Value chain analysis helps businesses review their supply chain and logistics to reduce operating costs and improve economic value. It includes inbound logistics, operations, outbound logistics, marketing, sales, and service. Increasing production can reduce costs, while differentiation creates a competitive advantage. Technology shortens turnaround times and improves efficiency.
Value chain analysis helps a business review its supply chain and logistics to maintain a competitive edge. A generic value chain can include a number of different steps, such as inbound logistics, operations and outbound logistics, as well as marketing, sales and service. Each step represents a part of the enterprise’s infrastructure that affects how the enterprise completes tasks and activities. A primary purpose of value chain analysis is to find areas in which to reduce operating costs and improve the overall economic value added of the company.
Inbound logistics includes the procurement and storage of materials needed to produce goods. Internal operations can also affect this process, as companies will need to move materials around the business to produce goods. This leads to the operational part of the value chain analysis, which includes the activities of transforming raw materials into consumer products. Outbound logistics is the distribution of finished products to retail stores. This also leads to marketing and sales, which can help the company reach consumers for product sales. Service is needed to receive customer feedback and find ways to improve products.
Owners and managers will often undergo a value chain analysis to determine whether their business will benefit from an economy of scale. This economic theory holds that a firm can reduce costs by increasing the number of goods it produces. For example, each step in the value chain will add operational costs to the company’s operations. While some costs are necessary, such as raw materials and labor to produce goods, others can simply add expenses without generating any revenue. Increasing production can reduce these costs, as society can allocate the money spent to produce more goods, which in turn equate to higher revenues when sold.
Another purpose of value chain analysis is the ability of a company to differentiate its operations from other companies. This can create a unique competitive advantage, as other companies in the business environment may not be able to replicate this process. Ways to differentiate across the value chain include using in-house or custom software, integrating with vendors and suppliers, or using specific locations to serve consumers.
Technology in business transforms the value chain process enormously. Historically, much of the interactions between companies in this chain used forms of interpersonal communication to complete tasks. Technology takes the human element out of many of these interactions. Businesses can use technology to transfer information electronically, shortening the turnaround times needed to move goods or information through the value chain.
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