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What is a Value Added Chain?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 26 November 2016
  • Copyright Protected:
    2003-2016
    Conjecture Corporation
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A value added chain is a means of describing the way that commercial businesses tend to generate additional benefits or values during the course of their usual operation. In some cases, the chain of events functions as a supply chain that provides raw materials for some businesses that are then used in the manufacturing of various goods and services purchased by commercial or individual consumers. The general idea of the value added chain is that there is always some additional benefit in terms of generating revenue, since the buyer uses the acquired goods to create something that is ultimately sold at a profit and earns income for the company.

One of the easiest ways to understand a value chain is to consider what happens when a textile manufacturer purchases petroleum byproducts that were once considered useless. Today, those waste products can be used to produce artificial fiber that textile plants can use in the creation of a number of different products, including upholstery and carpeting. The manufacturer buys the waste at a very low cost, then refines it into fiber. From there, the raw fiber is sold to other textile manufactures that refine the raw fiber into what is known in the industry as roping yarn. In doing so, the manufacturer earns a considerable amount of profit from refining the waste and turning it into a useful product.

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The value added chain continues as the buyer of the roping yarn further refines the product via carding and spinning operations to create yarn that is suitable for weaving into cloth, upholstery, or carpeting. The refined yarn is sold at a profit to manufacturers that actually make the products that are sold on the open market. In turn, the carpet or upholstery manufacturer sells the finished products at a profit to retailers or even directly to consumers. At each step in the process, the materials purchased were used to create something that is later sold at a profit, adding value in the form of profit for each entity involved in the chain.

Value chains differ in specifics, based on the type of raw materials involved and the different ways those materials can be used efficiently by others. The one constant with a value added chain is that every stage or phase in the chain generates additional benefits or values for those concerned. As a business process, understanding the value added chain makes it possible to identify how much profit can be generated while still remaining competitive in the marketplace. For this reason, many businesses make it a point to secure materials that are considered high quality as well as low in price, maximizing the potential to turn those materials into some other type of high quality goods and sell them at the highest price that the market will bear, effectively increasing the value earned from the process.

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