Conventional wisdom says that businesses – manufacturers or not – should focus on moving higher and higher up the value chain to command the highest margins and move from being a mere supplier to a trusted advisor. But is this view correct? 

Today, many forward-thinking businesses are skirting the norm to strategically move down the value chain and foster growth from the ground up. Here’s why that approach is particularly beneficial for manufacturers.

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Value chain definition 

First, though: What is the value chain? In a manufacturing context, the value chain refers to how each step in the manufacturing process adds value to the end product and impacts the end-to-end manufacturing process. In a broader context, a value chain is a set of activities that a company carries out to create value for its customers. This includes everything from production to marketing and sales, customer service, and logistics. The goal of any value chain model is to provide the most value to the customer at the lowest cost.Moving down value chain

Owning the value chain in manufacturing 

Many manufacturing businesses choose to outsource links towards the bottom of the value chain – such as procurement of raw materials, inbound logistics, and production – instead directly managing only top-end activities like customer service and distribution. However, owning more or even all of the value chain can have significant advantages:

Efficient operations

Owning more of your value chain gives you a more complete picture of how your end-to-end manufacturing process works. With greater control and insights into your processes, you can make strategic decisions about tweaks to the process that will allow you to operate more efficiently, and, in turn, at a lower cost.

For example, moving production from an external provider to an in-house operation gives you the opportunity to control and optimize your material costs and waste minimization techniques, rather than having to trust the approach of a third-party provider.

Growth opportunities 

As well as improved efficiencies, moving down the value chain can open up new growth opportunities through activities like product expansion or even developing a whole new approach to manufacturing your product. 

Zara is an excellent example of a business that has driven continued growth through owning and reinventing the traditional value chain of the fashion industry. Moving to in-house manufacturing allowed it to go from designs to clothes on the shelf in just weeks. The company’s agile approach allowed it to be responsive to spur-of-the-moment fashion trends, providing more value to customers in the form of cutting-edge designs at a faster rate than other fashion labels.

Greater protection from competitors

Competitors that pose the biggest threat often start by operating in low-end markets or performing outsourced work. It’s here that they learn the skills needed to move up the value chain themselves and take over. This is a trend that can be observed with Amazon’s own private label (AmazonBasics) and in a wide range of industries, including tech and software, fashion, personal goods, and more.AmazonBasics-thumb (1)

The only way to prevent “attacks from below” is to retain rather than outsource those activities i.e. don’t give suppliers the chance to become future competitors. 

Maintain an ethical supply chain 

Many businesses now have supply chain networks that are so complex that it’s impossible to oversee the practices of every supplier – and this increases the risk of unethical working conditions taking place without even knowing it.

Embracing in-house manufacturing or taking responsibility for more activities in the value chain makes it easier to monitor and maintain an ethical supply chain, which is especially important if your brand reputation depends on it.

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