How To Create a Strong eCommerce Logistics Value Chain
For more than 35 years, the value chain has been considered a powerful business tool. It's used to look at a company in terms of its strategically relevant activities in order to identify and build competitive advantages. So how does it work? In this blog, we’ll look at the value chain definition and how it has evolved over the years, how it benefits eCommerce businesses, how to conduct a value chain analysis, and more.
What is a Value Chain?
The term value chain refers to all the activities and processes involved in creating a product or performing a service. The concept was conceived in 1985 by Harvard Business School Professor Michael Porter in his book The Competitive Advantage: Creating and Sustaining Superior Performance. In it, Porter wrote: "Competitive advantage cannot be understood by looking at a firm as a whole. It stems from the many discrete activities a firm performs in designing, producing, marketing, delivering, and supporting its product."
It’s important for companies to take stock of the processes that comprise their value chain to gain insight into what each transaction consists of. Companies do this by conducting a value chain analysis, which allows them to maximize the value created at each point in the chain. This helps develop a greater understanding of a company’s competitive advantage and allows them to share more value with customers.
Primary and Secondary Activities in Porter's Value Chain
According to Porter’s definition of value chains, all of the activities that make up a company’s value chain can be divided into two categories that contribute to its bottom line: primary activities and support activities.
These contribute to the creation of a product or the delivery of a service, such as:
- Inbound logistics: Activities related to receiving, warehousing, and inventory management of source materials and components
- Operations: Activities related to turning raw materials and components into a finished product
- Outbound logistics: Activities related to distribution, including packaging, sorting, and shipping
- Marketing and sales: Activities related to the marketing and sale of a product or service, including promotion, advertising, and pricing strategy
- After-sales services: Activities that take place after a sale has been finalized, including installation, training, quality assurance, repair, and customer service
These make primary activities more efficient in order to create a competitive advantage. They include:
- Procurement: Activities related to the sourcing of raw materials, components, equipment, and services
- Technological development: Activities related to research and development, including product design, market research, and process development
- Human resources management: Activities related to the recruitment, hiring, training, development, retention, and compensation of employees
- Infrastructure: Activities related to the company’s overhead and management, including financing and planning
Evolution of the Value Chain
Like all things in business, value chains are constantly evolving. When the concept was first introduced, before the dawn of the internet, it related to brick-and-mortar business only and was pretty straightforward: A product was made in a factory, transported to a retail store, and then purchased by a customer.
The internet changed all that. Today, products are generally shipped to a warehouse or fulfillment center instead of a physical retail store. The customer purchased the product from an eCommerce seller, and it is shipped from the warehouse or fulfillment center. When it comes to eCommerce, there’s no need for customers to go into a store – they simply browse and buy from the convenience of their computer or mobile device.
The way products are made has also evolved thanks to Industry 4.0 and the introduction of smart manufacturing. Previously, most manufacturing was done through automated machinery, producing a large scale of the same product in order to keep costs down. Now, smart manufacturing combines flexible robotics and 3D printing to affordably produce short runs of personalized goods. And it’s only going to get better.
How to Conduct a Value Chain Analysis
To understand where improvements can be made to grow competitive advantage and customer value, companies need to conduct a value chain analysis. A value chain analysis is an evaluation of each activity that contributed to a company’s value chain. This allows business leaders to see how each step in the chain adds or subtracts value from the final product or service.
For example, an eCommerce value chain analysis may determine that activities can be made more efficient, reducing costs; or, if could identify ways to improve product design, increasing product differentiation. Typically, increasing the performance of one of the four secondary activities can benefit at least one of the primary activities.
There are three steps involved in conducting a value chain analysis.
1. Identify Value Chain Activities
This first step involves gaining an understanding of all primary and secondary activities that go into the creating of a product or service. For companies that sell multiple products or services, it’s important to conduct a value chain analysis for each one of them as the touchpoints may be different.
2. Determine the Cost and Value of Activities
The next step is to determine the value that each identified activity adds to the value chain process. It’s also important to look at the costs involved with each activity, as lowering them could improve the value of each transaction.
Questions to ask during this step should be focused on how each transaction improves the customer experience and creates value for the company (for example, do the sourced materials make the product more durable? Does the premium, personalized packaging make the product stand apart from the competition?)
3. Determine Opportunities for Competitive Advantage
Once you understand your value chain and the cost and value associated with each step, you can analyze it through the lens of whatever competitive advantage you’re trying to achieve.
For example, a company trying to lower costs will want to look at the eCommerce value chain through the lens of reducing expenses and increasing efficiencies. Perhaps the analysis will uncover that there are transactions that could be outsourced or even eliminated to reduce costs, or maybe inefficiencies in the supply chain will be discovered that could be corrected to save time and money.
How about a company looking to differentiate its product from others on the market? The analysis may determine that new features could be added, or that sourcing a new raw material could make the product more luxurious for consumers.
How The Fulfillment Lab Helps Improve Your Ecommerce Value Chain
Can a fulfillment center help improve the quality of an eCommerce value chain? Absolutely! Here’s a look at how The Fulfillment Lab can provide a competitive advantage and improve the customer experience in primary and secondary activities.
- Inbound logistics: We can receive and ship products from 14 global locations.
- Outbound logistics: Our team members are experts at packing, sorting, and shipping. We also have relationships with major carriers to get discounted pricing and pass some of the savings on to our customers.
- Marketing and sales: Our fulfillment marketing services allow you to create custom packaging, flyers, labels, and inserts to wow your customers.
- After-sales services: We handle customer inquiries during and after a sale, and take care of returns management.
- Procurement: We have a variety of on-demand private label and white label products, so you can quickly and cost-effectively add to your product line.
- Technological development: Our Global Fulfillment Software (GFS™) quickly integrates with other eCommerce platforms and allows you to manage inventory, track orders, customize packages, and much more.
- Human resources management: Our team acts as an extension of your team, without adding to your labor costs.
- Infrastructure: You can reduce your company’s overhead and management costs by outsourcing to our facilities.
Ready for a new fulfillment partner? We’re here to help! Contact us today to learn more or get started.