A value-added chain is a process where each stage generates additional benefits or value, resulting in profit for each entity involved. The chain can involve the supply of raw materials to the manufacture of goods and services, and companies aim to secure high-quality, low-priced materials to maximize profit.
A value-added chain is a means of describing the way in which commercial enterprises tend to generate additional benefits or value during the course of their usual operation. In some cases, the chain of events functions as a supply chain that supplies raw materials to a few companies that are used in the manufacture of various goods and services purchased by commercial or individual consumers. The general idea of the value-added chain is that there is always some additional benefit in terms of revenue generation, as the buyer uses the purchased goods to create something that ends up being sold at a profit and generates revenue for the company.
One of the easiest ways to understand a value chain is to consider what happens when a textile manufacturer buys petroleum by-products that were previously considered useless. Today, this waste can be used to produce man-made fibers that textile factories can use in creating a number of different products, including upholstery and carpeting. The manufacturer buys the waste at very low cost and then refines it into fiber. From there, the raw fiber is sold to other textile manufacturers who refine the raw fiber into what is known in the industry as rope yarn. By doing this, the manufacturer makes a considerable profit by refining the waste into a useful product.
The chain of added value continues as the buyer of the tying yarn further refines the product through carding and spinning operations to create yarns suitable for weaving fabric, upholstery or carpet. Refined yarn is sold at a profit to manufacturers who actually manufacture the products sold on the open market. In turn, the carpet or upholstery manufacturer sells the finished products at a profit to retailers or even directly to consumers. At each stage of the process, the purchased materials were used to create something that is later sold at a profit, adding value in the form of profit for each entity involved in the chain.
Value chains differ in detail, based on the type of raw materials involved and the different ways in which these materials can be used efficiently by others. The only constant with a value-added chain is that each stage or phase in the chain generates additional benefits or value for those involved. As a business process, understanding the value-added chain makes it possible to identify how much profit can be generated while still remaining competitive in the market. For this reason, many companies are keen to secure materials that are considered high quality and low priced, maximizing the potential of turning these materials into some other type of high quality commodity and selling them for the highest price the market will bear, increasing effectively the value obtained from the process.
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