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Why Value-chain is important for Cost Management?

Value chain is the linked set of value creating activities from the basic raw materials and components sources to the ultimate end use of the product or service delivered to the customer.

The six business functions contained in the value chain are (i) Research and Development, (ii) Design (iii) Production (iv) Marketing (v) Distribution and (vi) Customer service.

The objective of value chain is to serve as means of increasing the customer satisfaction and managing costs effectively. Coordination of the individual parts of the value chain activities creates conditions to improve customer satisfaction in terms of cost efficiency, quality and delivery. A firm which performs value chain activities more efficiently and at a lower cost than its competitors will be able to gain competitive advantage. 

The following methodology should be adopted.

1. The firm should identify the industry value chain and then assign costs, revenues and assets to value activities.
2. Diagnose the cost drivers regulating each value activity.
3. Develop sustainable cost advantage either by controlling cost drivers better than competitors or by reconfiguring the chain value.

By analyzing costs, revenues and assets in each activity systematically a company can achieve low cost. Thus value chain helps managers in deciding how to apply the organization’s valuable physical and human resources to each linked process so as to achieve cost effectiveness.
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