An Integrated, Value-Added Supply Chain
The goal for today’s supply chain is to achieve integration through collaboration to achieve visibility downstream toward the customer and upstream to suppliers. In a way, many of today’s companies have been able to “substitute information for inventory” to achieve efficiencies. The days of having “islands of automation,” which may optimize your organization’s supply chain at the cost of someone else’s (for example, your supplier), are over.
As you will see throughout this book, the concepts of teamwork and critical thinking aided by technology enable organizations to work with other functions internally and with other members of their supply chain, including customers, suppliers, and partners, to achieve new levels of efficiency and to use their supply chain to achieve a competitive advantage that focuses on adding value to the customer as opposed to just being a cost center within the organization.
The Value Chain
The Value Chain model, originated by Michael Porter, shows the value-creating activities of an organization, which as you can see in Figure 1.2 relies heavily on supply chain functions.
In a value chain, each of a firm’s internal activities listed after the figure adds incremental value to the final product or service by transforming inputs to outputs.
Figure 1.2 The value chain
- Inbound logistics: Receiving, warehousing, and inventory control of input materials
- Operations: Transforming inputs into the final product or service to create value
- Outbound logistics: Actions that get the final product to the customer, including warehousing and order fulfillment
- Marketing and sales: Activities related to buyers purchasing the product, including advertising, pricing, distribution channel selection, and the like
- Service: Activities that maintain and improve a product’s value, including customer support, repair, warranty service, and the like
Support activities identified by Porter can also add value to an organization:
- Procurement: Purchasing raw materials and other inputs that are used in value-creating activities
- Technology development: Research and development, process automation, and similar activities that support value chain activities
- Human resource management: Recruiting, training, development, and compensation of employees
- Firm infrastructure: Finance, legal, quality control, and so on
Porter recommended value chain analysis to investigate areas that represent potential strengths that can be used to achieve a competitive advantage. As you can see, the supply chain adds value in a variety of ways, so it should be a critical area of focus (Porter, 1985).
We investigate ways to identify value-added and non-value-added activities (which should be reduced or eliminated) in a supply chain later in this book using a Lean methodology and tools.