When it comes to manufacturing, smart companies are always looking for a competitive advantage. One way they can do so is to optimize their business’ value chain.

A value chain is a term that Michael E. Porter came up with in his 1985 book, Competitive Advantage, to describe the steps that need to be taken, from start to finish, in order to produce a product, or deliver a service.  

So, what does value chain mean in manufacturing? If you analyze your own company’s value chain, you may be able to figure out ways to make the process simpler and cheaper. For example, if you do not spend enough time and money in product planning, you may save money in the short run, but you may end up with products that end up being recalled, or that simply do not sell well. By paying closer attention to your value chain, you can increase communication and cooperation, and increase your customer satisfaction.

5 Major Components of the Value Chain

According to Porter, a successful value chain must contain the elements below. Without these components, the company will not succeed. Here is how they break down when it comes to manufacturing.

The five major components in the value chain:

4 Support Components in the Value Chain

Porter also identified the following as the four support components in the value chain:

Where the margin comes in

Porter also talked about how the profit margin would be larger if these categories provided more value – at lower cost. For example, a company may find it more profitable to outsource some of the support activities to others, rather than have an in-house technology department. On the other hand, businesses may be willing to make bigger expenses in the short term to increase profits over the long haul.

For example, they may want to hire an outside advertising firm to market their product and increase consumer awareness. While this will be an expense at the beginning, it will result in many more sales, particularly if the advertising hits a nerve with customers’ needs. The same rationale goes for spending more time researching consumers’ needs for a new product – the short-term expenses could result in long-term sales.

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