Value Chain vs. Supply Chain: An Overview
The term value chain refers to the process in which businesses receive raw materials, add value to them through production, manufacturing, and other processes to create a finished product, and then sell the finished product to consumers. A supply chain represents the steps it takes to get the product or service to the customer, often dealing with OEM and aftermarket parts.
While a supply chain involves all parties in fulfilling a customer request and leading to customer satisfaction, a value chain is a set of interrelated activities a company uses to create a competitive advantage.
- The value chain is a process in which a company adds value to its raw materials to produce products eventually sold to consumers.
- The supply chain represents all the steps required to get the product to the customer.
- The value chain gives companies a competitive advantage in the industry, while the supply chain leads to overall customer satisfaction.
The idea of a value chain was pioneered by American academic Michael Porter in his 1985 book "Competitive Advantage: Creating and Sustaining Superior Performance." He used the idea to show how companies add value to their raw materials to produce products that are eventually sold to the public.
The concept of the value chain comes from a business management perspective. Value chain managers look for opportunities to add value to the business. They may look for ways to cut back on shortages, prepare product plans, and work with others in the chain to add value to the customer.
There are five steps in the value chain process. They give a company the ability to create value exceeding the cost of providing its goods or service to customers. Maximizing the activities in any one of the five steps allows a company to have a competitive advantage over competitors in its industry. The five steps or activities are:
- Inbound Logistics: Receiving, warehousing, and inventory control.
- Operations: Value-creating activities that transform inputs into products, such as assembly and manufacturing.
- Outbound Logistics: Activities required to get a finished product to a customer. These include warehousing, inventory management, order fulfillment, and shipping.
- Marketing and Sales: Activities associated with getting a buyer to purchase a product.
- Service: Activities that maintain and enhance a product's value, such as customer support and warranty service.
In order to help streamline the five primary steps, Porter says the value chain also requires a series of support activities. These include procurement, technology development, human resource management, and infrastructure.
A profitable value chain requires connections between what consumers demand and what a company produces. Simply put, the connection or sequence in the value chain originates from the customer's request, moves through the value chain process, and finally ends at the finished product. Value chains place a great amount of focus on things such as product testing, innovation, research and development, and marketing.
The supply chain comprises the flow of all information, products, materials, and funds between different stages of creating and selling a product to the end-user. The concept of the supply chain comes from an operational management perspective. Every step in the process—including creating a good or service, manufacturing it, transporting it to a place of sale, and selling it—is part of a company's supply chain.
The supply chain includes all functions involved in receiving and filling a customer request. These functions include:
- Product development
- Customer service
Supply chain management is an important process for most companies and involves many links at large corporations. For this reason, supply chain management requires a lot of skill and expertise to maintain.
While many people believe logistics—or the transportation of goods—to be synonymous with the supply chain, it is only one part of the equation. The supply chain involves the coordination of how and when products are manufactured along with how they are transported.
The primary concerns of supply chain management are the cost of materials and effective product delivery. Proper supply chain management can reduce consumer costs and increase profits for the manufacturer.
The main stakeholders in value chains are shareholders and investors, while supply chain partners are crucial stakeholders in the supply chain.