Value chain analysis

Value chain analysis reviews the processing steps that a business follows to deliver goods and services. The intent is to locate those processing steps at which value is added to the final product. In addition, the chain of activities is reviewed to see where costs are being incurred. The ultimate goal of the analysis is to achieve the highest possible value increase for customers while incurring the lowest possible cost.

The basic processing steps involved in value chain analysis are:

  1. Inbound logistics, which involves sourcing the correct raw materials and merchandise, and bringing them to the business in the most cost-effective manner.
  2. Operations, which transform the raw materials into finished goods. Or, if the company is a retailer, operations can refer to the positioning of acquired merchandise within its stores.
  3. Outbound logistics, which involves the transport of sold goods to customers in the most cost-effective manner.

Though positioned outside of this process flow, the marketing function can be used to increase the level of value perceived by customers when they acquire goods or services from the company. Also, the field servicing function can be employed in a similar manner. Thus, both functions can be considered part of the value chain.

All other parts of a business, such as accounting, administration, human resources, and information technology, are usually considered to be cost centers, where the focus is solely on cost reduction. However, it is possible to add value in some of these areas. For example, hiring specific personality types can improve the customer experience in a retail operation. Also, information technology can be used to develop unique applications that give a business a competitive advantage.

Once management understands where value and costs are being generated in the organization, it can focus its attention on these areas.

A common outcome of value chain analysis is that some operations are outsourced, on the grounds that they provide little additional value to customers, and yet involve a significant cost to the business.