Business tips
August 1, 2023
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A supply chain refers to the system that encompasses every person, organization, technology, activity, resource, and process that is involved in creating and selling a product, beginning with delivering raw materials from the vendor to the manufacturer, up to the delivery of finished product to the customer.
Value chain on the other hand, is concerned with the process and methods by which the raw materials are converted into finished goods – the iterative activities – to ensure efficient production of quality products.
We can say that a supply chain comprises everyone and everything engaged in fulfilling customer needs leading to satisfaction, value chain comprises interconnected activities a company uses to attain a competitive edge.
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The idea of a value chain is not new; in fact, it was first proposed in 1985 by Michael Porter, and American scholar, to demonstrate how businesses add value to raw materials during the production cycle, and sell those goods to consumers.
Value chain managers always consider ways of adding value by reducing shortages, getting product plans ready, working with others in the chain to add value, and so on.
From a business management perspective, there are five steps that allow a business to create value that is beyond the cost of producing and delivering goods and services to customers.
A business can gain a competitive edge if they focus strongly on any of the following five steps:
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The value chain needs HR management, tech development, infrastructure, procurement, and other support activities to streamline these five steps.
For a value chain to be profitable, it must connect consumer demand and company production.
That is, the value chain sequence begins with the customer demand, moving through the whole process of production and ends at the finished product.
These chains give importance to research and development, innovation, quality checks, testing, and marketing.
The supply chain is made of the flow of materials, information, funds, and products from stage to stage in the process of producing and selling a product to the consumer.
This is an operational management concept, where every step from ideating about a product, manufacturing it, shipping it out to warehouses, and eventually selling it, is a supply chain component.
All the functions that makeup receipt and fulfilment of customer requests, like product development, finance, operations, distribution, customer service, and marketing, make up the supply chain. It is a crucial process for most businesses, involving several links at large companies.
This is why managing the supply chain necessitates a great deal of know-how and skill.
Shareholders and investors are the primary stakeholders in value chains, and it’s the supply chain partners who are crucial stakeholders in the supply chain.
Apart from logistics, supply chain involves coordinating the manner and time of manufacture of products, along with the manner of transportation, and not logistics alone.
Supply chain management is chiefly concerned with material cost and proper product delivery.
With efficient supply chain management, you can bring down costs, which is good for the customer, and boost profits for the producer.
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Both terms are often interchanged, but there are a few differences between supply chain and value chain.
Let’s see the differences categorized by:
Supply chains are mostly physical, as they comprise a network of persons and businesses that manufacture a product or service, where raw materials are procured and put through the requisite steps to convert them into finished products.
These are then delivered to consumers.
Value chains on the other hand, focus on consumer needs, and start from there.
They analyze how value can be added to the product across the supply chain: this could be features or qualities capable of delighting the customer.
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Supply chain is an operations management process, and chiefly about logistics, where the aim is to efficiently manufacture and distribute the product economically.
Value chain is a business management process, and mainly analytical in nature, collecting information about what customers truly value.
They then consider the best ways to infuse those qualities into the product.
It is here that the differences between supply chains and value chains can be clearly understood, as value chain activities comprise a wider range of business functions.
It is more visible during customer interactions. Supply chain activities are about physically transporting things economically, quickly and efficiently, whereas value chain activities include market research, marketing etc.
Research helps in learning what consumers want, and advertising helps boost demand for the products; surveys also help in learning if the business is actually delivering value.
Innovation, product development tasks, technology, the right procurement etc. all come under the purview of value chains.
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Supply chain managers think linearly as the main concern is timely and efficient production and delivery, and are also referred to as assembly lines.
However, value chain thinking can impact any stage in the supply chain in any order.
Let us suppose that there is a huge demand for eco-friendly packaging material for a packaged snack.
The manufacturer has to search for and procure such packaging for the new batches that will be produced henceforth.
This will of course increase customer satisfaction, but could mean more expense and delay – at least initially – in the supply chain.
Supply chains aim at continuously enhancing the production process to become more reliable and efficient.
However, the chief goal of a value chain is to deliver a superlative customer experience, gaining a competitive edge for the business.
For example, supply chain managers would like to use the cheapest and lightest packaging to cut costs; value chain thinking is aligned towards providing a great unboxing experience to the customer – which could motivate the customer to post a great video review online, boosting the company’s reputation.
Customer appreciation and positive feedback are often able to achieve what expensive marketing activities using influencers cannot!
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There are several more steps involved in value chains vs supply chains.
Supply chain management is about figuring out the best way in which physical results can be achieved quickly and economically.
Value chain managers consider if various other physical results could be what is needed.
For example, let us think about cotton shirts.
Supply chain managers would think about the most efficient and economical way to source cotton that fulfils their requirements.
Value chain managers go a step above and think about whether the company’s customers would prefer Indian cotton or Brazilian cotton; how much they are likely to prefer either of these over the local cotton; and if the extra expenditure can be traded off by how delighted they would be.
They also consider if the customers would be willing to pay the extra cash for the higher quality cotton the shirts are made of.
If market research shows the answers are very delighted, and ‘yes’, the supply chain activity will change from ‘procure cotton’ to ‘procure Indian/Brazilian cotton’.
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Can supply chains use the principles of value chains to create and deliver value for consumers that is above the cost of the products and services they manufacture and deliver?
Not unsurprisingly, the answer is yes.
There are three main areas where these two processes, seemingly at odds with each other, intersect, and give rise to several opportunities for value creation.
Let’s take a look:
We have seen that inbound logistics is to do with the receipt, storage, and management of the resources required for manufacturing products.
Obviously, the value lies in making sure that the precise quantity of materials is at hand, and in ideal condition for production, thereby reducing the time required for manufacture.
By utilizing value chain thought processes, businesses can urge vendors to create and add value through efficient inventory management; for example, the kind of management that makes just-in-time delivery possible.
This decreases the burden of inventory management for that business.
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In this area, value addition could be mainly discovering methods of cost reduction without compromising on the quality of the final product.
Examples could be acquiring or developing software or new equipment to make the whole process quicker, enhancing quality control to minimize defective and unsellable products, or finding vendors who sell cheaper.
Value chain managers may also look at production activities that enables products to be customized as per consumer needs.
This is where you have to ship the products and deliver them to the customers, and involves storing, collecting, and distributing the products.
Companies can add value by directly delivering to a customer’s business instead of a store, or even by removing the current (old) item when delivering the new one.
Some may even offer a small discount – an ‘exchange offer’, so as to say.
For example, if you purchase a new cooking chimney, the company may remove your old one and take it away, after installing the new one.
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Tranquil ERP contains feature-rich modules that help you plan demand, manage inventory, ensure quality, procure economically, utilize resources efficiently, and more.
You also get an in-depth and comprehensive view of your supply chains, simplifying your job of implementing opportunities for value addition according to value chain thought process.
these various modules enable businesses to track and study the manner in which materials are delivered from vendors, are transformed into products, and eventually shipped and delivered to consumers.
Ensuring smooth and efficient workflows has its own value, and adds to the supply chain, benefiting the entire company all round.
Tranquil helps in managing your supply chain, infusing value chain thinking within it, and in resolving multiple challenges faced by the business every day.
It has powerful forecasting tools that help in avoiding stockouts, factoring in lead times to minimize delays in production, offers real-time recording and monitoring of data, financial reporting, inventory, and more.
This helps to ensure that every stage of the supply chain functions with identical data set.
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Implement Tranquil ERP in your business to enjoy the many benefits it offers across the company. Schedule a FREE demo to know more. We are happy to answer any query you may have.
