Very often, people interchangeably use the terms supply chain, demand chain, and value chain. While they may sound similar, there are several differences. In this post, we explain the differences and their roles in helping businesses.
The supply chain is an extensive network that starts from raw material procurement to the manufactured product reaching the end customer. It comprises all the information from the flow of raw materials, products, and funds between all the entities in the various stages of the process.
Every step of the process, such as procuring raw materials, converting raw materials into manufactured goods, transporting the products to the point of sale, and selling it to the end customer, is all a part of the supply chain.
Some of the key functions of the supply chain include:
To put it in a nutshell, supply chain management is essential for a business to reduce the overall costs of its product, thereby reducing consumer costs and increasing its profit margins.
Unlike a supply chain where the manufacturer is at the core of the process, in a demand chain, the customer is at the center of all operations. The customer decides how the supply chain operates.
A demand chain operates from the perspective of a customer – it aims for a quick turnaround of products, reduced consumer costs, excellent customer service, turning new customer demands into new products quickly, and more.
Remaining profitable in a demand chain model implies that companies have to focus on best practices to respond to customer demands while reducing operating costs and improving customer quality and service.
Demand-driven supply chains are tightly integrated. All stakeholders involved in the process – right from raw materials supplier to the product manufacturer and reseller – require accurate visibility into the customer demand patterns.
Decisions about inventory, production, and movement of materials are taken based on customer demand signals, which change constantly.
Simply put, the demand chain model is a supply chain where the customer is at the driver’s seat of operations. The customer determines what he wants when he wants it and how he wants to get it.
Michael E. Porter introduced the concept of Value Chain in his 1985 book “The Competitive Advantage: Creating and Sustaining Superior Performance.”
The value chain denotes the series of activities and operations that add value to the product. According to Porter, the value chain has five key steps that help a business create an added value to its product and help it to win an edge over its competitors.
The five steps defined by Porter are:
By maximizing any one of these five steps, the business creates an excellent product that stands out from similar products offered in the market. Unlike supply chains that focus on product manufacture to delivery, value chains emphasize other activities such as product innovation, marketing, product testing, customer feedback, research and development, and more.
Simply put, the Value Chain = Supply Chain + Demand Chain
The functioning of the logistic channels
Meeting the demands of the customer
Providing customers with added value
Procuring, manufacturing, logistics, and payment
New product development based on customer demands, refining existing products, forecasting customer demands
Value-added services like customer service, innovative products based on R&D
Supply chain partners
Shareholders and investors
As is evident, although the supply chain, demand chain, and value chain are similar, they are worlds apart in what they do and how they do it.