In his 1985 book, "Competitive Advantage: Creating and Sustaining Superior Performance," author Michael Porter introduced the world to the concept of the “value chain.” The value chain is a series of activities designing to create value in a product greater than the cost of providing the product. Following the value chain, profits generate within a company.
Porter described five functions within the value chain including: inbound logistics, operations, outbound logistics, marketing and sales, and service. When the five functions are properly set in motion, a company creates a profit on the product being created. By making sure each of the five functions operates efficiently and in the most cost-effective manner, value is added to the product. By being able to produce a quality product at a reasonable cost, the overall value of the product is seen.
The first function of the value chain comes with inbound logistics. Companies need a way to receive and store the raw materials needed to create their product, as well as a means to distribute the materials. The more efficient the inbound logistics are, the greater the value generated at the first state of the value chain.
The next stage of the value chain comes via operations. Operations takes the raw materials seen from the inbound logistics and creates the product. Naturally, the more efficient the operations of a company is, the more money the company saves, providing more overall value.
After the product is completed, the next function of the value chain is the outbound logistics. This is where the product leaves the actual production center and is shipped to the various wholesalers, distributors or even to the final consumer himself.
Marketing and sales is the fourth function of the value chain. This is how consumers learn about the product -- through marketing and sales. Advertising costs are a part of this function of the value chain, as well as any other costs incurred in getting the word out about the created product.
The final function of the value chain is service. Service covers many areas, ranging from any actual installation needs to customer service handling after the sale of the product. This function also deals with any training needed to use the product safely and correctly. Having a strong service component in the supply chain provides customers with needed support, thereby increasing the value of the product.