What Is Value Chain Management? (With Key Benefits)

Updated 3 April 2023

A value chain is an idea that refers to a company's manufacturing activities. A business may implement measures to manage its value chain so it can better track its reception of inventory to its product delivery. Learning about managing a value chain can help you experience greater success in a logistics, sales or marketing role. In this article, we define value chain management, describe the benefits of this practice and explain how to conduct a value chain analysis.

What Is Value Chain Management?

Value chain management is the process of managing a business' manufacturing activities. This process includes the oversight of the following factors:

  • Production: Production is the process of creating new goods from raw materials.

  • Quality control: Quality control involves evaluating products a company produces to ensure they meet the organisation's quality standards.

  • Costing: Costing is the process of analysing the cost of manufacturing to determine the ideal selling costs of a product.

  • Distribution: Distribution is transferring goods from the manufacturer to the buyer.

Related: What Is A Supply Chain? (With Supply Chain Types And Steps)

Benefits Of Managing A Company's Value Chain

Here are some benefits of managing a company's value chain:

Increased profits

One benefit of having a system for managing a value chain is that it can increase a company's revenue and profit margins. Value chain management focuses on identifying areas in which a company can streamline processes or improve a product, meaning the company can also reduce spending. When a company makes an effort to manage its value chain, it may experience enhanced customer satisfaction. This may increase the likelihood of new customers purchasing products from the company and lead to an increase in profits.

Related: What Are Profitability Ratios? (With Types And Examples)

Reduced costs

With an increase in profits comes a reduction in costs. Managing a value chain can help a company optimise its manufacturing processes, meaning it can lower its costs via waste elimination and proper inventory control. This can also reduce logistics-related costs, as efficient internal outbound or inbound logistics operations can help a company reduce expenses more if it used third-party logistics services.

Better planning

When a company manages its value chain, it may create a more efficient planning process. This process can help different departments within the organisation work more effectively. They may be able to complete projects more quickly and for fewer costs. Still, they may be able to streamline communication with one another and be able to allocate more monetary resources to other ventures. As a result, a company may require less staff to work productively since all team members may be more aware of the company's larger goals.

Related: What Is The Importance Of Planning? (With Advantages)

Increased quality control

The process of quality control includes testing and evaluation. Managing its value chain can help a company streamline its quality control process by creating clear guidelines and criteria for suppliers. This can improve customer satisfaction, which can influence the other benefits of implementing a good system for managing the value chain.

Related: What Is Quality Control? A Complete Guide

More standardisation

When a company manages its value chain, it can more easily standardise all its manufacturing processes. When a company achieves standardisation, it creates repeatable processes that help a business become more efficient and reduce unnecessary waste. When there are standard processes, employees can know what to do in a specific situation because they have a set process to follow. This can increase employee productivity and the quality of work they produce.

Related: What Is Business Efficiency And 11 Strategies To Improve It

Greater competitive advantages

Managing its value chain can help a company create a competitive advantage by optimising elements that make consumers want to choose the company's offerings over the offerings of its competitors. Some of these components may include marketing, logistics and operations. In this way, managing a value chain can increase productivity and decrease costs, which results in a heightened competitive advantage.

Better product flow

When a company optimises and improves components of its manufacturing, it can also improve product flow. A good system for managing its value chain can help a company shorten the amount of time it takes for a product to get from the manufacturer to the consumer. This system can minimise delays and make it easier to track products throughout the manufacturing process.

Enhanced information flow

Information flow is the way employees transfer information throughout a company. When a company refines its value chain, it can improve its communication processes, which can be essential to making good business decisions. Managing a value chain can assist with the automation of information transfers among people and departments, which can allow the company to share information seamlessly, access data more easily and fill gaps in information.

How To Conduct A Value Chain Analysis?

As you are managing a company's value chain, discuss how to conduct an analysis of this framework. Below, you can review a list of steps on how to conduct a value chain analysis:

1. Familiarise yourself with the primary activities of a value chain

To create and sell a product, a business can be aware of the primary elements of a value chain. For example, inbound logistics involve the oversight of inventory and warehousing of products. Operations refer to how the manufacturers construct and test the materials for the final products. In contrast to inbound logistics, outbound logistics refer to distribution processes that occur when the manufacturers process the final products and schedule their deliveries.

Still, there are two additional primary activities to consider when conducting a value chain analysis. During the marketing and sales stages, a company advertises the products' features and value to consumers. Service refers to the support that a company provides to consumers who purchase its products. Service activities may include repairing defective products, offering refunds or providing exchanges.

Related: 8 Types Of Complaints From Customers And Their Resolutions

2. Learn about the secondary activities of a value chain

There are four secondary activities of a value chain about which you can learn. They are company infrastructure, human resources (HR) management, technology development and procurement. Company infrastructure refers to how a company organises itself so it can create a valuable product. For example, it may have various departments, including legal and accounting departments, to help with the development of product creation strategies.

Another secondary activity is HR management. This process allows staff members to preserve the company's interests and recruit talented employees who can contribute to the development of a new product. Technology development as a secondary activity involves the consideration of what technological resources a company needs to initiate the manufacturing process. There is also procurement to consider, which is the process of acquiring raw materials to use within the manufacturing process.

Related: Human Resources Management System: Features And Benefits

3. Separate each primary and secondary activity into sub-activities

Even if you understand a business' primary and secondary activities, it can be helpful to further separate them into sub-activities. When you complete this task, you may be able to assess each operation on a more intricate level. With a more specific analysis available, you can more easily compare the financial reward that each function produces in comparison to the cost, effort and time it requires.

Related: What Is The Profitability Index? (And How To Calculate It)

4. Analyse relationships between sub-activities

It is possible that the inconsistencies or inefficiencies of one activity can cause issues with another activity. For example, an HR member who has received poor training and cannot advise product manufacturers properly may cause issues at various stages of the manufacturing process. Issues within inbound operations or technology development may also affect a business' value chain. Determine if any obvious relationships are present so you can proceed to the next step.

Related: Problem-Solving Skills: Definitions And Examples

5. Determine areas of improvement

Note any patterns and trends that you discover in sub-activities or the relationships between these activities. Determine potential opportunities for improvement in these areas. You may consider consulting with individuals from different departments within the company so you can analyse the situation from different perspectives and consider different approaches to devising solutions.

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