The value chain, also known as value chain analysis, is a concept from business

management that was first described and popularized by Michael Porter in his 1985
best-seller, Competitive Advantage: Creating and Sustaining Superior Performance.[

A value chain is a chain of activities for a firm operating in a specific industry. The business unit
is the appropriate level for construction of a value chain, not the divisional level or corporate
level. Products pass through all activities of the chain in order, and at each activity the product
gains some value. The chain of activities gives the products more added value than the sum of
the independent activity's value. It is important not to mix the concept of the value chain with the
costs occurring throughout the activities. A diamond cutter, as a profession, can be used to
illustrate the difference of cost and the value chain. The cutting activity may have a low cost, but
the activity adds much of the value to the end product, since a rough diamond is significantly less
valuable than a cut diamond. Typically, the described value chain and the documentation of
processes, assessment and auditing of adherence to the process routines are at the core of the
quality certification of the business, e.g. ISO 9001.

[edit] Activities

The value chain categorizes the generic value-adding activities of an organization. The "primary
activities" include: inbound logistics, operations (production), outbound logistics, marketing and
sales (demand), and services (maintenance). The "support activities" include: administrative
infrastructure management, human resource management, technology (R&D), and procurement.
The costs and value drivers are identified for each value activity.

[edit] Industry Level

An industry value chain is a physical representation of the various processes that are involved in
producing goods (and services), starting with raw materials and ending with the delivered
product (also known as the supply chain). It is based on the notion of value-added at the link
(read: stage of production) level. The sum total of link-level value-added yields total value. The
French Physiocrat's Tableau économique is one of the earliest examples of a value chain. Wasilly
Leontief's Input-Output tables, published in the 1950s, provide estimates of the relative
importance of each individual link in industry-level value-chains for the U.S. economy.

[edit] Significance
The value chain framework quickly made its way to the forefront of management thought as a
powerful analysis tool for strategic planning. The simpler concept of value streams, a cross-
functional process which was developed over the next decade,[2] had some success in the early
1990s.[3]

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The value-chain concept has been extended beyond individual firms. It can apply to whole
supply chains and distribution networks. The delivery of a mix of products and services to the
end customer will mobilize different economic factors, each managing its own value chain. The
industry wide synchronized interactions of those local value chains create an extended value
chain, sometimes global in extent. Porter terms this larger interconnected system of value chains
the "value system." A value system includes the value chains of a firm's supplier (and their
suppliers all the way back), the firm itself, the firm distribution channels, and the firm's buyers
(and presumably extended to the buyers of their products, and so on).

Capturing the value generated along the chain is the new approach taken by many management
strategists. For example, a manufacturer might require its parts suppliers to be located nearby its
assembly plant to minimize the cost of transportation. By exploiting the upstream and
downstream information flowing along the value chain, the firms may try to bypass the
intermediaries creating new business models, or in other ways create improvements in its value
system.

Value chain analysis has also been successfully used in large Petrochemical Plant Maintenance
Organizations to show how Work Selection, Work Planning, Work Scheduling and finally Work
Execution can (when considered as elements of chains) help drive Lean approaches to
Maintenance. The Maintenance Value Chain approach is particularly successful when used as a
tool for helping Change Management as it is seen as more user friendly than other business
process tools.

Value chain analysis has also been employed in the development sector as a means of identifying
poverty reduction strategies by upgrading along the value chain.[4] Although commonly
associated with export-oriented trade, development practitioners have begun to highlight the
importance of developing national and intra-regional chains in addition to international ones.[5]

VALUE CHAIN MANAGEMENT

Value chain management (VCM) is the integration of all resources starting with the vendor's
vendor. It integrates information, materials, labor, facilities, logistics, etc. into a time-responsive,
capacity-managed solution that maximizes financial resources and minimizes waste. In other
words, efficient and effective value chain management optimizes value for the customers'
customer. The following sections discuss the development of VCM, integrated supply chain
planning and scheduling, full resource management, cycle time responsiveness, chain-wide
resource optimization, and information integration.

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 DEVELOPMENT OF VALUE
CHAIN MANAGEMENT
Using the previous definition as a basis, it is helpful to review how VCM was developed.
Traditional industries focused on vertically integrated operations. For example, if you
manufactured a product, you wanted to control the material sources, the transportation, the
warehousing, the production, and possibly even the retailing of your product. The theory held
that more vertical elements that were under your direct control, the more efficiently you were
able to perform.

International competitive pressures caused organizations to realize that they simply were not
good at everything; thus, they began to focus on what they did best. In other words, they focused
on their core competencies. This shift away from vertical integration encouraged organizations to
look outside of themselves for services. For example, a manufacturer would have a shipping
company do all their packaging and shipping. This introduced more steps in the vendor-to-
customer linkage, making the management of this process more complex.

The trend toward operational diversification focused organizations on developing a supply chain
whereby an organization would establish a relationship with shippers, vendors, and customers so
that all the linkages in the supply chain could be effectively integrated. These interrelationships
became extremely complex to manage. Initially, the management of these relationships and
linkages was primarily performance-based. Having too many linkages in the supply chain would
often cause unresponsiveness to customer demands. Time-to-market became the buzzword of
successful competitive positions; the organization that managed its supply chain most effectively
tended to have the competitive advantage, at least in terms of customer responsiveness and order
fulfillment.

Soon, managers realized that time responsiveness was not the only important element in
customer satisfaction. The supply chain linkages-the links among upstream suppliers,
manufacturers, and downstream distributors-also had a cost element and resource-efficiency
element associated with them. This realization generated a need for value chain management,
which is the management of all the linkages of the supply chain in the most efficient way.
Sometimes this includes the elimination of elements of the supply chain; for example, Web
marketing has eliminated the need for retail outlets. Amazon.com is a well-known example of
eliminating the need for physical "bricks-and-mortar" retail locations. Another example is
Atomic Dog Publishing. This textbook company leases online textbooks to students for a
semester. Because the texts are online, Atomic Dog has cut out an intermediary between text
development and customers; in other words, Atomic Dog manages its value chain through
disintermediation by eliminating the need for college bookstores.
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Returning to the definition of value chain management, we can now look at the key aspects that
are incorporated in VCM. These include:

• integrated supply chain planning and scheduling

• full resource management
• cycle-time responsiveness
• chain-wide resource optimization
• information integration

INTEGRATED SUPPLY CHAIN PLANNING

AND SCHEDULING
The planning process for managing the supply chain is easy and has existed for many years.
Systems like material requirements planning (MRP), manufacturing resource planning (MRP II),
distribution requirements planning (DRP), theory of constraints (TOC), just-in-time (JIT),
critical path method (CPM), and program evaluation and review technique (PERT) have
performed the planning process effectively for the last 30 years. However, under these
environments, capacity has been treated largely as an afterthought, and therefore scheduling has
been plagued with performance challenges. The introduction of capacity management tools like
finite capacity scheduling (FCS) into the existing planning environments has allowed the
development of schedules that were optimizable both in timing and in cost. Most planning
systems still do not include these scheduling elements, but rather focus on achieving delivery
performance through the utilization of an overriding expedite process. FCS enhancements are a
key piece in the development of efficient VCM environments.