Stop yanking my chain. Unpicking supply and value

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Feb 8th, 2015

Supply chain? Value chain? They’re interchangeable right? What’s the difference and does it matter?

Recently, someone told me they wanted to ‘identify where they sit in their value chain’. While this sounds reasonable, it really makes no sense at all.

While we know what they meant–or at least we think we do–it’s vital to unpick the question to understand it, as the answer we give will depend on what they meant.

A value chain is an internal model of an organisation, exploring how its activities enable it to manage and support adding value to the materials it purchases by assembling, finishing, and delivering a product to a customer’s specifications (as in the diagram below, derived from Michael Porter’s 1985 book ‘Competitive Advantage‘).

davidjcmorris-valuechain

A supply chain, on the other hand, is an external model of a network of organisations, that progressively transforms resources into products, from the extraction of raw materials to placing the finished product in the hands of a consumer (as in the simplified diagram below).

davidjcmorris-supplychain-closed

In other words, you cannot ask what your organisation’s position is within your own value chain, however you can ask where you are in your supply chain.

Of course, both the supply chain and value chain are part of a continuum: your supplier delivers products into your inbound logistics (where your value chain starts), and when your are ready you then deliver your products via your outbound logistics to your customer. So, in theory you could open your spot in the supply chain to see something of your internal functions (as in the diagram below, loosely based on the ‘Supply-Chain Operations Reference model‘).

davidjcmorris-supplychain-open

When we explored these various ideas, we came to the realisation that what they really needed was to understand where the value was being generated in their supply chain and how far removed they were from that, in order to explore ways of shifting themselves toward the value or shifting the value toward them.

This is a great strategic question, and once they have understood that external shift, they can then look internally to understand what they might need to change in their people, processes, and platforms in order to realise their strategic repositioning.

Note: Value chains are not be confused with value streams, which are individual series of activities that generate an outcome of value, such as ‘concept to market’, ‘order to cash’, ‘request to service’, etc.

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