The supply chain and value chain might sound similar, but they’re actually two separate processes. Businesses follow one to create products from raw materials, and another to increase the perceived value of those products.
Let’s look at how supply chains and value chains work, as well as the major differences between these two processes.
What Is a Supply Chain?
The supply chain is a process that encompasses everything a business does to produce and deliver products to the end consumer. At a high level, the process includes:
- Sourcing raw materials
- Creating finished products
- Distributing the products to customers
In other words, the supply chain is the process of creating and sharing physical products with customers. That includes manufacturing, logistics, and everything in between to create a finished product.
Typically, multiple companies are involved in the supply chain. Only very large businesses own the entire supply chain, so it’s common to collaborate with vendors to ensure products arrive at customers’ doorsteps in a timely fashion.
The ultimate goal of the supply chain is to reduce costs and increase profits. Managers often try to optimize the supply chain by lowering the cost of materials, opting for cheaper shipping methods, and optimizing warehousing and storage.
What Is a Value Chain?
Consumers buy your products because they perceive them to be valuable. But what if you could increase the perceived value of your products — and justify charging a higher price?
First coined in 1985 by Harvard professor Michael Porter, the term “value chain” refers to the actions businesses take to make their products more valuable to customers. Since perception affects what customers will pay for a product, adding value to the customer can often justify charging a higher price.
The value chain team looks for competitive advantages through testing, research and development, and marketing optimization. They look at the supply chain to make sure that your product creation process matches up with customer expectations.
For example, your supply chain team might outsource manufacturing overseas to save money. However, the value chain team receives feedback that customers prefer products made in the USA, so you change the supply chain based on demands from the value chain.
Supply Chain vs. Value Chain: What’s the Difference?
While they might sound similar, supply chains and value chains are different. They intersect as a way to improve the supply chain and ensure your company is delivering on customer expectations. At the same time, the supply chain needs the value chain to ensure consistent customer demand for the goods it produces.
Supply chains and value chains differ in these areas:
- Parties involved: It’s expensive to manage the entire supply chain within one company, so this process usually involves cooperation between multiple businesses. However, the value chain is usually handled internally. You may occasionally collaborate with third-party supply chain vendors to make necessary changes, but more often than not, the value chain happens internally.
- Tasks: The supply chain team primarily concentrates on producing goods and getting them from point A to point B in the best, cheapest way possible. They’re primarily concerned with efficiency and costs. The value chain, on the other hand, takes customer feedback and uses it to adjust the supply chain.
- Processes: Supply chains have a very defined, linear process. The value chain, however, requires ongoing effort where you’re constantly sourcing customer feedback and incorporating it into your business. The value chain doesn’t ever truly end, while the supply chain has a defined start (sourcing raw materials) and end (customer receives the product).
- Goals: The supply chain needs to be efficient, fast, and low-cost to generate the most ROI for a company. The supply chain is primarily concerned with affordability, while the value chain focuses on the quality of the customer experience. The value chain strategically enhances the supply chain in certain areas that benefit the customer — and help your business stand out. For example, the supply chain team might opt for the cheapest product packaging possible, while the value chain team requests higher-quality packaging materials to boost perceived value.
Your supply chain distributes products, while the value chain increases the perceived value of your products. However, supply chain optimization doesn’t end with the value chain.
Businesses need to optimize every aspect of their business to come out on top. When you stay on top of the latest trends and best practices and know the right levers to pull, you’ll be able to reduce time to market, decrease costs, and boost profits.
However, you can’t optimize the value chain and supply chain without the right tools. It’s time to embrace digital transformation. See how an experienced supply chain management consultant like Argano makes organizations more agile or contact us today for more information.