Value Chain Optimization

A value chain is comprised of the links and relationships between inputs and final products – it may encompass a product’s entire life cycle. It begins with extraction of raw materials and ends with use by the end consumer and the external effects of the product, such as how long the material in the product takes to decompose. The term “value chain” may also more narrowly describe the changes single firm makes to a material in order to produce the firm’s goods.

Value chain optimization is the strategic adjustment of a company’s process to achieve optimal results within their value chain. A firm should clearly define its goals for a value chain optimization program. Of course, maximizing margins on any given product is an important and critical target for any company, but increasing reliability, reducing energy usage, or improving operational efficiency are other frequent priorities.

Optimizing a value chain

Value chain optimization and production optimization often go hand-in-hand. Many of the same principles apply: reduce waste and increase profits by finding and eliminating inefficiencies.

In order to properly optimize a value chain, companies need accurate historical and current data about the value chain. These data should include information about costs, availability, throughput, and inputs. Anything that impacts production should be brought into consideration.

Companies with an existing process simulation have already captured much of the sensing data on energy usage and asset productivity during adoption of industrial digitization practices. Firms should also draw on purchase records that track supplier reliability and pricing to optimize the value chain.

Once enough data has been collected, teams can identify the relationship between any given control in the value chain and the value added during that step of production. It may also become easier to identify which suppliers are providing the most value to the company, offering critical insight necessary for any smart enterprise. For instance, although it might seem that one supplier is consistently charging above-market rates, they may provide more value than other suppliers by always delivering on time. Value chain optimization allows companies to appraise these competing variables in terms of total value provided to the business.

Specialized value chain optimization software allows a human operator to analyze, diagnose issues and prescribe changes to the value chain.

Modern tools

As more companies adopt plant digitalization technology and practices, it becomes easier to maximize profits, reduce emissions, and increase production with value chain optimization. Once a firm has digitized every step of production, the data is ready to be mined. Given the enormous complexity of supply and value chains, an Industrial AI solution is best suited to perform this task. Artificial intelligence (AI) has seen a remarkable increase in power and ease of use, making predictive tools that leverage AI an important addition to a company’s toolset.

Industrial AI takes much of the guesswork out of the task of weighing the costs and benefits of the variables in any company’s supply chain. It can also help a company isolate the business side of their relationships with their suppliers. Industrial AI can identify the patterns in deliverables, and call out changes in the value chain that might escape a human’s attention, such as a subtle variation that could turn out to be a highly profitable piece of information.

Compliance and responsiveness

Value chain optimization can ruffle feathers by providing counter-intuitive recommendations for asset optimization. Often, the way a company manages a value chain is based on years of experience and hard lessons learned during a lean quarter. Changing a functional process can be hard to sell to the personnel that will be in charge of cleaning up the mess if anything goes wrong.

Fortunately, tracking whether a requested change has been made is made possible with plant digitization technology. Compliance can be tracked and managed, and resistance to change will stand out in the data.

FAQs

How is value chain optimization used in smart enterprise?
The smart enterprise relies on intelligent collection, analysis, and use of an organization’s measurable data. Any company that has adequate sensors and has empowered management to enact the changes base on insights from their own data can quickly implement value chain optimization.

How does value chain optimization differ from production optimization?
Value chain optimization can be viewed as a scaling up, or an expansion outward, of production optimization. While in production optimization an enterprise might adopt changes to maximize the margins of one part of a supply chain, value chain optimization will look at the entire chain with which the company interacts. Furthermore, in production optimization, an input might be treated as a given. For example, the cost of ethylene is taken into account during production optimization, but the availability of ethylene is assumed. Value chain optimization will weigh the effects of price fluctuations on total value added, and can direct resources accordingly.

How does value chain optimization increase a firm’s reliability?
Being able to deliver on a contract is an essential part of any company’s business relationships. Determining which suppliers are consistently living up to their promises, and ascertaining if a shortage is due to conditions outside of a vendor’s control, is an important component in value chain optimization. Knowing whether any given contract is really providing the value required to maintain that contract helps reliability managers determine how many suppliers they need in order to sustain production.