Supply Chain Vs. Value Chain: Why the Difference Matters

Supply chain and value chain are two terms often used interchangeably. Though they might sound similar these two concepts are distinct in meaning and function. That said, they need to work in unison to create resilient and powerful supply chains.

What Makes up a Supply Chain?

A supply chain is a network of suppliers, manufacturers, distributors and retailers who are involved in sourcing raw materials, creating a product and selling it to the consumer.

Generally, supply chain involves multiple stages, like:

• Procurement: Sourcing raw materials or components from producers/suppliers.
• Manufacturing: Converting raw materials into finished goods.
• Distribution: Delivering the finished goods to retailers.
• Customer service: Aiding a customer’s experience for convenient buying.

What Makes up a Value Chain?

The term “value chain” was coined by Michael Porter, a Harvard Business School professor, in his 1985 book “Competitive Advantage: Creating and Sustaining Superior Performance.”

He defined value chain as the lens through which companies figure out how to produce products that offer customers greater value than the intrinsic job they do.

The value chain Is defined as a series of activities by a business to offer valuable products or services to its customers.

Value chains aim at boosting value across the buyer journey while reducing overheads. Where the supply chain focuses on the operational side – the flow of materials and products, a value chain prioritizes value-addition in products while creating and delivering products or services.

The value chain typically Involves the following stages:

• R&D: Developing new strategies, better products and/or enhancing existing ones.
• Design: Optimizing product designs suitable to customer desires.
• Production: Strategizing ways to produce goods and services in a better and sustainable manner, i.e. good for the business, consumer and the environment.
• Sales & marketing: Effectively delivering the key messaging and values of the product/services to prospects for better sales.
• Customer service: Support and assist customers with efficient buying.
• After-sales Support: Aims at offering value through the customer journey and increases customer lifetime value by increasing customer retention.

The Relationship Between Supply Chain and Value Chain

As mentioned earlier, though supply chain and value chain are different concepts, they are interrelated and complementary. Supply chains offer the raw materials and resources needed for product development, while the value chain focuses on how to offer maximum value to customers with these products.

In the absence of a resilient supply chain, the value chain would not effectively function. And with an inefficient value chain, the supply chain will produce suboptimal products that fail to meet customer needs and wants.

Is Supply Chain a Part of Value Chain?

Yes, all of the supply chain is a subset of a business’s value chain. The value chain includes processes beyond primary activities like operations and inbound and outbound logistics of the supply chain. These additional processes include sustainability measures, sales, marketing, after-sales support, customer experience, the state of the firm’s infrastructure and more.

How To Use Value Chain Thinking in the Supply Chain

Here are some key areas where value chains merge with supply chains to offer value to customers and growth for businesses:

• Inbound Logistics

Here, a value chain emphasizes how to quickly and efficiently procure goods. With value chain thinking, a business motivates suppliers for just-in-time delivery, optimizing inventory – mitigating over and understocking and reducing inventory management burden.

• Manufacturing and Production

Adding value in this stage of the supply chain will aim at reducing product cost while improving product quality. That may include investing in technology – leveraging data and automation. This will help speed up the process and improve quality control. Value chain thinking might also lead to a production process that allows for sustainable product development – like sustainable packaging and using recycled raw materials.

• Outbound Logistics

Value addition in outbound logistics aims at ensuring that goods reach customers quickly and efficiently. This would include optimizing shipping routes, last-mile deliveries, introducing strategic warehouses/fulfillment centers, co-sourcing and outsourcing, collaborating with brick-and-mortar stores and even digital deliveries.

To Sum Up

A supply chain is a network of businesses and individuals that undertake activities for developing and delivering goods and services to customers. The value chain focuses on optimizing these processes to add value to these products and services. To increase profitability, businesses need to have strong overarching value chains in which supply chains operate efficiently.