Quite often, the terms value chain management and supply chain management are used interchangeably. While they overlap and are ultimately complementary, they are in fact two separate yet critical terms that impact your organizational success.
Value chain management (VCM) and supply chain management (SCM) are both related to the processes involved in getting goods from initial conception, purchasing all necessary raw materials and subassemblies and through all steps of manufacturing and ultimately, shipped, delivered or otherwise sold to consumers.
But, both VCM and SCM view these processes from unique perspectives, and with different objectives.
To best help you understand these important terms and how they impact your business, let’s examine value chain management and supply chain management and their differences.
Value Chain Management
The concept of a “value chain” was first introduced by Michael Porter in his book, Competitive Advantage: Creating and Sustaining Superior Performance, back in 1985. It includes the components or steps that are required from start to finish for a business to make a product or supply a service. Value chain management, then, is the process of monitoring or managing all the steps needed to achieve those end goals. Those include:
- Procurement
- Production
- Quality Control
- Distribution
Effective VCM includes taking steps to examine these components and identify opportunities to make them more efficient and ultimately, more cost effective. To achieve this goal in a global economy, that often means outsourcing some steps to trusted vendors.
VCM requires careful examination of each potential vendor and comparison to other alternatives, in order to determine where to get the best possible value. Ultimately, it is an examination of how to measure vendors and process alternatives based on the value they can provide.
Would a potential vendor make sense to provide essential raw materials? Would another vendor be better logistically to process those raw materials? Would a better option be a third vendor who could deliver finished intermediates? Or would it be more efficient for my organization to procure and process those materials itself? With VCM, these questions need to be asked for every step in the ultimate creation and delivery of the finished goods and the value that each participant provides is used to determine the best path to the finished goods.
These are the types of questions frequently asked throughout the course of value chain management.
Supply Chain Management (SCM)
Supply chain management exists to manage the flow of products from suppliers to the end user – consumers. A litany of processes takes place along the supply chain, which must be effectively controlled for the company to deliver goods to consumers while remaining profitable and competitive.
There are five (5) main components of supply chain management:
- Creating and designing a product to meet consumer demand
- Sourcing the materials needed to produce the products
- Manufacturing the product
- Delivering the product to consumers
- Accepting and processing returns of defective products
Supply chain management often focuses on cost of materials and efficient transport or delivery to mitigate cost. When done effectively, it reduces costs for the consumer while increasing profits for the manufacturer.
The Differences Between VCM and SCM
The primary difference between value chain management and supply chain management is that SCM is the management of all parties involved in fulfilling a customer request. VCM is a set of interrelated activities performed by chain participants a company uses to create a competitive advantage.
While both ultimately end with the consumer receiving their goods, VCM focuses on how the organization will be competitive and profitable while doing so, while SCM focuses on how to efficiently and effectively meet customer needs.
Both have similar goals: making customers happy with your products while operating efficiently, but take slightly different (but complementary) paths to get there.
Now what? How do I leverage VCM and SCM to grow my business?
PSGi helps organizations operate more efficiently to manage the value chain and the supply chain. Through our Business Process Review, we’ll complete a thorough review of your value chain management and supply chain management processes, and how your software not only captures these processes but is able to measure and determine optimal choices. We’ll help you identify areas of improvement and make recommendations to streamline operations to run more efficiently and profitably. Contact us to learn more.
