Chapter 6

VALUE CHAIN

6.1 Concept of Value Creation

Product-Based Business

Direct Involvement – means creating, producing or assembling a product through the

use of in-house manpower and other forms of resources and facilities.

Partial or Indirect Involvement – means using or employing the concept of outsourcing,

subcontracting, purchased services, etc.

Service-Based Business

It is about providing a service of value to a client or customer. The kind and quality of
such service determines its price.

6.2 Concept of Value Chain System

The series of activities and process as well as the supply of raw materials or needed
inputs involved in producing a product or delivering a service constitutes the premises
and essence of the concept of value chain system.
6.3 Concept of Supply Chain

Supply Chain (Upstream Activities)

It is a series of activities involved in the production or processing of a product or

rendering of a service.

It consists of a set of activities involved before the creation or production of a product or

the kind of services to be rendered by the business firm to the public at large, or the
specific market it wants to serve.

It consists of the activities on the supply side that result to the creation, production or
generation of a product and such kind of services serve as part of the core business
activity of the organization.

It is a term that describes how organizations (suppliers, manufacturers, distributors, and

customers) are linked together. – Chase, Jacobs and Aquilano (2004)

Parties and involved in delivering or causing the creation of the product or services
within the confines of the business organizations.

Supply Chain Management

It is a total system approach to managing the entire flow of information, materials, and
services from raw material suppliers through factories and warehouses to the end
customer. – Chase, Jacobs and Aquilano (2004)

It is a strategic management of distribution channels and processes that support the

entire business process. – Dietel (2000)

6.4 Concept of Distribution Chain

Distribution Chain (Downstream Activities)

Parties involved in moving the products from the confines or perimeters of business
producing the product.

It is not limited only to distribution organizations but it covers all the other parties with
direct and indirect roles in moving or causing the transfer of the product from its origin
to various places or countries and all the way to final consumption or user stage.
6.5 Concept of Value Chain

Value Chain

It refers to the processes involved in converting a product from raw material to its
finished, saleable and consumable stage.

It involves a way of organizing the activities of a business so that each activity adds
value or productivity to the total operation of the business.

Thus, it is a linked set of value creating activities beginning with basic raw materials
coming from suppliers, moving on to a series of value added activities involved in
producing and marketing product or service, and ending with distributors getting the
final goods into the hands of the ultimate consumers. – Wheelen and Hunger (2004)

6.6 Center of Activity

It is considered the most important to the company or the activity central to the
existence of the business itself.

6.7 General Components of a Value Chain

Primary Activities

It refers to the operations in the business organization where most of the value creation
efforts are made or done.

It is that aspect where operations and process are involved to produce the kind of
products or services the organization wants to sell or market.

These activities are done in the manufacturing or production department.

It composed of the following:

1. Inbound Logistics
Activities associated with raw materials or inputs procurement activities covering
vendor selection, comparative shopping, negotiating supply contracts, and just-
in-time arrival of goods.

They form part of the backward channel or supply side of the business.
2. Operations
Activities generally involve the actual conversion of raw materials into a finished
product.
 It includes fabrication, assembly, testing, and packaging the products.

The point in the value chain where actual value is added on account.

3. Outbound Logistics
It is a sequel to the inbound and processing activities particularly such aspects as
storage, distribution, and shipping of the finished product.
4. Marketing and Sales
Activity deals with the interactions with prospective clients including the ultimate
customers or end-users.
5. Services
Activity focuses on after-sales services to the customer whether end-user, a
processor or secondary producer.

Secondary Activities

It refers to support activities that are undertaken to support the value creation activities
both at the level of supply and distribution chain or the entire value chain system.

Includes tasks or activities indirectly associated with the actual production of goods and
services.

It covers the areas of administration, finance, human resource, and other logistical
components.

It composed of the following:

1. Corporate Infrastructure
The support backbone activities of the business operation.
2. Human Resources
Unique activity of matching the right people to the job expected.
3. Research and Technology Development
Adds value in a way it improves the product and the business processes in the
primary activities.

6.8 Importance of Value Chain

Backward Channel

It composed of the companies or organization providing raw materials or other forms of

inputs for the company to undertake its value creation process.

Generally, this channel refers to the suppliers of the business concern.

Forward Channel

It refers to the distribution side of the business or parties involved beyond the
production and storage line.

They bridge the gap between the business and the ultimate consumers of their
products.

6.9 Revamping the Value Chain

The shorter the value chain, the lower the cost of raw materials or other inputs supplied
to the value creator.

It means lower production costs and eventually lower price for its product in the
marketplace.

Revamping the value chain can be done by way of any of the following:

Abandon traditional business methods and shift to e-business technologies and use of
the internet

Use direct to end-user sales/marketing methods

Simplify product design

Offer basic, no frills product/service

Shift to simpler, less capital-intensive, or more flexible technological process

Find ways to by pass use of high-cost raw materials

Relocate facilities closer to suppliers or customers

Drop “something for everyone” approach and focus on a limited product/service

Reengineer core business processes

6.10 Value Chain in the e-Commerce Era

Seamless Chain Scenario

 Electronically connects various organizations either in the supply or distribution side
thereby ensuring timely information sharing and efficient logistical operations both at
the supply and distribution aspects of the business.

Internet technology benefits business organizations in the following ways:

a. Powerful tool for better supply chain management

b. Critical to internal operations

c. Useful for collaborative data sharing with distribution channel partners

6.11 Customer-Oriented Value Chain

In this model of value chain, the idea is to make all the other activities and strategies of
the various components of the value chain bias towards the needs and wants as well as
limitations of the prospective customers or clients.