Transforming of Supply Chain to Value Chain (E)
What is the relation between Supply Chain and Value Chain? What are the levers that moves Supply Chain to Value Chain?
Posted: May 2009
One of the biggest steps forward in modern management is the change of the approach that places the focus on providing the utmost value in the eyes of customer and consumer. Since the cost cutting and price-off strategy is not enough guarantee for sustainable competitive advantage on the long run, it is necessary for the company to provide the value that will justify the price of the product.
One of the biggest contributors to customer centric approach through value creation is the Michael Porter. One concept in particular that Michael Porter has brought to a wider audience is the concept of Value Chain.
Competitive advantage can be understood by looking at segment of a firm rather as a whole. The company activities reflects in designing, manufacturing, marketing, distribution, and supporting its product. Each of these activities can contribute to a company cost position and create a basis for differentiation.
The value chain dismembers a firm into its strategically relevant activities in order to understand the behavior of costs and the existing and potential sources of differentiation. A company gains competitive advantage by performing these strategically important activities more efficientl or more effective than their competitors competitors.
Value chain activities can be categorized into two types – primary activities ( logistics, manufacturing, marketing and sales, and service) and support activities (infrastructure, human resource management, development and procurement). These activities are integrating functions that expand across the traditional functions of the firm. Competitive advantage is gained from the way in which firms organize and perform these activities within the value chain.
To gain competitive advantage over its competitors, a company must deliver value to its customers by performing these activities more efficiently than its competitors or by performing the activities in a unique way that creates greater differentiation from competitors.
The product of Michael Porter's theory is that organizations should look at each activity in their value chain and assess whether they have a real competitive advantage in the activity. In case that they do not, then perhaps they should consider outsourcing that activity to a partner who can provide that cost or value advantage. This concept is widely accepted and has produced to massive shift to outsourcing activity. There are many examples in every industry
The effect of outsourcing is to extend the value chain beyond the boundaries of the business. In other words, the supply chain is transformed into value chain. Value is created not just by the focal firm in a network, but by all the partners that participate in that value chain.
Outsourcing has made supply chains more complex and therefore has made the need for effective supply chain management even more pressing. Today it is impossible to keep all activities within the walls of the company. The outsourcing is the way of successful value chain creation.