The Global Value Chain
The contemporary value chain in manufacturing is a fairly simple concept to describe: get the right products where they are supposed to go, as quickly as possible, and at the right price for yourself and your customer. It’s a set of activities wherein products pass through, gaining value at each step of the process. This is not to say that the actual cost of each step is assigned as a specific value to the products passing though the chain. Some processes may be low cost activities that add much greater value to the product than that cost amount incurred in the production step.
Take, for instance, the production of artificial heart motors. The motor itself is a relatively low cost production item that, when included in the whole package of the heart, adds a larger increased value to the finished good. Indeed, by definition value chain activities are designed to create value in a product that, hopefully, exceeds the cost of producing that value. The difference between the actual cost of producing the value and the added value amount itself is where profit is located.
Since the late 1980’s, these value-adding activities have included inbound logistics (receiving/warehousing/inventory), operations (production), outbound logistics (warehousing/fulfillment/shipping), marketing/sales (advertising/pricing), and service (customer support). For the manufacturer, any or all of the activities present opportunities for creating a competitive advantage. Of course, the emphasis of one area over the other may be different from industry to industry.
Still, understanding company strengths as a means of assessing value for your product or service is the first step in finding your best position in the overall chain. This is even more vital when faced with the globalization of manufacturing. In other words, the global value chain must take into account not only traditional value chain activities, but the movement of products across broad geographic space—often with varying business/political rules and economic consequences.
Global value chain considerations must account the very real phenomenon in the manufacturing business of increased outsourcing and off-shoring of production. Supply and demand is less predictable than ever, and globalization is by no means a new concept in business. However, it is the rapid growth and size of the movement that is without precedent. This surge in globalization is mostly due to the sophistication of information technologies and the resulting improvement of communication not only within an enterprise, but between far flung value chain members and their production activities.
For manufacturers, globalization has often meant a fragmentation of the production process for the maximization of profits. To this end, and at its heart, the primary motivating factor of global value chains is the increase in production efficiencies. With lean manufacturing as the common business approach to manufacturing, it was inevitable that the continuous improvement of processes would mean turning toward the global market for cost savings in labor, materials, and administration.
The challenge, of course, in the rise of global value chains is to spread profitability through all links in both the short and long terms. By joining a global value chain, small and medium sized enterprises, especially, have the ability to transform their operations in a number of positive ways. While they once might have been a simple assembly shop, producing products from imported components, now they have the ability to move toward perhaps taking oversight of any entire production scheme to even designing, building, and marketing of their own products. The concept of the global value chain implies that manufacturing production thought is no longer just local, but is often the quest for profit margins found by doing business around the world.