The concept of value chain, described and popularized by Michael Porter in 1985, seeks to maximize value creation while minimizing costs. It can apply to individual organizations or to interconnected supply chains and distribution networks.
At different stages in the value chain, the design and marketing stages usually provide much added value.
From Local to Global Value Chain
The delivery of products and services to the end customer mobilizes many firms, each managing its own value chain. The industry-wide interactions of those local chains create an extended value chain. It includes the value chains of a firm's suppliers (as well as their suppliers), the firm itself, its distribution channels and buyers (as well as the buyers of their products).
By exploiting the upstream and downstream information flowing along the
global value chain, firms may create new business models, improving their value system.
The value chain framework is useful for management policy purposes because:
- Activities are often carried out in different parts of the world;
- Some activities add more value and are more lucrative than others (the policy-makers' concern is to help local enterprises move into lucrative activities); and
- Some actors in the chain have power over others. The powerful actors are often called the "head firms" who seek to "govern" the chain. They set and enforce the terms under which others in the chain operate. Attention must be given to the relationships between global head firms and local producers.
(adapted from Schmitz, H.,
Job Creation and Enterprise Development Department (EMP/ENTERPRISE), International Labour Organization (ILO), visited 2009-07-28)
Modularity and outsourcing may induce the bunching up of functions at other points along the
global value chain. Contract manufacturers, therefore, aim at extending their offerings to the lead firms along the value chain. To do so, "suppliers often increase design and other services they provide in hopes of wooing new customers and making it harder for lead firms to switch their business away from them. On the other side, lead firms are reluctant to enter into deals that make it very costly to switch from one contract manufacturer to another." The lead firms worry "about how much integration to buy from the suppliers and how great the risks are of lock-in."
(Berger, S.,
How We Compete: What Companies Around the World Are Doing to Make it in Today's Global Economy, Doubleday Broadway, 2005, pp. 223-224)
Global Value Chains and the Globalization of Production
"Multinational companies (MNCs) must ascertain where and with whom they locate their high value-added activities and where and with whom lower value-added activities will be located […]. The globalization of production means that national frontiers are increasingly blurred for any given product: customer service can be performed in India for products conceived in North America and manufactured in China. The frontiers of the firm are also blurred by unceasing movement in what is subcontracted, offshored, joint-ventured and so on, the architecture of which can be thought of as the value chain."
(CRIMT,
Future Perspectives of Multinationals in Canada, Université de Montréal, 2006, p. 19)
Triangle Manufacturing
"One of the most important mechanisms facilitating the shift to higher-value-added activities for mature export industries like apparel in East Asia is the process of ‘triangle manufacturing' (global logistics contracting). The essence of triangle manufacturing, initiated by the East Asians in the 1970s and 1980s, is that global buyers place their orders with the manufacturers they have sourced from in the past; those manufacturers then shift some or all of the requested production to affiliated offshore factories in low-wage countries (China, Guatemala, Indonesia). These offshore factories can be wholly owned subsidiaries, joint-venture partners or simply independent overseas contractors. The triangle is completed when the finished goods are shipped to the overseas buyer […]. Triangle manufacturing thus [involves] established suppliers for retailers and designers [in the home country] [and] middlemen in buyer-driven commodity chains that can include as many as 50 to 60 exporting countries."
(UNIDO Exchange,
Innovation and Learning in Global Value Chains, visited 2009-07-28)
Difference Between a Supply Chain and a Value Chain
The supply chain focuses on the activities involved in acquiring raw materials and sub assemblies, and getting them through the manufacturing process smoothly and economically. Value chain management aims at turning a supply chain into a value chain by applying lean manufacturing principles. By adding value and cutting waste at any and every point in the supply chain, you create greater value in your end result. Value chain management looks at every aspect, from raw materials (including those the suppliers' suppliers use) to customers and the eventual end user, right down to disposing of the packaging. The goal is to deliver maximum value to the end user for the least possible total cost. This involves the firm, its suppliers and their suppliers' suppliers.
(adapted from Wisconsin Manufacturing Extension Partnership (WMEP),
Value chain management, visited 2007-03-26)