If you’re confused about the difference between a value chain and a supply chain, you’re not alone. The two models almost seem to be the same, even interchangeable, but they are fundamentally different—and a business needs both to succeed.
Think of it this way: There are two ways a product becomes something you own. It has to physically be transported from the factory to a warehouse to a retailer. That, simply put, is the supply chain.
The other way products get to you is via a combination of things like pricing and marketing— the things that make a product appealing (or, literally, give them value, both to the business and the consumer). That is the value chain.
The Concept of Value Chain
Value chain analysis was first made popular by business academic Michael Porter in 1985 in his book Competitive Advantage: Creating and Sustaining Superior Performance. Porter describes the value chain as a series of activities that add value to the consumer.
For example, say your product is a chair. The value chain might go something like this:
- Design the chair in an appealing way (operations).
- Obtain a hardwood at a good price (inbound logistics).
- Build the chair (operations).
- Test the chair (operations).
- Paint the chair in this season’s popular colors (operations).
- Ship the chair to a store (outbound logistics).
- Put the chair on display at a retailer (marketing and sales).
- Advertise the chair (marketing and sales).
- Offer support for purchasers of the chair (service).
In addition to these primary functions, the value chain also has support functions, including Human Resources, procurement, and the firm’s infrastructure.
Each step in the chain should add value to the chair, and in the end, the cost of creating the product should be lower than the value that’s been created (the profit margin).
When analyzing the value chain, steps that don’t add value to the customer are reevaluated. In this way, the value chain aims to put more resources toward functions that add value to the product, and as little as possible toward functions that add little to no value or increase costs.
Following the Supply Chain
The supply chain is made up of all of the players, from the provider of the raw materials to the sales associate at the store. While many members of the supply chain have no direct connection to each other, they need to work together seamlessly, with one step flowing into the next with little loss of value (whether it be materials, time, etc).
The supply chain for the chair might look like this:
- Lumber distributor
- Paint distributor
- Trucking company
- Sales associate
The list is similar to the value chain, but instead of functions that add value, it’s about who is doing what and how they flow together (which is why supply chain models often involve flow charts).
If one part of the supply chain is not working well, the entire chain is affected.
So, while value chain data analytics might conclude that the chair sells just as well without extra display materials (increasing profit margins by omitting a costly link), supply chain data analytics might find that the lumber distributor has caused delays with the builder (and therefore the tester, painter, etc), so a more reliable distributor should be considered.
Boost Your Bottom Line
The value chain determines the profitability of a product, while the supply chain gets it done as efficiently as possible. While functions overlap, what makes the two models different is the angle and focus (functions vs. players). Using supply chain analysis can help your company get accurate information about costs, so you can identify areas where you might be able to save, or need to invest, to improve the profitability of operations.
Together, these two models are key to a successful business, whether you’re selling widgets to consumers or services to large corporations.