A company's basic, high-level goal is to sell a product to consumers. In order to successfully sell that inventory, consumers need to find some kind of value in it. The more value an organization can create, the more profitable they can become.
Therefore, it's critical to understand completely how your business creates value and where more value can be added to create a competitive strategy.
A value chain is a set of processes and/or activities a business partakes in to create value for its consumers. How value chain activities are carried out determines cost and influences your profit level. By understanding your sources of value, your numbers can go in a direction that makes everyone happy.
Where to Look for More Value in Your Supply Chain
When companies are faced with the task of reducing costs, entire departments are many times the first places they look to. This automatic jump shouldn't occur. Instead, managers should focus on systems, specifically how inputs are converted into outputs, as a first place to start.
There are several primary activities common to all businesses that relate directly to a product. These activities include the creation, sale, support, and maintenance of a product. Inbound logistics, operations, outbound logistics, marketing and sales, and service are primary activities that often hold undiscovered value. Going into more depth, supplier relationships, operational systems, communication, and support are areas where companies can increase their value added.
In a systems framework, support activities directly support the primary ones. These support activities can include procurement, human resource management, infrastructure, and technology development. Good human resources best practices can increase the value of employees. Minimizing technology costs and keeping up with new technology also increases the value of business. When both primary and support activities are used in tandem, building blocks are created, which help the company generate more overall value.
How to Find Untapped Sources of Value in Your Supply Chain
There are four steps companies can follow to find untapped sources of value in their midst. For the first step, identify subactivities for every primary activity you have. This step will help you discover which subactivities generate value. Subactivities can be divided into three different categories. There are direct activities that create value all by themselves, indirect activities that allow direct activities to function, and quality assurance activities that ensure the first two meet professional standards.
Once that's done, step two involves doing the same thing but with support activities. In step three, you look for links; find the connections between the value activities found. Although time-consuming, this step is important for increasing your business's competitive edge. During step four, you look for opportunities and places where you can increase the value. Think outside the box about how to alter or enhance the value you offer to your customers.
When going through this entire process, watch for areas where you see excess spending or where value is quite limited. Reducing costs in areas where there is little to no value will help refocus your value chain, allocating money to activities that increase value instead. For example, when looking at transportation and motion as a primary activity, you may find waste. Excess motion doesn't add value and means more cost in terms of increased administration, fuel, warehousing, inventory, or transportation costs. Consider changing the plant/warehouse layout to one that is more sensible and practical. One of the largest forms of waste is in paper processing and administrative functions, so reviewing your paper flows can result in significant time savings, allowing your team to focus on value added versus non-value added activities.
Value can sometimes be hard to find. Businesses need to look high and low for areas where it can be increased. By breaking down business activities into strategically smaller pieces, managers are better able to see the big picture, cut costs, increase value, and become more competitive.