A quiet revolution is underway that is transforming business practice. For years we talked about the supply chain. Companies can do good and enhance profitability by converting their supply chains to value chains. To keep it really simple, I believe the key difference between these chains is that various parts of the supply chain seek to extract value creating winners and losers. The various stakeholders in the value chain seek to create value, and ideally, create shared value.
The graphic below contrasts the supply chain and the value chain. It deliberately polarises the two concepts to illustrate how the value chain can transform business. If you want a deeper understanding of the value chain, try Bob Willard’s blog. I am going to focus on giving some diverse examples to illustrate the how a value chain ethos can transform business and create multiple benefits.
Going back two or three decades, most city councils in my country (New Zealand) had in-house parks and reserves departments. As financial reforms swept through the country, this function was contracted out. In the first years, the councils had a number of suppliers, but over time, using their power in the relationship, the contractors were encouraged to “sharpen their pencils” when tendering for contracts. While this was good for the ratepayers, as it drove down costs and the training infrastructure embodied in the old system was severely damaged. Now in a user pays age, staff employed by contractors, have to pay for their own training if they want qualifications.
The supply chain and value chain in gold
Here is an extract from Harriet Lamb’s Fighting the Banana Wars and Other Fair Trade Battles (page 170 – 171).
The most vulnerable people mining gold are getting ripped off, they earn absolutely nothing – and so work in the most appalling conditions…. the men go deep underground hacking out the ore. Kids as young as six then stands on a huge granite rock rolling it over the ore mixed with water and mercury, which gradually absorbs the gold.
Then these kids scoop it up with their bare hands into cut off plastic bottles and take it to their homes. There, on their kitchen stoves they evaporate the mercury, so releasing poisonous gasses, to leave the gold.
Mercury is incredibly toxic – just small amounts will kill over time. I imagine these children have to work, because their parents are busy doing the heavy work extracting the ore, and the financial returns are so poor. Do you think these people know that the price of gold has gone through the roof – probably not. I imagine that some of this gold goes to gold plating in the mansions of the opulent, or for rapper “bling”. These consumers would have no idea of the suffering they are complicit in (is that too harsh?).
The Fairtrade movement seeks to extract miners from the supply chain and embed them in a value chain. A major difference will be that those making the purchase will know the good that their purchase creates. Here is a video telling the story of Fairtrade and Fairmined gold. Note the children grinding the ore.
Walmart’s value chains
Earlier blogs have identified how Walmart is created shared value in supplier relationships with companies such as Peterbilt. The massive trucks Peterbilt sells to Walmart are at the heart of their strategy to reduce their emissions 100% by 2015. Peterbilt will benefit both from this long-term relationship with Walmart, and in creating technology to make their vehicles more environmentally friendly – probably opening up other markets.
Another value chain strategy is Walmart’s intention to reduce sugar and sodium content and eliminate transfats from the foods they sell. As they supply 25% of the food in the U.S., they benefit the consumer and the wider community by, hopefully reducing the burden on the health system. Here is Daniel Goleman commenting on the Walmart value chain.
Here are just three examples of the supply and value chain. Feel free to comment and add further examples.