Coined in 1982 by British Logisticist Keith Oliver and in 1985 by Professor Micheal Porter, the Supply Chain and Value Chain are often relevant concepts discussed and utilized within business entities. My personal experience with the Supply and Value chains revolves around the time I drafted a restaurant operations manual with my colleagues. Here we had to understand the nuance and niches that both concepts fall under.
Through my written work, I understood how both concepts raise the awareness business owners are required to ensure efficiency and productivity when utilizing Supply Chain and Supply chain Management (SCM). While the Value Chain assist business owners by helping them understand how their operations generate the entity’s competitive advantage through the analysis of their primary and supporting activities.
The Supply Chain is a set of step-by-step logistical processes that depict the journey raw materials go through to become a product that will find its way to a customer. The Value Chain, on the other hand, is a business analysis and strategic tool much like the PESTLE, VRIO, and SWOT analysis tools that portray a full range of activities a business entity goes through to add value to a raw good, from concept to production.
These activities include the process of procurement, manufacturing, and shipping, much like the supply chain. However, the Value chain analysis also studies supporting activities such as Human Resources (HR) management, Research and Development (R&D) of technology, procurement, and firm infrastructure. These activities hope to make the business more efficient, earning the entity a competitive advantage by generating maximum value for minimal costs.
Value Chain vs Supply Chain Up Front
The most concise way I can portray the difference between the Supply Chain and the Value chain is that the Supply Chain answers the what, while the Value Chain answers the how when we talk about operational logistics. The former adequately illustrates what the process is and what is required, while the latter explains how the process works to generate an advantage for the entity involved.
Value Chain vs. Supply Chain Key Differences
- Process: The supply chain is operational management focused, whereas the value chain is business management focused.
- Activities: The supply chain facilitates logistics involved in the product’s creation, transportation, and distribution, whereas the value chain adds value to the product through activities that turn operations into a competitive advantage for the entity.
- Order: The supply chain’s process cycle begins with procurement and ends with product delivery, whereas the value chain begins with customer demand and ends with product improvement and development
- Objective: The supply chain is customer satisfaction-focused, whereas the value chain focuses on sustaining the firm’s competitive advantage.
- Key steps: The supply chain details planning, purchasing, product assurance, packaging, and post-delivery service as its key steps, whereas the value chain has primary activities that deal with receiving, packaging, sales, marketing, and after-sales services that go hand in hand with supporting activities that facilitate research, innovation, development, and testing of products post feedback.
A supply chain is an operation cycle and network system that links suppliers to businesses. This relationship is formed multiple times to create a chain link depending on the entity or entities involved. The supply chain sees to it that the raw material is eventually turned into a product to be bought by a consumer.
The supply chain is often correlated or interchanged with logistics; however, logistics only covers and oversees the delivery and transportation of goods and thus is only a part of the whole process.
Parts within the Supply Chain
1. Raw Material
The supply chain begins with raw materials being procured by a manufacturing entity; raw materials can be seen as parts of a whole product.
In this step, a manufacturing company, say, Coca-Cola would begin to amass materials they will require to create their array of branded drinks. Raw goods such as plastic, sugar, and water, among others, would be what the Raw Material portion of the supply chain would refer to.
2. Suppliers Suppliers:
are also likely to be the producers of raw materials because said suppliers often have stock or produce these raw materials for manufacturing entities. However, this may not always be the case; popularly among agricultural goods, farmers, the producers of crops and animal products can at times not have direct lines of contact with manufacturing or business entities, leading them to instead partner or sell to a middle man who would later price these raw goods at a profit when selling to an entity in need of said goods.
The next part of the supply chain would be a manufacturer or the manufacturing entities; here, the parts mentioned are brought together to be created into products that will later be sold to the market.
In this step, the plastic, sugar, and water previously mentioned will be processed and made into the branded selection of drinks under Coca-Cola that we see, buy and enjoy from our local supermarkets and convenience stores.
In this part of the supply chain, Manufacturers who do not have their delivery system will, like the farmers, contact a third-party delivery or transportation service to safely and securely bring the products to associated Retail stores for them to be sold to customers for profit.
At this point of the supply chain, the products, in this case, the assorted soft drinks from Coca-Cola, have been properly delivered to retailers to be stocked, shelved, and sold to the customers. Examples of retailers, as mentioned, include but are not limited to supermarkets, convenience stores, hotels, and restaurants.
Lastly, the supply chain ends when the consumer receives and is satisfied with the product. This satisfaction would then generate a demand for the product, resulting in the supply chain beginning again.
Supply Chain Management (SCM)
SCM refers to the facilitation of the supply chain here; entities call upon experienced experts to ensure that the supply chain runs smoothly from planning to procurement till the customer receives and is satisfied with their product. SCM includes the following steps.
- Planning: In this stage, those who facilitate the Supply chain will plan and ensure that the inventory is balanced with the demand for their product. In this step, the several links established when we discussed the supply chain would coordinate with one another to ensure that the right amount of resources are procured at the right time.
- Purchasing: After the planning comes purchasing; all the necessary goods are bought from their respective sellers by those in charge of the supply chain
- Product assurance: At this point, before the products are sent off, SCM facilitates that the products made are up to the standards their entities require. If not, they are discarded and are not delivered.
- Packaging: Here, the products are labeled and stored correctly in safe delivery containers and boxes to be shipped to retailers; those in charge of SCM will ensure that no package or container is damaged or compromised before shipping.
- Post Delivery Service: SCM, as mentioned, also ensures customers’ satisfaction and deals with requests from clients post-purchase.
The Value Chain is a business model that analyzes the business’ operational logistics and answers how the activities within the entity will be value-adding in a way that generates and becomes a competitive advantage for them to capitalize on. The Value Chain comprises five primary activities monitored to ensure the operation process is efficient and cost-effective. The primary activities are then coupled with supporting activities that answer how the business can adequately handle the operations mentioned above in a way that nets them an advantage over their competitors.
1. Inbound Logistics:
The first activity of the Value chain is ensuring that the business is appropriately able to receive and inventory its stock consistently. Depending on the industry, particular standard operating procedures must be followed to confirm delivery times are met and that the inventory taken stock is quality.
Coming from a restaurant’s standpoint, this would come in the form of receiving ingredients or going out to buy them fresh for the day to come before properly storing them in their containers and storage, keeping in mind the ideal temperature and environment to maximize their shelf life and use for the restaurant.
For example, fast food giant McDonald’s utilizes fixed suppliers to ensure that the quality and consistency of their ingredients are assured. These suppliers range from trusted ally companies such as Coca-Cola for their soft drinks to local grocers and farmers to ensure the freshness of the ingredients.
Would then facilitate inputs and turn them into products. These activities include assembly and manufacturing. In the context of the restaurant, this step would oversee the preparation portion that restaurants go through before opening here; ingredients are prepped so that a systematic and efficient flow can be achieved once the cooking begins.
McDonald’s has a systematic kitchen system equipped with only the necessities, their operation style as a fast food chain would ultimately focus on the brevity of which the product can be pushed out to the customer. Large grills, dressing stations, beverage corners, and expedient routes to large counters all aid in this process.
3. Outbound Logistics:
Deals with the transportation and delivery of the product to the customer. This step takes many forms that end in order fulfillment for the client. In the case of restaurants, it would begin with taking in and organizing reservations and walk-ins, seatings, order taking, and service.
In the case of McDonald’s, not only do they partner with 3rd party delivery services on top of their own for accessibility, their in-house operations remain fast and practical. While their ambiance remains recognizable while providing comfort for their customers, it also ensures a satisfying dine-in experience.
4. Marketing and Sales:
Raises awareness, promotes the company’s brand, and entices the customer’s perception of the product, encouraging them to partake in the service or purchase the item/s being sold.
For McDonald’s and other restaurants, these take the form of TV, Social Media, and physical ads such as billboards and flyers. Word of mouth is also efficient concept marketers can capitalize on.
Enhances the already perceived value of the product and continues to add to the experience of the customers to increase profit by creating a loyal client base.
Mcdonald’s achieved this through time and consistency. Their service is always fast and accessible. On top of this, aspects such as Free Wifi, Free Delivery, and well-timed gift coupons for discounts effectively ensure that the brand is well received and well-loved.
- Procurement: Answers how the entity consistently receives the raw materials they require. As mentioned, Mcdonald’s has trustworthy and consistent suppliers that ensure the product’s quality and timely delivery. On top of this, they practice E-procurement techniques that streamline the process for their franchises.
- Technological Development: Speak of automation and the development of efficient productions. Effective R&D can be accomplished through heavy machines, the proper use of technological equipment, and well-practiced and efficient manufacturing techniques.
From self-ordering kiosks to joining the e-commerce market by partnering with 3rd party deliveries, McDonald’s has streamlined their service efficiency. On the side of effective product modernization, McCafe would be the first that comes to mind when analyzing how McDonald’s menu has modernized over the years.
- Human Resource (HR) management: Involves the entity’s hiring and retaining of employees. This means overseeing the turnover rate and ensuring it is within the right margin. HR management also involves having employees become a part of the operation’s design, assisting the entity in marketing and selling the product.
In the case of McDonald’s having hundreds of franchises worldwide, McDonald’s employs both contracted and permanent positions within its entity. An all-inclusive, flexible hiring scheme allows all types of people to join the entity.
- Infrastructure: composes the entire entity management team, including but not limited to the decision-makers, planners, financial analysts, and quality control associates.
McDonald’s, one of the market leaders in the fast-food industry, has its infrastructure focused on well-planned activities that boast sophistication and modernization while focusing on eco-friendly initiatives to maintain its triple bottom line. There would then naturally be several experts involved within their operations, making up a strong infrastructure for the entity.
FAQ’s – Value Chain vs Supply Chain
Question: Is Supply Chain just an outdated version of the Value Chain?
Answer: Although both tackle similar questions for the business entity, the Supply Chain focuses on function and operation. In contrast, the Value Chain focuses on value-adding activities that maintain an entity’s competitive advantage. Both are equally effective to utilize, given the proper context.
Question: Would a company ever utilize both the Value Chain and the Supply Chain?
Answer: Companies would utilize the Supply Chain amongst the manufacturing side of things where SCM can be utilized to its fullest in keeping high productivity for a reasonable cost. Decision-makers and planners would better utilize the Value Chain for the entity, those who understand how to use the operational capabilities of the entity fully.
Question: Could we use one concept and not the other one?
Answer: Several other business models can be utilized for internal and external business environment analysis that can take the place of the Value Chain. At the same time, a properly planned and written standard operating procedure (SOP) or operation manual can still achieve the same results the supply chain and SCM can accomplish.
The Supply Chain and Value Chain are practical business concepts that, when used properly, can become critical success factors for the business that utilizes them. However, both concepts answer similar questions. Understanding where and who they can and should be utilized would be the challenge for companies that wish to use both simultaneously.
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