What is Value Chain Analysis and How to Use Them?

What is Value Chain and Value Chain Analysis? Many academics and practitioners use the word "value chain" and "supply chain" interchangeably. Is it correct? What is the difference between 2 concepts? This article will shed light on the development of value chain and how to use it to create a superior supply chain.

Value chain is a concept proposed by Michael Porter in his book "Competitive Advantage" in 1985. In this book, Porter explains that "Competitive Advantage" is the ability for a firm to put "generic strategy" into practice, generic strategy includes,

- Cost Leadership: aiming to offer the lowest price to customers.
- Differentiation: selecting the important attributes that buyers want so company can get premium price.
- Focus: doing each strategy according to each market segment.

Value chain is mentioned extensively in the first half of the book and by definition, it's a strategic framework about activities that foster generic strategy.

This is classic value chain model. As you can see, it represents various function under one company.

Another related concept is "Value System", it's simply how each value chain (company) is connected with each other.

So there are some points need to be highlighted,

- Value Chain is a strategic planning tool and it is centered around the focal company. Using this term interchangeably with the word "supply chain" is theoretically incorrect.

- "Value System" is more appropriate if you would like to discuss about "Supply Chain" because, from graphical representation, both value system and supply chain has a network-like structure and span across multiple companies.

- Buyer value chain, in this case, refers to buyer as the organization not in the sense of consumers.

Literature Review
Convenient sampling has been carried out to determine the current practice of value chain analysis, 20 scholarly articles available via Google Scholar are examined and the results are as below,

The results, to me, are surprisingly shocking! Only 9 of out 20 articles cite Porter as the source of the concept (only 3 of them explain the concept appropriately, the rest of them do value system analysis using unknown methodology). Five articles (mainly from economic perspective) mistakenly use the term to present unrelated concept called "Global Commodity Chain" by  Gereffi, G. and Korzeniewicz, G. (Ed) (1994) Commodity Chains and Global Capitalism.

The surprise doesn't end there, 5 articles present the concept without citing any source, it seems they invent their own methodology and name it "value chain analysis". One paper cites many lean manufacturing articles instead of Porter's so conclusion can be drawn that it's Value Stream Mapping.

Actual Value Chain Analysis
According to a literature review, articles related to this concept is extremely unreliable. Then, Original Porter's Competitive Advantage is use as source. The concept is simplified without losing its essence in the infographic below,

1) Defining Value Chain: identify business units/products, determine key functions and include all relevant activities of each function

2) Capturing Cost Data: estimate costs and assign them to various activities in your value chain. Then, select stronger competitors and determine how they allocate costs to each activity and why

3) Controlling Cost: find cost drivers and control them such as,

- Scale: expand product lines/facilities
- Linkage: control supplier scheduling, location of warehouse, payment policies
- Timing: Wait until technology is getting less expensive then acquire them
- Investment: focus on technology that cut costs
- Procurement: reduce SKUs, supply base for better volume

4) Cutting Buyer's Cost: follow these simple guidelines,

- Lower setup cost/time
- Decrease financing cost
- Improve quality/reduce inspection
- Reduce required maintenance
- Speed up processing time
- Reduce required monitoring/control

5) Determining Purchasing Criteria: try to figure out the key criteria and try to provide favorable delivery timing or improve product features, packaging and appearance or improve after sales/service

6) Reconfiguring Value Chain: change the way each activity is performed to support strategy

Concluding Remarks
According to Porter, cost analysis part doesn't need to be very precise, just the estimate is OK. But, a company needs to compare its cost profile against its competitors to reveal the competitor's strategy. For people who manage only the operations side of supply chain, this type of analysis brings a broader perspective so you can see a company as a big picture. For people working in 3rd party logistics company, the differentiation strategy makes lot of sense. Lastly, when you need to change the way each activity is performed, the use of standardized business process such as SCOR Model by Supply Chain Council, Value Chain Model by Value Chain Council or Process Classification Framework by APQC will definitely help you to bring best practices into your value chain.