Value Chain vs. Supply Chain

If there is one thing I know that is true about supply chain, it is that we love our acronyms and buzzwords.  When I first began to study and immerse myself in the supply chain world, one of my first challenges was understanding, in plain language, what the heck my professors and textbooks were talking about.  That led me to create the Supply Chain Wiki when I first landed on the Supply Chain Insights team.  Check it out if you’d like help understanding different terms or acronyms.  I find that clear definitions, like those found in our Wiki, enable even seasoned professionals to ensure they are on the same page in high-stakes supply chain conversations.  And that leads me to the topic of this post.

One question I have heard recently, and the inspiration for an upcoming report is clarification regarding the difference between a value chain and a supply chain.  Today, I’d like to briefly discuss what a value chain means to me and present a couple of graphics that I’ve built with Index data that help to solidify the value chain concept.

A supply chain is a chain of upstream and downstream business engaged in arms-length transactions in an effort to bring a product through the stages of plan, make, source, and deliver.

Source:  Chain Sequence, Inc. (http://www.chainsequence.com/supply_chain_legal_notices.html)

A value chain, on the other hand, is a step further in evolution, moving beyond arms-length transactions and separate cogs into a cooperative and mutually beneficial environment.  A value chain environment is at odds with the outdated idea of passing costs onto upstream and downstream partners for the benefit of the focal firm (the main firm that is the focus of the analysis).

The majority of the work I have recently been focused on involves charting the financial performance of different peer-group companies operating within a single industry.  For example, our September 26th webinar (you can listen here) focused on CPG, Chemical and Pharmaceutical companies.  But I’ve taken a different approach recently, charting different members of the same value chain as you can see in the image below illustrating a packaging company, a CPG company and two retailers.  What is so striking here is that the pattern of evolution as shown by the companies in this graphic do not mimic each other, as they have in previous slides.  Most of the Chemical companies, for example, followed a similar pattern only differing on their starting location in 2000.  Each company here displays a very distinct and unique pattern.

The companies occupy different parts of the graph, yet both retail companies are in very close proximity to each other and display decreasing C2C values.  Do members of a supply chain operate within a bubble of possible improvement?  Are retailers limited to the area occupied above by Kroger and Walmart?  What retailers are breaking this pattern?  Target?  Costco?  And are they doing better or worse than the “retail” sphere defined by Kroger and Walmart?

In addition, what is striking here is that the improvement in supply chain performance have not been shared equally by all members of the supply chain.  In the coming value chain world, the gains will be realized and shared by all members, as opposed to a game of one-upmanship, for example, pushing inventory costs to less visible and powerful members of the chain.

This pattern of different regions for members of different tiers of the same supply or value chain is also visible in the healthcare sphere.

Here, Vanguard Health Systems illustrates the lowest C2C (desirable) as well as the lowest gross margin (not desirable).  Eli Lilly, on the other hand, shows a path of chaotic evolution in the upper right quadrant of the graph.  The gains being made in this graph are not consistent.  They are not gradual and sustained year-over-year improvements.  The motion is chaotic and often reversing on itself.  This value chain is broken.

And what about you?  What do you think differentiates a value chain from a supply chain?  And what graphical representations do you use to better understand this ongoing evolution in the supply chain sphere?  I would love to hear from you.  If you would like a custom cut of companies (either value chain based or peer-group within an industry), please reach out at abby.mayer@supplychaininsights.com or join the SCI Community and find me there as Index Girl or Abby Mayer.  Let’s keep the conversation going!

 

18 thoughts on “Value Chain vs. Supply Chain

  1. Supply chain consists of series of activities in which a product or a material is just transfer from the one point to the final point. while in the value chain, instead of just transfering we add certain values to it.
    eg- suppose a supply chain is there
    farmers- wholesaler-retailer-consumer
    if the apples just passes through d same channels with out any grading sorting then its a supply chain.
    while if at each stage,we add some values to the apples like grading, sorting,packaging,cool storing. then this is called value chain

  2. Hi Matteo
    I think that’s a great summary. You’ve condensed my blog post into a very simple, but powerful statement. I think the key point of a value chain is adding value to both end consumers as well as partners within that chain. Thanks for reading!

  3. Hey guys,

    I have read the blog and the comment above.

    Is this all value chain got to offer to the real business or is there more to it?

    As per my understanding value chain just gets a better value (cost) to the item/product.

    Please help

  4. Hi Hussain

    Thanks for reading! I think a large portion of it is about cost. However, I also would argue it is about building mutually beneficial relationships with upstream and downstream partners. This can be a goal in itself, but also likely leads to better business dealings, lower cost, less wasted time, improved communication and maybe even opportunities to collaborate on larger or different products in the future. What do you think?

    -abby

  5. How far up or down the value chain should an organization be expected to exert influence? It seems that the effectiveness of efforts to influence the value chain diminishes rapidly as one ventures beyond direct suppliers and customers.

  6. Hi Kevin-

    Great question. I think the level of influence will naturally decline the further away one gets from the organization, but it will depend upon a lot of factors. These could include the size of companies in the value chain, strength or length of working relationship, etc. In some instances, a very large organization with long working histories with several smaller companies could probably exert a large level of influence in terms of changing “the norm” in the supply chain/value chain organization. In other, more fragmented or less developed value chains, the amount of influence is going to be less.
    So yes, ultimately I agree that the level of influence will vary and will definitely decrease the further away from the organization you get. I suppose a very advanced value chain would evolve so that each company had buy-in to the goal and so the influence could extend further by the simple fact that more links in the chain shared the goal and it was not simply one company trying to enact change.

    Thanks for reading, and especially for commenting!

  7. Hello!!

    I wanted to know what you meant by “arms-length transactions” when you were explaining the basics of SC and VC.

    Thanks

  8. Hi Amai

    What I meant by arms-length transaction is a relationship between companies that is very transaction oriented so there is no extra coordination or cooperation. It is a very simple, even distant relationship with an exchange of money for product/service. A value chain would ideally go beyond these transactional relationships and create an environment where companies can cooperate and build stronger bonds with each other for the benefit of all parties.

    Thanks for reading!

  9. i am still confused. if supply chain includes purchasing, manufacturing, warehousing, transportation, customer service, demand planning , supply planning and Supply Chain management. then isn’t manufacturing here a value chain thing? i mean it ismanufacturing so isn’t it adding value? plzz reply fast

    • The supply chain has a value. Supply chain is the network. Value can be related to any component of the chain and to the whole chain. There is no confusion.

        • essentially you can think to that in that way. Value chain is technically just the VALUE of nodes/links or of the whole chain (depending on the scale of analysis) of the SUPPLY CHAIN. I can say e.g. RISK chain if I just look at Risks of the SC…

  10. great post indeed, i’d like to request Mr Matteo to shed some light on the blue ocean strategy which functions by removing competitions.
    2- could u please clarify what are upstream and downstream parties in the context of value/supply chain.
    3-as u said that the value chain is a more evolved form, what r the key features that distinguishes the two.

    thanks in advance for your promt reply…

  11. Hi Nile
    I think we’ve answered those questions earlier in the comment section and body of the post in regards to what differentiates a value chain and supply chain. Upstream companies are those furthest removed from the consumer, while downstream companies are usually retailers selling directly to the consumer. I hope that helps.

  12. I understand the difference between the value chain and the supply chain in a traditional manufacturing model, but it seems the two merge when there is a service, rather than a product, being delivered. When I think of the insurance claims management value chain, for instance, almost all of the various processes (intake, triage, coverage verification, assignment, inspection, etc.) could be performed by the supply chain. The insurer’s challenge would be to manage the inputs from the different suppliers (quality, costs) while providing the ultimate customer with a seamless, hopefully pain free experience. I wonder if there are any examples of service businesses where the supply chain performs all of the activities in the value chain.

    • Hi Dean
      This is an interesting thought and something I haven’t really spent much time thinking about before. It is so much easier to imagine those manufacturing supply chain to value chain evolutions, but service value chains are a bit trickier to imagine. This is the best article I found which begins to address some of those ideas- what do you think?

      • Thanks, That article isn’t quite on point, at least from my perspective. There are a few insurance companies who have outsourced their entire value chain–they simply monitor performance with a real-time dashboard and intervene only when customer issues arise. So it is supply chain management with a twist–full visibility into exactly how each supplier is performing, and handoffs that create a seamless customer experience. I was wondering whether other services organizations were doing the same thing.

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