Value Chain Analysis

Value Chain Analysis is a process that helps businesses understand how value is created and captured from each product’s initial conception through to its end use and beyond. The goal of Value Chain Analysis is to identify ways to improve the efficiency and effectiveness of the supply chain by optimizing the flow of goods, services, and information.

During this lesson, we explore the five primary activities and four support activities that finance leaders should identify and evaluate during Value Chain Analysis, and how to perform Value Chain Analysis on each of these.

Primary activities

There are five primary activities within Value Chain Analysis:

• Inbound logistics is the process of receiving and storing materials. It includes acquiring goods, handling and storage, and preparing the products for use in downstream processes.
• Operations refers to all the activities that transform inputs into finished products. This includes tasks such as manufacturing, processing, and assembling.
• Outbound logistics is the process of getting products to customers. For physical goods, this typically includes shipping, delivery, and returns management. For other services, this may include user accounts, systems access, and telecommunications.
• Marketing and sales are activities that promote a product or service to potential buyers. This can include advertising, public relations, and customer service.
• Service encompasses all the activities that provide support to customers after they have bought a product or service. This can include installation, repairs, and troubleshooting.

These will vary across different business, for example a business producing and shipping physical goods to customers versus a company providing professional services to clients.

Support activities

There are four support activities within Value Chain Analysis:

• Firm infrastructure includes all the systems and processes that a company has in place to operate. This can include anything from accounting and financial management systems to marketing and customer service procedures. Good firm infrastructure makes it easier for a company to execute its plans and respond to changes in the market.
• HR management is responsible for hiring, training, and managing employees. They also work with other departments to make sure that everyone is working together effectively towards the company’s goals. Effective HR management can help a company attract and retain talented employees, which is essential for success.
• Tech development refers to the process of creating new technology or improving existing technology. This can be done in-house or by partnering with outside companies. Having strong tech development capabilities is important for companies that want to stay ahead of the curve and maintain a competitive edge.
• Procurement is the process of acquiring goods and services for a company. This can include anything from raw materials to office supplies to marketing services. Good procurement practices can help companies save money and get better deals on products and services.

Again, these will vary across each company, although most of these will be valid in one form or another.

Performing Value Chain Analysis

There are three steps in Value Chain Analysis:

1. The first step is to identify the activities that create value for customers. This includes all the activities from initial research and design to production, marketing, and delivery. You should also consider the customer’s perception of value and any unique selling points.
2. The second step is to determine how much value each activity creates. This can be done by estimating the cost of performing each activity and then subtracting the cost savings generated by performing it more efficiently or effectively.
3. The third step is to identify ways to improve the efficiency and effectiveness of each activity. This may include streamlining processes, reducing waste, or finding new ways to add value for customers.

By performing these three steps across each of the primary and support activities, finance leaders can determine which activities create the most value versus those that should be discontinued.

Summary

Value Chain Analysis is a powerful tool for businesses of all sizes. By understanding how value is created and captured along the supply chain, businesses can identify ways to improve efficiency and profitability.