Value Chain

What is Value Chain

The value chain is a series of activities in the operations of a firm that adds value, whether directly or indirectly, to a firm’s products or services.

What are the two types of value chain activities?

These series of activities depend from one firm to another. Two (2) types of activities comprise the value chain. These are the primary activities and support activities.

Primary activities directly add value to a product or service.

On the other hand, support activities support the primary activities to perform more effectively and efficiently. Thereby, indirectly adding value to a firm’s products or services.

Primary Activities

Value chain primary activities include activities that produce, market, and deliver products and services to customers and provide post-delivery service and support.

1. Operations

These are the activities that transform a firm’s input into outputs. For instance, a manufacturing firm has raw materials as inputs and finished goods as outputs. Improving the efficiency of this activity reduces cost and helps a firm gaining a better profit margin.

2. Marketing and Sales

Marketing involves strategies that enhance a firm’s products or services’ visibility to the appropriate target audience. While sales involve strategies after marketing activities and to the ultimate closing of the sale. Improving these activities lets a firm to have a higher return, a strong position in the market, and a much larger audience as potential buyers.

3. Customer Service

These are also called post-sales services. Meaning to say, customer service is usually done after a sale is closed. Examples are customer support activities and warranty on repairs and maintenance. Improving this service will greatly increase customer satisfaction. This increases the chance that customers will likely repeat purchases in the future. Remember that it is harder to find new customers than selling again to a loyal customer.

4. Inbound Logistics

These activities involve receiving, storing, and managing movements of inventory within the firm. Improving these activities will have a huge impact on the direct cost of the product. For instance, implementing a just-in-time inventory system will greatly reduce the cost of handling and storing inventory and also the cost of capital tied to maintaining the inventory balance.

5. Outbound Logistics

Outbound logistics involves activities that distribute final products to the intended customer. In this activity, it important to determine appropriate carrier services your firm needs or to have your own fleet of delivery trucks.

Support Activities

Value chain support activities include activities such as firm infrastructure, technology, purchasing, and human resources that enable primary activities to be performed efficiently and effectively.

1. Firm Infrastructure

This involves accounting, finance, legal, and general administration activities that allow an organization to function. These activities usually comprise non-product operating expenses in a firm’s income statement.

2. Human Resource

Involves hiring, training, and compensating and retaining employees for the firm’s various departments. Improving this activity will improve employee turn-over rates and seek and retain the right talents for a firm.

3. Technology

Involves research and development of a firm’s products and services. Tons of investment is made in these activities by large companies such as Google, Amazon, and Microsoft.

4. Procurement

Procurement involves activities related to how a firm acquires raw materials from a supplier. Improving these activities have a direct impact on a firm’s product cost. For instance, implementing a purchasing schedule based on the Economic Order Quantity (EOQ) principle will balance carrying and ordering costs. Ultimately, reducing the overall cost.

How can the Value Chain be useful to a firm?

By performing value chain analysis, a firm can look deeper into its operations. It then lets the firm determine what activities add value to its products or services.

In this way, the firm can analyze and identify ways to increase each activity’s efficiency.

Furthermore, the value chain can be a part of a much larger set of activities such as the supply chain.

By implementing ways to improve the efficiency of a value chain activity, can have a good big impact on the supply chain.

For instance, by analyzing a firm’s inbound logistics and procurement, it decided to implement a more solid computerized inventory system with warehousing and supplier management modules.

By using this new system, the inbound logistics and purchasing activities were greatly improved.

However, this is not yet the end of its benefits. Using the new system now allows the firm to provide suppliers more detailed and timely information about its inventory needs.

In this case, the supplier can now more efficiently plan their production schedules and may result in cost reduction. The cost reduction is thanks to the new inventory system.

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