Supply Chain Costing and Performance Management, 2nd Edition

CHAPTER 8The Need for Value Chain Analysis

MODERN SUPPLY CHAIN COSTING requires a reevaluation of the traditional view of costing and a broadening of the scope of the actual and projected cost data collected by the firm. Supply chain costing emphasizes a process view and spans multiple internal functions. A broader perspective assists managers in evaluating how process changes will affect changes in costs and revenues over time, as well as in capturing the effect other members in the supply chain have on internal costs and overall supply chain profitability.

Value chain analysis (VCA) is a uniquely important tool for supply chain costing. The following section outlines the essential elements of VCA and describes why this technique is useful for evaluating the total cost of key supply chain processes. Leading firms in executing supply chain costing have a good understanding of their internal value chains and are engaging in costing efforts that extend beyond their firm into the external supply chains.

VALUE CHAIN ANALYSIS

Two schools of thought have emerged regarding how to visualize and analyze the value chain. The original view, suggested by Michael Porter, depicts an internal value chain comprised of the activities and processes that a firm completes “to design, produce, market, deliver, and support its product or service.”¹

A broader and more relevant view for the supply chain cost journey is the one described by John Shank and V. Govindarajan: They suggest that the “value ...