What is Value Chain Analysis?

Value chain analysis helps a company review its supply chain and logistics to maintain a competitive advantage. A generic value chain can include a number of different steps, such as inbound logistics, operations and outbound logistics, as well as marketing and sales and service. Each step represents a portion of the company’s infrastructure that affects how the firm completes tasks and activities. A primary purpose of value chain analysis is to find areas to decrease operating costs and improve the overall economic value added of the company.

Inbound logistics includes acquiring and warehousing the materials needed to produce goods. Internal operations can also affect this process, as companies will need to move materials throughout the firm to produce goods. This leads into the operations portion of value chain analysis, which includes the activities for transforming raw materials into consumer products. Outbound logistics is the distribution of finished products to retail stores. This also leads into marketing and sales, which can help the company reach consumers for selling the product. Service is necessary to receive customer feedback and find ways to improve products.

Owners and managers will often undergo a value chain analysis to determine if their company will benefit from an economy of scale. This economic theory purports that a company can lower costs by increasing the number of goods produced. For example, each step in the value chain will add operating costs to the company’s operations. While some costs are necessary — such as raw materials and labor to produce goods — others can simply add expenses without generating revenues. Increasing production can lower these costs, as the company can allocate the money spent to produce more goods, which in turn will equal higher revenue when sold.

Another purpose of value chain analysis is the ability of a company to differentiate its operations from other companies. This can create a unique competitive advantage, as other companies in the business environment may be unable to replicate this process. Ways to differentiate the value chain include using internal or custom-designed computer software, integrating with vendors and suppliers or using specific locations to serve consumers.

Technology in the business world vastly transforms the value chain process. Historically, much of the interactions between companies in this chain used interpersonal communication forms to complete tasks. Technology takes the human element out of many of these interactions. Companies can use technology to transfer information electronically, shortening the lead time it will take to move goods or information through the value chain.