Michael Porter first addressed the notion of value chains in his famous business writing Competitive Strategy. He explains the concept as a set of business processes operating within a firm that together provide increased value to customers. This value building set of process operations incorporates information and activities connecting a company’s supply side with its demand side, and thus covering raw materials, inbound logistics, production process, marketing, sales and all other aspect of a diverse supply chain. Following this explanation, companies whose values lie in corporate social responsibility and sustainable operations should think of their supply chain as a value building mechanism. To do this organizations must shift focus from the customer centrist approach to a more holistic one that incorporates the well-being of people, environment and resources in countries where they have a licenses to operate.
From the perspective of the organization the concept of value is subjective, but there are various benchmarks that help companies measure and quantify efforts. As an example, the textile industry is one of the most chemically dependent industries on earth and the #2 polluter of clean water. As we have seen in recent years, clean water is becoming a coveted treasure as drought and bad business practices continue to deplete the last remaining clean water sources. In countries like Pakistan, India and China, where the textile industry is booming, we can notice the most deplorable water situations. This is not sustainable for the local societies, and it builds instability up the supply chain creating a very risky environment for large multinationals.
New technologies are available to help multinationals gather information from the bottom of the supply chain such as water use in cotton growing, energy use in knitting and weaving, or chemicals used in dying and cleaning. At the moment these are measured at factory level, and are rarely shared with buyers. Such practices allow bad practices to continue unnoticed, and the supply chain in weakened by unsustainable practices. Multinational corporations cannot make proper forecasting decisions when they depend solely on production from unsustainable suppliers; their supply risk increases as they choose to ignore these practices.
Furthermore, the public is keeping a much closer eye on the business practices of large organizations. Take for example the multiple scandals that Nike has been a part of over the years. From unsafe working environments, to child labor their stock prices have suffered one blow after another. This has weakened their buying and negotiating power to suppliers and hurt their image to customers around the world. The public relations department tried to defend the company by placing the blame on suppliers’ business practices, but in the eyes of Nike customers the company should have assumed responsibility for all practices in their supply chain.
So is value building through improved business processes a concept that should still be questioned, or is it the norm for industry leaders? Organizations must find ways of monitoring materials and information flows in the supply chain. A resilient supply chain is one from which all actors benefit and want to be a part of for an extended period of time. This ideal supply chain is built on best practices learned over years of exchanging information with customers and suppliers in a transparent manner; this IS building value through operating processes. Companies can implement best practices offered by organizations such as the Global Impact Investing Rating System or the Global Reporting Initiative to ensure the maximum amount of value is drawn from all business processes for all actors’ part of the supply chain.
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2 thoughts on “Supply Chain or Value Chain?”
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