Any business is composed of many processes. All of those processes have direct or indirect impact to the main activity – serving the customers. Customers expect to receive product and/or service from their supplier that will satisfy their needs.

Usually, more than one company is competing for the same customer base. Eventually, the customer base is split based on chosen supplier. What is the reason for customer to choose one supplier out of many? All suppliers are competing to satisfy customer's needs by offering them a certain value. This value is represented as ratio between benefits and price. More benefits for less price gives greater value to the customer. So, the product/service needs either to have bigger benefit for the same price, or lower price for the same benefit, for some company to be chosen as a preferred supplier.

When we come to cost structure, that affects the value delivered, we find many process steps that increase, directly or indirectly, the price of the product. These activities can be either value adding or waste activities.
 

Value Adding Activities

Since customer appreciate greater value that he receives from his supplier, any activity that customer cares about is value adding. Any activity that improves the product appearance, functionality, durability, satisfaction and brand loyalty is value-adding activity.

Also, value adding activity is any activity that changes the product itself. This can be in any step in raw materials manipulation, production, or adjustments and packing of the product.

Finally, any activity that is done properly from the first time can be considered as value adding. Obviously, failure to achieve activity from the first time does not add to the value of the product.

Waste Activities

Unfortunately, there are many waste activities that are waiting any company during their activities. Wastes are sometimes even difficult to detect, especially in case that proper structure of key business indicators is not implemented. There is a whole range of wastes that can generate in Supply Chain:

Overproduction – This Type of Waste can happen in case of greater production versus demand, or in case of inaccurate forecasting. In some cases overproduction can be justified, like pre-stocking prior to the main sales season.

Unnecessary Inventory – It is true that higher inventory is the protection from uncertainty of demand and from Stock Out, but too high inventory does not add value. From financial perspectives, high inventory level is capturing the working capital, that can be used for better purpose ( investment, interest, etc. )

Defects can slow down or stop production. Low productivity and scrap are increasing cost per unit produced.

Inappropriate processing due to inadequate technology or design can produce waste.

Waiting of item in the queue to be process does not add value to the customer.

Transport is an important part of operations, but unnecessarily movement of products is not adding value.

The optimum price of the product is achieved by proper balancing of activities. Value adding activities should be optimized, while waste activities should be either reduced or eliminated.