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6 advantages and disadvantages of value chain analysis

Company leaders seeking to optimize efficiency and reduce costs should learn the advantages and disadvantages of value chain analysis to determine if it's the right choice.

Value chain analysis can help organizations improve processes, but the method comes with disadvantages as well. Company leaders should learn about those disadvantages to make sure they are using the right combination of tools and strategies.

Value chain analysis is often paired with value stream analysis and continual improvement frameworks like Lean Six Sigma, enabling companies to continually improve their activities. It provides insight into the ways certain business activities add value for the company and the end consumer. Value chain analysis can help maximize production efficiency, reduce costs and improve a company's bottom line, but if company leaders rely on that approach, they may overlook important information.

Learn more about the advantages and disadvantages of value chain analysis.

The advantages of value chain analysis

Value chain analysis is a useful tool and can benefit a company in several ways.

1. Value chain analysis is a systematic approach to analyzing individual business processes

Companies engage in various interconnected activities to produce goods and services for consumers. Value chain analysis examines each activity in a specific process, which can help company leaders understand how to improve operations.

Company leaders can apply this method to their own organization, their suppliers or even their competitors.

2. Value chain analysis is based on objective, data-driven insights

Value chain analysis uses high-quality data to deliver insights into current business processes.

This approach makes value chain analysis an objective source when attempting to discover the best ways for an organization to reduce costs and differentiate its business offerings.

3. Value chain analysis can help improve manufacturing and product development

While companies in a wide range of industries can undertake value chain analysis, the process is particularly well-suited to manufacturing organizations.

Company leaders can apply the method to every part of the supply chain, from procurement through manufacturing to storage, order fulfillment and distribution.

The disadvantages of value chain analysis

Value chain analysis does include some drawbacks if company leaders use the method in isolation or do so without gaining further context.

1. Value chain analysis may miss some opportunities for improvement

One of the advantages of value chain analysis -- its focus on individual processes -- is also a potential weakness.

By focusing solely on specific business processes, company leaders might miss potential opportunities elsewhere. Combining value chain analysis with other types of business analysis is critical for getting a complete view of risks and opportunities. Failing to do so can cause the connections within a company or between business partners to become a liability for analysis.

2. Value chain analysis may not work as well with third parties

Value chain analysis relies on access to data, a continual improvement mindset and a commitment to change. Company leaders may have achieved internal buy-in, but securing it with external stakeholders, like vendors and partners, can be more difficult.

Company leaders must have a strong relationship with owners of the other parts of the supply chain to be able to convince them to commit to improvements. Ideally, third-party agreements could help with this.

3. Value chain analysis may not work for service-based companies

While value chain analysis works well for product-driven operations, the strategy is more difficult to apply to service-based companies because those types of organizations are based on the way employees interact with consumers, which usually includes a tremendous amount of variation.

Strategies that focus on the customer journey and toolsets that capture data about the customer experience may yield better results for service-based companies than value chain analysis.

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