Value Chain

Every product moves through a “chain” of activities from resource extraction to production and distribution, while in the process gaining value at each step. Value and cost, in this concept, are not the same: the cost of a step in the chain may be relatively low (as in pumping crude oil out of the ground), but it adds greatly to the value of the good. Conversely, a cost may be relatively high (as in transporting gasoline to the various gas stations), but the value added is very low.

The initial concept of the “value chain” was introduced by Harvard business professor Michael Porter in his 1985 book Competitive Advantage: Creating and Sustaining Superior Performance, and further developed in subsequent work. Competitive advantage represents a company's ability to sustain its position in the industry, maintaining levels of profit while outperforming competitors. A perennial topic of discussion in business has been how to develop sustainable competitive advantage—how to remain in that position, without one's competitors duplicating one's value-creating processes.

In the 1990s, a simplified version of the value chain, the value stream, became a popular approach to business process management. The value stream is the point-of-origin-to-point-of-consumption process that brings a product or service to market, composed of process steps that may involve the use or production of intermediate goods or services. Analyzing a business's processes in terms of the value stream can lead to greater efficiency by bringing to light unnecessary or redundant processes, or demonstrating which processes contribute the least value. Such an analysis produces a value stream map, which originated at Toyota under the name “material and information flow map.” Though intended for economic efficiency, value stream maps are useful in achieving greater environmental and resource consumption efficiency, and the analysis process has been streamlined through the use of both stand-alone software and software add-ons for packages like Microsoft Visio. In the Toyota method, the model is constructed both horizontally and vertically, with the single horizontal telling the narrative of the product being created and brought to market, and the many verticals telling the story of each process along the way.

Both the value stream and the value chain are compatible with, and in the case of the former explicitly conceived of as part of, “lean production,” usually abbreviated (and capitalized for clarity) as simply Lean. Lean is a 1990s generalization of the [Page 528]efficiency-focused production techniques implemented at Toyota, and is a descendant of such management schools of thought as Fordism, scientific management, and the time-motion study of the 1920s (which sought to increase productivity by streamlining the physical motions workers used to do their work, a remarkable goal of efficiency to strive for in a decade still becoming accustomed to the gains of the assembly line).

The core premise of Lean is simple: more value for less work. Lean focuses on “the seven wastes,” seven types of Muda, a Japanese term for unproductive activity: overproduction, unnecessary transportation, excessive inventory, unnecessary motion (as that targeted by time-motion study), defective product, overprocessing (when more work is done on a product than a customer requires or more is provided than is asked for, or the kind of waste, for instance, that led some airlines to discontinue complimentary snacks), and waiting. Lean differs from the management system used by Toyota in that it is generalized enough to be applied to accounting, to business management, and to services, and not just to manufacturing. Lean also emphasizes profit maximizing less than Toyota does, and the principles of Lean production can in fact be used to optimize a company's business process with ecoefficiency in mind, rather than simply making as much profit as possible from the least amount of effort. The focus on eliminating waste applies not only to wasteful activity, but also to overconsumption of resources.

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