What is the Value in your Supply Chain? (A PI Q and A)

 

Member Question:

What is the difference between Supply Chain and Value Chain?

My Response:

To begin, the reference to supply or “value” chain is a misnomer in that it implies a sequential architecture.  This is a term that is on its way out as an organization’s supply “practice” is actually centered on the synchronization of diverse stakeholders sometimes spanning multiple supply networks.  This is an important distinction given the impact that real-world synchronization has on theories such as value chains.

That said the concept of the value chain was first introduced by Michael Porter in 1985 in his book, Competitive Advantage: Creating and Sustaining Superior Performance.

Congruent with the supply chain, the premise behind the value chain concept according to Porter is that as products pass through each point of the chain (he refers to these individual points as activities), the products gain “added value.”  This is why the structure or architecture of the chain is so critical re sequential versus synchronized.

As demonstrated by the analogy of a diamond cutter, whose costs associated with cutting the diamond may be low, but the service he provides in cutting the diamond increases its collective value as a finished product over that of an uncut diamond, Porter stressed that it is important to differentiate the value from the actual cost of the related activity.

The assignment of “added value” takes on greater importance in the emerging global marketplace, especially in key areas such as the development of viable supply clusters both domestically as well as internationally.  (Note: I have included a link to an article I wrote last year on this subject.)

Porter’s theory also needs to be examined much closer in the context of double marginalization and the broad application of a vendor rationalization strategy (the practice of which has been largely discredited).  (Note: I have also included a link to a corresponding article on double marginalization.)

So even though Porter’s theory at the conceptual level has merit, its “value” in terms of applicability in a real-world supply practice is now proving to be inconclusive.  Especially since supply practice models such as SCOR – in which the framework was based on Porter’s theory – are undergoing close scrutiny in terms of sustainable effectiveness.

I have included a link to an article I wrote on Supply Chain Optimization which should provide additional insight into the thought process behind the above answer.

Links:

 

Double Marginalization and the Decentralized Supply Chain – https://procureinsights.wordpress.com/2007/08/09/double-marginalization-and-the-decentralized-supply-chain/

Public Sector Procurement Practice and the Principles of External Economies, Clustering and the Global Value Chain – https://procureinsights.wordpress.com/2007/08/28/public-sector-procurement-practice-and-the-prinicples-of-external-economies-clustering-and-the-global-value-chain/ 

Optimization Modeling and the Modern Supply Chain (A PI Q and A) – https://procureinsights.wordpress.com/2008/03/18/optimization-modeling-and-the-modern-supply-chain-a-pi-q-and-a/