Value Chain vs. Supply Chain: What's the Difference?

The value chain and supply chain are both useful models for understanding the process of moving goods from manufacturer to end customer. They illustrate different stages of production and the connections between the various parties involved in a given industry, but they do have some significant differences between them. Understanding the difference can help marketers, supply-chain professionals, finance directors, and others better use these models to make decisions. This article will outline those differences.

Value chain:

The term value chain was coined by Professor Michael Porter in his 1990 book "Strategy: an economic approach to management" to describe a model of value creation over time in which companies source raw materials, produce the final product and sell it. Porter emphasized that this value chain does not exist only for a specific industry, but accounts for all industries. He points out that there are five major segments of a company's value chain: suppliers, intermediaries (such as wholesalers), customers, employees, and shareholders. Porter introduced the idea of the value chain in order to give a more comprehensive explanation of how a company is able to compete and gain market share.

Supply chain:

Supply chains, on the other hand, are a way of managing complexity by connecting suppliers and firms. The supply chain is comprised of all parties involved in the physical process of delivering a good from the source through manufacturing, sales, and distribution to the end-user. The various steps in a particular supply chain are connected together via contracts (buyers purchase products from suppliers using suppliers' orders) or other non-contractual agreements (buyers must purchase low-cost raw materials at low prices from sources such as open marketplaces). Supply chains are typically more complex than value chains.

Difference between a value chain and supply chain:

The primary difference between these two concepts is that the value chain focuses on explaining how a company creates value for its customers, while the supply chain looks at how a company works with its suppliers to meet customer needs. The value chain runs from beginning to end, while the supply chain functions in loops. Put differently, the goal of a supply chain is to find or create final products or services that satisfy customers' needs. A company can then use those final products or services to satisfy other customers' needs. The end goal is to reach further into the supply chain and acquire more raw materials at less cost by capturing a larger market share than one's competitors.

The supply chain is about the strategy for creating value for customers and capturing new customers. Supply chains are complex and dynamic because they involve numerous organizations that rely on one another. Many firms play many roles within supply chains, including manufacturers, distributors, wholesalers, retailers, service providers, and others.

A common way to set up a supply chain is as illustrated in the diagram to the right. The diagram illustrates three main parts: manufacturers (M), suppliers (S), and retailers (R). The manufacturer creates a new product, which is then marketed by the retailer to consumers; this process repeats itself until each unit of a product reaches a final customer as an end-user.

The first time a product is sold is at the manufacturer. In this stage, the manufacturer purchases materials and labor to produce new goods. If a product requires more than one step of production to create, the product will be manufactured by suppliers; in most cases, these suppliers are not the same as the manufacturer itself. After manufacturing, the completed product may be sold to wholesalers and resold to retailers; wholesalers are often middlemen between manufacturers or retailers and consumers. Businesses sell their products through intermediaries such as wholesalers in order to make it easier for them to fulfill customers' needs.

In the latter half of the supply chain, retailers buy goods from wholesalers and sell them to consumers or end-users. The retailer is responsible for taking an item from the wholesaler and arranging it on a retailer's shelves in a way that makes it easy for consumers to purchase. Retailers may sometimes own their own stores, while in other cases they may not; a retailer who owns their own shop is called an independent retailer, while retailers who do not possess their own shops are called dependent retailers. After a consumer purchases an item from the retailer, then that consumer becomes the end-user.

There are a number of ways that companies can move products and services through supply chains, but the method and cost that are used to get from supplier to customer are consistent across all supply chains and provides businesses with a basic framework for assessing costs and setting the price.

A supply chain works in cycles: there is a start/end point for every cycle (i.e. every time a product is delivered to a retailer or consumer), and the supply chain moves backward one step along the value chain (e.g., from retailer to wholesaler to manufacturer). The diagram on the right illustrates three primary processes: manufacture, distribution, and retail. Each process comprises three other activities that support the main endeavor.

Manufacturing: It is the process of conversion of raw materials into intermediate and final goods. It involves production, quality control, and packaging. The raw materials are purchased from producers or imported from abroad in international trade; then they are converted into an intermediate material that is used for production (e.g., compressed coal is processed to make coke). The end product has better quality than the intermediate product because it has undergone more production processes (the "rolling" of steel using a steel mill may be used as an example); it is ready for storage or transportation to its customers.

Distribution: It is the process of moving goods from suppliers to retailers, wholesalers, or directly to customers. Goods may be moved in bulk by sea, rail, air, or truck; they may also be moved individually via mail orders or Internet orders.

Retail: It is the selling of goods to consumers directly (independent retailers) or indirectly (e.g., through department stores and catalog companies). Sometimes manufacturers sell their products directly to consumers; in this case, the manufacturer acts as a retailer. Businesses sell their wares through intermediaries such as wholesalers in order to make it easier for them to fulfill customers' needs. After retail, the products may be resold to another customer.