Understanding the value chain

 

Editor’s note: Michelle Stockman is an independent consultant with her company, Fort Smith-based Msaada Group. Stockman earned a bachelor’s degree from Loyola University-Chicago in communications and fine arts, and earned a master’s in entrepreneurship from Western Carolina University. Her thoughts on business success appear each week on The City Wire.

A product is the sum of all its parts, which is an easy explanation for value chains. All products (and services) are connected to other products, raw materials or actions. The job for your company is taking the pieces of the puzzle to create a new puzzle piece or product that has enough value to attract consumers to purchase from the business.

Value chain analysis and management became a business practice in the mid ‘80’s to understand product production, product value and assist in strategic planning for the product line, business unit or business. While many associate value chain management with larger corporations, it is a valuable exercise for entrepreneurs as well.

Many start-up entrepreneurs are faced with pricing their products or services. Most will look at a competitor or two and determine the price within a range they have found in their research. This is a good place to start to understand what the community is paying for the product at the time.

However, stopping here is a big mistake. The entrepreneur needs to consider their value chains to factor into pricing and what kind of customers the business seeks. Wanting to be the next Tiffany yet selling products like the Dollar Store will not work.

How does an entrepreneur find their value chains? To start, look at the product being produced and sold in a holistic manner. Start by picking apart the product. We’ll use Girl Scout cookies as an example. We all buy them, so there is value in the product. While all businesses may not want to get as detailed as the following example, it is good practice to understand each step in the supply chain that creates the value chain for the item being sold.

Start at the farm supply store by buying wheat seeds. Move on to the farmer, who plants and sows the seeds which produce the raw grains; or the farmer who breeds the cows who provides the milk and the other farmer who raises the chickens that produce the eggs which are all raw materials. Meanwhile there are cocoa pod producing plantations in countries rich with rain forests. Those plantations harvest cocoa pods for sale on the commodities market and the same is true for the vanilla bean and sugar cane.

Buyers for the companies that are licensed Girl Scout cookie produces purchase the raw materials needed for producing the cookies from any number of wholesaler of the commodities used in the cookies. Those materials have gone through milling, churning and other processes (too long to list here) to be ready for shipment at the commercial bakery. Once the materials arrive, flour, sugar, eggs and butter (and/or other ingredients that comply with the trade secret Girl Scout recipes).

While the cookies are baking, packaging and boxes are made from their respective raw materials. These items are then shipped to the manufacturing plant ready to count, wrap and prepare the product for shipment to a warehouse for distribution to the Girl Scout troupes. Meanwhile, an army of Girl Scouts solicit neighbors, churches and office places selling boxes of cookies to raise funds for their activities. Once the orders are turned in, cookie shipments begin and the yearly comfort food makes it into our homes.

Along this value chain, we see the farm supply store selling seeds, the farmer selling raw farm goods, the miller or exporter selling their refined goods, the wholesaler selling the distribution of those goods, the manufacturer selling an edible product, the distributor providing shipment and the Girl Scout selling our cookies.

Entrepreneurs often don’t realize how much is involved in creating a simple widget. Knowing the steps involved in your business, the risks that you face from farmer to cookie and understanding the value created each step of the way not only helps manage the outside pieces of the company, it will shape the value of the product thus the price of the product.

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Stockman can be reached at [email protected]