Actually, it’s none of these. In value chain management ultimately customers are the ones with the power. They’re the ones he define what value is and how it’s created and provided. Using value chain management managers seek to find that unique combination in which customers are offered solutions that truly meet their needs and at price that can’t be matched by competitors. For example, in an effort to better anticipate customer demand and replenish customer stocks. Shell Chemical Company developed a supplier inventory management order network. The software used in this network allows managers to track shipment status, calculate safety stock levels and prepare re-supply schedules. With this capability Shell Chemical enables its customers to purchase goods when desired and to receive them immediately.

A good value chain is one which a sequence of participants works together as a team, each adding some component of value – such as faster assembly more accurate information or better customer response and service – to the overall process. The better the collaboration among the various chain participants the better the customer solutions when value for customers and their needs and desires are satisfied everyone along the chain benefits. For example, at Tata Steel one of the strategic goals of the company is to create value creating relationships with suppliers and customers. Tata Steel believes that management of knowledge across the value chain translates into tangible benefits in total shareholders returns (TSR).