Value Chain Definition

What is Value Chain?

Let us start this topic with the understanding of What is Value Chain? A value chain is a set of activities that a firm operating in a specific industry performs in order to deliver a valuable product or service for the market, and also defined as "A high-level model of how businesses receive raw materials as input, add value to the raw materials through various processes, and sell finished products to customers". Aside from the Value Chain Definition, there are some other aspects of supply chain management that should be highlighted at this time.

  • Supply chain management is about creating net value. Early efforts at managing chains often focused only on cost reduction - on making the chain leaner. Unfortunately, these efforts sometimes reduced the ability to create value more than they reduced costs, for a net negative effect. As we’ll see, there’s more to creating value through intelligent management than simply squeezing costs out of one or another activity in the chain.
  • There should be value-creating activities in the supply chain that transcend the activities of particular entities in the chain. Supply chains are generally organized by one strong firm called a channel master or nucleus firm—often a manufacturer, sometimes a powerful retailer, which often manages those activities. Nevertheless, the chain has to produce value for more than one stakeholder in addition to generating value for the consumers or investors.
  • Managing supply chains requires a balancing act among competing interests. Given the complicated nature of group dynamics, this can be a challenging task, especially in “worldwide” chains. Consider the rivalries that arise among and between the 50 American states, the 25 nations in the European Union, the various sects of any world religion, and the divergent cultures around the globe.

Supply Chain Management System:

Supply chain management is defined as “the design, planning, execution, control, and monitoring of supply chain management systems with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand, and measuring performance globally.” (Globally, in this case, can mean either worldwide or applying to the chain as a whole rather than to a particular entity within the chain).

The value chain definition of supply chain seems fairly solid when you consider the chain as linked organizations—supplier, producer, and customer connected by product, information, and payment flows. But the supply chain is more accurately viewed as a set of linked processes that take place in the extraction of materials for transformation into products (or perhaps services) for distribution to customers. As it is given in value chain definition, those processes are carried out by the various functional areas within the organizations that constitute the supply chain. When considered as a set of processes rather than a succession of companies, the supply chain becomes just a little more difficult to identify - let alone manage.

Figures mentioned below shows flow chart of supply chain management system or process as per value chain definition.


value chain definition

What is Value Chain Mapping:

Although many would assume that a supply chain is, in fact, a value chain—at least it is if well managed—others may draw a distinction between the two. A value chain is a string of collaborating players who work together to satisfy market demands for specific products or services. The value chain is made up of “the functions within a company that add value to the goods or services that the organization Bells to customers and for which it receives payment.”

As it is also explained in a value chain definition, the value chains integrate a variety of supply chain activities throughout the product/service life cycle, from determination of customer needs through product/service development, production/operations, and distribution. The intent of a value chain is to increase the value of a product or service as it passes through stages of development and distribution before reaching the end user.

Not all value chain activities are technically part of the supply chain, and those engaged in them may not understand their role in supporting the supply chain. Those activities might include engineering, marketing, finance, accounting, information technology, human resources, and legal. For example, managers from outside the supply chain often don’t understand the requirements of supply chain management, can’t distinguish a value chain from a supply chain, and consequently don’t provide the SCM support required from their areas.

Value Stream:

Two closely related terms are value stream and value stream mapping. A value stream is the processes of creating, producing, and delivering a good or service to the market. For a good, the value stream encompasses the raw material supplier, the manufacture and assembly of the good, and the distribution network. For a service, the value stream consists of suppliers, support personnel and technology, the service “producer,” and the distribution channel. The value stream may he controlled by a single business or a network of several businesses.

A value stream encompasses all the primary actions required to bring a product or service from concept to placing it in the hands of the end user. It also includes timing. Mapping the stream aids in process improvement. A value stream encompasses all the primary actions required to bring a product or service from concept to placing it in the hands of the end user. It also includes timing. Mapping the stream aids in process improvement.


NOTE:
This interactive lecture on Value Chain is designed by Institute of supply chain management. This topic is discussed in more details in AIMS' supply chain programs, and they includes: supply chain management courses online, supply chain management diploma online and supply chain management degree programs.

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