When Sydney Stupp places an employee at a customer's site to help specify and procure nuts and bolts, he saves the client the cost of having his own staff handle what is usually a low-level task. At the same time, by knowing customer needs in advance, Stupp cuts his own marketing and inventory costs.
"We eliminate redundancies in the supply chain so we don't have our people doing work their people are doing," explains the co-owner of industrial distributor Process Products Ltd. in Toronto. "We put the work where it belongs and have one company do it."
What Stupp is doing is changing Process Products' place and role in the value chain--the linkage of activities and processes that create and deliver products and services to customers. Instead of simply playing the role of a distributor between fastener manufacturers and the equipment makers who are his customers, he creates a vertical linkage between himself and his customers.
Similar value chains exist in any industry. Magazines, for instance, reach customers through a value chain consisting of publishers who link to wholesale distributors who are linked to bookstores and newsstands that link to the final customer. Experts say understanding value chains can help entrepreneurs do everything from cutting costs to spotting new opportunities.
"You can look at how to alter the value chain and hopefully capture more value for yourself," suggests David Wilson, a professor of entrepreneurial studies at Pennsylvania State University in University Park. "Or you may be able to replace a longer value chain with a shorter one by removing steps."