Value-added concepts

The term “value-added” describes the economic enhancement a company gives its products or services before offering them to customers. Value-added helps explain why companies are able to sell their goods or services for more than they cost to produce. Adding value to products and services is very important as it provides consumers with an incentive to make purchases, thus increasing a company’s revenue and bottom line.

Value-added could thus apply to instances when a firm takes a product that may be considered homogeneous with few differences from that of a competitor, if any and provides potential customers with a feature or add-on that gives it a greater perception of value. Adding a brand name to a generic product can be just as valuable as producing something new or in a way that no one has thought of before.

Value addition and Supply Chain

• Supply Chain basically starts from raw material suppliers, OEM, Distributor, Retailer and ends at Customer (or the other way around)
• Value can be roughly formulated as (Quality/Cost)

Value Addition in Supply Chain Management is about processes and activities that enables products (goods or services) to be more desirable by the customer  it has nothing to do with price or cost of production.

When you undergo a through analysis of supply chain systems (processes and activities) and you identify those that are not directly linked to ensure customer satisfaction and you remove such from the system, you are doing Value Addition.

Value-added is the difference between the price of a product or service and the cost of producing it. The price is determined by what customers are willing to pay based on their perceived value. Value is added or created in different ways.

These may include, for instance, extra or special features added by a company or producer to increase the value of a product or service. The addition of value can thus increase either the product’s price that consumers are willing to pay. For example, offering a year of free tech support on a new computer would be a value-added feature. Individuals can also add value to services they perform, such as bringing advanced skills into the workforce.

Consumers now have access to a whole range of products and services when they want them. As a result, companies constantly struggle to find competitive advantages over each other. Discovering what customers truly value is crucial for what the company produces, packages, markets, and how it delivers its products.

Bose Corporation, as an example, has successfully shifted its focus from producing speakers to delivering a “sound experience,” or when a BMW car rolls off the assembly line, it sells for a much higher premium over the cost of production because of its reputation for stellar performance, German engineering, and quality parts. Here, the additional advantage has been created through each brand’s symbolic value and years of refinement.

The purpose of supply chains is to add value to production and distribution. Depending upon the markets and the value chains they are servicing, supply chains can be differentiated according to criteria such as costs, time reliability, and risk. Efficient logistics contributes to added-value in four major interrelated ways:

Location. Logistics adds value by taking better advantage of various locations, implying access to expanded markets (more customers), and lower distribution costs.

Production costs. Derived from the improved efficiency of manufacturing with appropriate shipment size, packaging, and inventory levels. Thus, logistics contributes to the reduction of production costs by streamlining the supply chain.

Control. Added value derived from controlling most, if not all, the stages along the supply chain, from production to distribution. By better synchronizing cycles and lead times, logistics enables better marketing and demand response, thus anticipating flows and allocating distribution resources accordingly.

Time. Added value derived from having goods and services available when required along the supply chain (e.g. lower lead times) with better inventory and transportation management.

A variety of factors are jointly shaping the configuration of supply chains:

Transit time. A factor that is increasingly being considered since it strongly influences inventory carrying costs and inventory cycle time in supply chain management. So, for cargo with a higher value (clothing) or is perishable (refers), the routing option that is the fastest and/or shortest will be preferred.

Logistics costs. Considers the full array of costs to make products available to the final consumer, namely transport, warehousing, and transshipment. Supply chain managers are particularly sensitive to the stability of the cost structure (consistent costs), implying that routes having cost fluctuations may be discarded in favor of routes of a higher cost but with less volatility. Therefore, costs are a standard criterion where the cheapest routing option is sought, as long as the cost structure remains stable as supply chains are unlikely to be modified if a cost advantage is only temporary. The concept of cost is relative since its importance is concerning the value of the cargo being carried. Cost considerations tend to concern more containerized goods with a low value, such as commodities (e.g. paper), than high-value goods (e.g. electronics).

Supply chain risk. Relates to a generally imponderable factor and involving the level of confidence that the shipment will reach its final destination within expected costs, time, and reliability considerations. In some cases, risk can also involve potential cargo damage or theft. Low risks routes are obviously preferred over higher-risk routes.

Reliability. Relates to a factor that is mitigated by contemporary supply chain management practices. For several supply chains, time can be a secondary factor as long as shipments arrive at the distribution center within an expected time frame. If shipments are regular and that this reliability remains consistent, it is possible to organize supply chains accordingly by having more inventory in transit.