How is value created?

Every business can be thought of as a “money machine.” On one end of this machine you have inputs; in between you have the value-added processes; and you have outputs on the other end. In the framework shown below, we have seven value-added processes – Design, Source, Make, Move, Store, Sell, and Service – which are the core processes that make up the “chain of value.” (This framework was developed by the Center for Intelligent Supply Networks at the University of Texas at Dallas.)

The seven core processes in the “money machine”

The illustration above captures two different perspectives of the money machine:

  • Customer focus: There is a perceived need (or idea) that goes through the seven value-added steps to create a product and/or fulfill a service at the other end of the process to the customer’s satisfaction.
  • Shareholder focus: Investors put in money in the hopes that they get more money out of the process. And the capital is invested in these seven core processes to operate the business in a way that maximizes profits and minimizes risk for shareholders.

All too often, this end-to-end process view is not readily visible to the people who are part of the money machine. In his book, The Fifth Discipline, Peter Senge captured the essence of this problem:

From a very early age, we are taught to break apart problems, to fragment the world. This apparently makes complex tasks and subjects more manageable, but we pay a hidden, enormous price. We can no longer see the consequences of our actions; we lose our intrinsic sense of connection to a larger whole.

When we then try to “see the big picture,” we try to reassemble the fragments in our minds, to list and organize all the pieces. But, as physicist David Bohm says, the task is futile–similar to trying to reassemble the fragments of a broken mirror to see a true reflection. Thus, after a while we give up trying to see the whole altogether.

In the business system, we have divided up the problem where these seven core processes are organized into departmental silos as shown in the picture below. (As you can see, this process fragmentation makes it hard to see the value triangle view of customers, products, and assets.)

Core process – Function – Value Triangle mapping

To see the holistic picture, by mapping the value triangle to the seven core processes, we can see how their respective “chains” help connect the dots across the larger business system:

  • The customer view maps to a “chain of orders” – in other words, a customer sales order triggers a number of dependent orders like purchase order, production order, shipping order, service order, etc.
  • The product view reveals a “chain of inventory” or “chain of materials” that go through different states of manifestation, from a concept or schematic, to raw materials, work-in-process, to finished goods.
  • And finally, the asset view reveals the “chain of capacity” to enable the transformation within each of these core processes. Capacity can be people, equipment, buildings, tooling, etc. – things needed to add value but does not go into the product.

When we connect the dots together, we get the holistic view of the value creation process:

The value triangle mapped to the seven core processes

Sidebar: What about business processes like finance, legal, IT, and HR? While they are no doubt important, from the value chain or process point of view, we consider these to be administrative or support processes that are embedded into each of the seven core processes. Why? Because such support functions cannot add value by themselves or stand alone – only the core processes can perform the transformational activities.

While departmental silos make it hard to see the end-to-end process view within a company, comprehending the end-to-end process view for an entire business ecosystem can be extremely challenging where the complexity can be greater by several orders of magnitude. For example, here we (attempt to) show the multiple value chains that must work together to enable a smart phone service. A carrier like AT&T must orchestrate hundreds of partners to ensure the performance as specified in the service agreement with the subscriber.

The multidimensional value chain of a smart phone service provider

Sidebar: The telecommunications value chain presents a fascinating study of how a value chain like AT&T has evolved over time. What used to be vertically-integrated (across all core processes) until its forced break up in 1974, has effectively reconstituted itself into a far more efficient and virtual value chain with more customers in more markets, offering more products and services, BUT with a far smaller asset base than under its previous vertically-integrated structure.

Despite the complexity of the virtual value chain depicted above, the framework still holds and provides a consistent way to deconstruct the value chain to understand how value is incrementally added from the upstream process of design, all the way to the downstream process of after-sales support.

The value chain framework still holds when the process goes in reverse.

The reverse supply chain has the same processes

There are many types of reverse supply chains where the process steps might have different names and it might happen in a different order but in essence the seven core process characteristics are the same, as shown above. Whether we are talking about waste treatment, garbage collection, or recycling, or refurbishment, the businesses that operate the reverse value chains have to sell their services, they need to move and store the stuff, they need to disassemble or de-manufacture, they need to find places to burn or bury our trash.

A closing thought: It all starts with design. All too often we think about the forward supply chain without realizing that practically every product or service creates waste that a reverse supply chain has to deal with. And part of that myopia is due to the fact that these costs are ignored or hidden. But these are real costs to society that have to be dealt with sooner or later by someone.