Analyze the Value-Chain Activities

posted: June 09, 2010

what is a value chain

The value chain in simple terms is the flow (or chain) where some "value" is added to the product or service as it moves from "raw materials or services (inbound logistics) all the way through to servicing the end-product or service.

For example, in a light manufacturing or service operation, there are five keys of the value chain as illustrated below:

Of course, there are support units that support the value chain; i.e., human resources, technology, accounting, etc. So the overall diagram of the company value chain is illustrated below. The value added at each stage of the chain translates into an overall margin that becomes the net profit for the company.

COST DRIVERS

When analyzing your value-chain activities, the goal of any management team is to drive down costs and to increase market opportunities. Value-chain analysis can present opportunities in market expansion and new developments.

For example, let's look at some of the cost drivers for market opportunities in procurement:

Cost Driver Description
Economies of Scale The volume of purchasing with a given supplier affects your bargaining power. Look to consolidate your purchasing for volume discounts.
Linkages with Suppliers Coordinating with suppliers on specifications, delivery, and other activities can lower total costs.
Interrelationships Combining purchases with sister business units can improve bargaining power with suppliers
Timing Historical loyalty to or problems with suppliers may affect input costs, access to inputs during tight periods, and services provided by suppliers.
Policies

Purchasing practices can significantly improve bargaining power with suppliers and the willingness of suppliers to perform extra services. For example:

  • selection of the number and mix of suppliers
  • hedging procedures
  • investment in information on supplier costs and availability
  • annual contracts versus individual purchases
  • utilization of by-products
Location Location of suppliers can affect the cost of inputs through the cost of transportation.

 

Again, this is a high-level example of how value-chain analysis can help shape your marketing strategy.

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