A value chain is a series of activities and processes that an organization or company undertakes to create and deliver a product or service to its customers. It is the set of activities that an organization uses to create value for its customers, starting from the procurement of raw materials to the delivery of the final product or service to the end-users.
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The value chain is composed of two primary activities: primary activities and support activities.
- Primary activities are directly related to the production and delivery of the product or service, and they include inbound logistics, operations, outbound logistics, marketing and sales, and service.
- Support activities are not directly related to the production and delivery of the product or service but provide essential support to the primary activities. They include procurement, technology development, human resource management, and infrastructure.
By analyzing and optimizing each step in the value chain, organizations can improve their efficiency, reduce costs, and increase customer value. Value chain analysis is a powerful tool for identifying areas for improvement in a company’s operations, as well as opportunities to differentiate its products and services from those of competitors.
The main primary activities in a value chain are:
- Inbound Logistics: This involves the receiving, storing, and distributing of inputs or raw materials that are used to create the final product. The objective of this activity is to ensure that the right quality and quantity of raw materials are available when needed.
- Operations: This activity involves the transformation of raw materials into finished products or services. It includes processes like manufacturing, assembly, testing, packaging, and quality control.
- Outbound Logistics: This involves the distribution of finished products or services to customers. It includes activities such as order processing, picking and packing, transportation, and delivery.
- Marketing and Sales: This activity involves creating awareness about the product or service and persuading customers to buy it. It includes advertising, promotion, branding, pricing, and sales.
- Service: This activity involves providing after-sales service and support to customers. It includes activities like installation, repair, maintenance, and customer support.
These primary activities are interdependent and can impact each other. A company that optimizes these activities can create a competitive advantage by reducing costs, improving quality, and increasing customer satisfaction.
The main supporting activities in a value chain are:
- Procurement: This involves the process of acquiring the raw materials, equipment, and supplies needed to create the final product. The objective is to ensure that the company acquires the right inputs at the right price and quality.
- Technology Development: This activity involves research and development to improve the production process, develop new products, or enhance existing ones. The objective is to create new technologies that can help the company to create products or services that are better, faster, or cheaper.
- Human Resource Management: This activity involves managing the company’s employees, including recruiting, training, compensating, and evaluating their performance. The objective is to ensure that the company has a competent and motivated workforce that can help it to achieve its objectives.
- Infrastructure: This activity involves the development and maintenance of the company’s physical and virtual infrastructure, including buildings, equipment, and IT systems. The objective is to ensure that the company has the necessary resources to carry out its operations.
Supporting activities are critical to the success of primary activities as they provide the necessary resources and capabilities to enable the primary activities to function effectively. Companies that optimize their supporting activities can create a competitive advantage by reducing costs, improving quality, and increasing innovation.
Corporate Sustainability Due Diligence Directive in the European Union
Mostly large companies have been increasingly deploying due diligence processes as it can provide them with a competitive advantage. This also responds to the increasing market pressure on companies to act sustainably as it helps them avoid unwanted reputational risks vis-à-vis consumers and investors that are becoming increasingly aware of sustainability aspects. However, these processes are based on voluntary standards and do not result in legal certainty for neither companies nor victims in case harm occurs.
In particular, therefore this Directive will:
(1) improve corporate governance practices to better integrate risk management and mitigation processes of human rights and environmental risks and impacts, including those stemming from value chains, into corporate strategies;
(2) avoid fragmentation of due diligence requirements in the single market and create legal certainty for businesses and stakeholders as regards expected behaviour and liability;
(3) increase corporate accountability for adverse impacts, and ensure coherence for companies regarding obligations under existing and proposed EU initiatives on responsible business conduct;
(4) improve access to remedies for those affected by adverse human rights and environmental impacts of corporate behaviour;
(5) being a horizontal instrument focussing on business processes, applying also to the value chain, this Directive will complement other measures in force or proposed, which directly address some specific sustainability challenges or apply in some specific sectors, mostly within the Union.
Article 2 defines the Scope of the Directive:
1. This Directive shall apply to companies which are formed in accordance with the legislation of a Member State and which fulfil one of the following conditions:
(a) the company had more than 500 employees on average and had a net worldwide turnover of more than EUR 150 million in the last financial year for which annual financial statements have been prepared;
(b) the company did not reach the thresholds under point (a), but had more than 250 employees on average and had a net worldwide turnover of more than EUR 40 million in the last financial year for which annual financial statements have been prepared, provided that at least 50% of this net turnover was generated in one or more of the following sectors:
(i) the manufacture of textiles, leather and related products (including footwear), and the wholesale trade of textiles, clothing and footwear;
(ii) agriculture, forestry, fisheries (including aquaculture), the manufacture of food products, and the wholesale trade of agricultural raw materials, live animals, wood, food, and beverages;
(iii) the extraction of mineral resources regardless from where they are extracted (including crude petroleum, natural gas, coal, lignite, metals and metal ores, as well as all other, non-metallic minerals and quarry products), the manufacture of basic metal products, other non-metallic mineral products and fabricated metal products (except machinery and equipment), and the wholesale trade of mineral resources, basic and intermediate mineral products (including metals and metal ores, construction materials, fuels, chemicals and other intermediate products).
2. This Directive shall also apply to companies which are formed in accordance with the legislation of a third country, and fulfil one of the following conditions:
(a) generated a net turnover of more than EUR 150 million in the Union in the financial year preceding the last financial year;
(b) generated a net turnover of more than EUR 40 million but not more than EUR 150 million in the Union in the financial year preceding the last financial year, provided that at least 50% of its net worldwide turnover was generated in one or more of the sectors listed in paragraph 1, point (b).
Supply Chain Act in Germany
The aim is to improve the protection of human rights. Companies in Germany also have a responsibility to do this. They must ensure that human rights are respected in their supply chains, i.e. that no children work or forced labour takes place. This is about compliance with basic human rights standards. It is not about implementing German social standards everywhere in the world.
Environmental concerns are also relevant if they lead to human rights violations (e.g. through poisoned water). The law sets out clear and implementable requirements for due diligence by companies, thus creating legal certainty for companies and those affected.
In order to implement the UN Guiding Principles on Business and Human Rights in Germany, the Federal Government had relied for many years on voluntary commitment and adopted the National Action Plan on Business and Human Rights. To check whether larger companies are fulfilling their human rights due diligence obligations in their supply chains, a monitoring system was set up with independent service providers.
Which companies are covered by the law?
From 2023: Companies with more than 3,000 employees (more than 600 companies in Germany).
From 2024: Companies with more than 1,000 employees (2,900 companies).
What are the effects that ESG has on the value chain?
ESG (Environmental, Social, and Governance) factors can have significant impacts on the value chain of a company. Here are some of the effects:
- Environmental: Environmental factors can impact the entire value chain, from the procurement of raw materials to the delivery of the final product. For example, a company that uses sustainable materials and energy sources can reduce its carbon footprint and minimize its environmental impact. This can improve its reputation, increase customer loyalty, and attract socially responsible investors.
- Social: Social factors can impact the marketing, sales, and service activities of a company. For example, a company that promotes diversity, equity, and inclusion can attract a more diverse customer base and increase customer loyalty. This can also help to attract and retain talented employees who value a supportive and inclusive work environment.
- Governance: Governance factors can impact the entire value chain, from the management of human resources to the development of new products and services. For example, a company that has strong governance policies and practices can reduce the risk of ethical violations and improve its reputation. This can increase the trust of investors and customers and improve the long-term sustainability of the company.
In summary, ESG factors can impact the value chain of a company in many ways, from reducing costs and increasing efficiency to improving reputation and attracting investors and customers. Companies that embrace ESG principles and practices can create a competitive advantage by differentiating themselves from their competitors, improving their social and environmental impact, and achieving long-term sustainability. Contact us to improve your supply chain processes.