Recognizing value in an organization or industry is a core competency for successful management. “Value chain” is a term that denotes a process comprising a number of related steps, with each step adding value to the total outcome. Value chain analysis combines activity-based costing (ABC), key performance indicators (KPIs), and maturity profiles to evaluate performance and identify areas for improvement and priority setting. Value chain analysis helps set the strategic direction for implementation of those elements of SCM that are most important. For example:
Four primary tasks are involved in any value chain analysis:
The analysis results drive the estimation of costs and potential savings that can be achieved if investments are made in particular processes.
When analyzing the specific activities through which organizations can create a competitive advantage, it is beneficial to view a model of the organization as a chain of value-creating activities. It is important to note that the perspective will differ based on the viewer’s position in the value chain. Figure 2.3 illustrates a typical value chain.
Figure 2.3
Example of a Business Value Chain
The value chain of a business process often begins with raw materials, to which a business adds its particular technology. This could be process technology, formula or packaging, ease of use, or some way of transforming the raw materials into useful resources of benefit to the Postal Service. Manufacturing follows technology; it adds value to technology, to generate units for sale. The units for sale proceed through a logistics step, which makes them available to the customer, either directly or indirectly through distribution networks. Marketing is the next step; it adds the value of positioning, advertising, image, and all that is necessary to enhance the features and product benefits. The sales channel is leveraged for making the units available to the customer. Finally, the customer’s needs are met when they purchase the product and/or service.
The business value chain illustrates how each step adds discrete value to the business process output. Having maximum process effectiveness, then, is defined as having every task and function in the process as productive as possible. Tasks or functions are productive only if they directly add value to the outcome. For example, securing the right raw material with the right qualities and delivering it to the point of use clearly adds value to the business process. However, actually filling out a purchase order, securing approvals, transmitting requisitions, etc., creates no value to the outcome. Thus, value chain mapping is an analysis that identifies the underlying activity structure and enables better understanding of the value added (or not) by each activity. Value chain mapping enables the organization to map its value chain and recognize value sources or lack of value sources. It allows the key player in the organization to identify areas of opportunity for value optimization, as well as areas of potential risk.
