The term "value chain" found its way into common business usage from the works of best-selling author Michael E. Porter - a leading authority on competitive strategy and international competitiveness.

Value chain is sometimes used as a synonym for "Value chain analysis" and is a description of the activities an organization performs whilst linking these activities to the organizations competitive position.

For full analysis of the value chain, you need to include business partner activities in your business supply chain.

Put simply, you want to maximize your value chain by increasing your profit margin whilst making sure the activities performed by your organization and business supply chain partners (upstream suppliers or downstream wholesalers and retailers) are optimized.

Value chain analysis is often used with other initiatives such as Six Sigma to deliver optimal business processes resulting inincreased business profit margins, increased quality and an increase in business process speed.

In other words, these types of analysis processes are concerned with producing

• Better
• Faster
• Cheaper

products and services resulting in more profit for an organization.

In the context of this article, we will treat products and services to be one in the same for the sake of simplicity and refer to them both as a "product".

In order to create a product, there must be a trigger point in a business process to start things off. Next, the product goes through a series of activities (i.e. the value chain) before it is finally ready for consumption by an end user or customer.

At each point in this process an activity takes place which "adds value" to the product.

If an organization is able to deliver a product / service the customer is willing to pay more for than the aggregate costs of all value chain activities then a margin of profit will result.

If not, the organization needs to recognize this and be prepared to accept a loss leader or do something to improve the negative profit margin they have.

You may have heard the old saying "You are only as strong as your weakest link". In the case of a value chain this is very true.

Within the confines of your own organization you must look to optimize your most important processes.

There is no point optimising 99% of the activities in your process and leaving a single bottleneck in the business process design.

Similarly when you look at the full supply chain logistics, you want to ensure your upstream and downstream partners are performing in an optimal fashion.

If one part of the value chain underperforms there will be repurcussions to others in the chain as well. Value chain analysis works on both the intra-organizational level and the whole supply chain / distribution networks.

In the same way there are dependencies between activties in a single business process, there are interdependencies between supply chain partners too.

No matter the type of business market, it could be the

• Retail Supply Chain
• Healthcare Supply Chain
• Pharmaceutical Supply Chain

or any other business supply chain for that matter, there are only 3 fundamental types of business process activities:

1. Value Added (VA)
2. Non Value Added (NVA)
3. Business Value Added (BVA)

Value Added (VA) activties are ones which a customer is willing to put their hands in their pockets to pay for.

Non Value Added (NVA) activities are the opposite to Value Added - the most obvious example being a delay (it's still an activity technically - albeit one where nothing is done). Result - unhappy customers.

Business Value Added (BVA) activities are ancilliary activities required by the business for various purposes (for example audit trails for the purposes of compliance).

According to Porter, there are 2 types of activities within an organization:

• Primary Activities
• Support Activities

Inbound Logistics

Goods are received from the upstream company supplier and stored as and until needed on an assembly line. Just-In-Time processing is an obvious way to improve this primary value chain activity by keeping inventory costs low with low stock storage requirements.

Operations

The goods needed to manufacture the product are in-situ thanks to Inbound Logistics, next "operations" take place to add value to the product. This could be the creation of pills in the pharmaceutical industry or the creation of a finished car in a motor manufacturing plant for example.

Outbound Logistics

The product is at this point complete, it is now the responsibility of outbound logistics to send the product to downstream supply chain wholesalers, retailers or direct to the consumer.

Marketing and Sales

Marketing and sales provide the momentum, excitement and emotion for the product in the eyes of target customers. Communications and promotions are an integral part of this activity.

Service

This activity could comprise activities such as installation, after-sales care, returns, warranties, complaints handling, training etc...

Procurement

Procurement takes care of all materials, goods and services acquisition with the goal of getting the best possible price and quality.

Technology Development/R&D

All successful firms embrace technology and use it to their advantage over their competition. Through creative and innovative technology use, profits can be increased, speed to market increased and quality increased.

Technology utilisation is all pervasive in the context of organizations within all aspects of the value chain primary and support activities.

Human Resource Management

The knowledge, experience and performance of employees are crucial to the success of a company. Without their active participation companies will not have optimal value chains, period.

Human Resources Management is responsible for the well-being, training, personal and professional development as well as recognition, rewards and remuneration packages designed to keep employees happy.

Firm Infrastructure

Including planning management, legal, finance, accounting, management information systems (MIS), quality management etc...