Value Chain Analysis
Trace a cost or quality problem through the business's activities. Use value chain analysis to locate losses and test a focused improvement.
Use the idea inside a branch. Never say the name.
- Raw materials
- Production
- Storage and transport
- Sales and marketing
- After-sales service
Watch out: Draw the chain this business has; a bank's is not a factory's.
On a case
A dairy's margin fell four points in a year.
- Milk collection
- Chilling
- Processing and packing
- Cold-chain transport
- Retail
Illustrative case. Figures and conditions below are assumptions for practice, not market data.
Follow the dairy's milk through collection, chilling, processing, cold transport and retail. Compare cost and loss per litre at each stage, using the same period and saleable-volume denominator. A lower collection price may be offset by spoilage downstream.
Assume revenue stays Rs 50 per litre while total cost rises from Rs 40 to Rs 42. Margin falls from 20 percent to 16 percent, exactly four percentage points. If records attribute Rs 1.50 of the cost increase to spoilage and Rs 0.50 to freight, the bridge accounts for the full change.
Investigate chilling delays and temperature failures before cutting every activity by the same percentage. Recommend a route or chilling pilot only after comparing avoided waste with its extra operating cost. Check that lower spoilage becomes more saleable milk rather than simply changing where losses are recorded.
Sources and further reading
- Harvard Business School: the value chain
Examines the activities that create value, incur costs and connect suppliers to customers.