Value chain analysis is a methodology that identifies the individual costs for each step during a products creation through its journey to market. It includes a determination of each individual element of cost up thru its manufacture that determines its COGS (upstream costs). Second, a value-chain includes the costs and value-adds incurred as a product moves forward to market until reaching it reaches the intended end-use (downstream costs).

Figure 1 shows a simplified view of the major cost segments that comprise a typical value-chain. 

The task of developing a meaningful and accurate value-chain is time consuming. It requires a focused market research effort that examines each of the individual elements of cost within each of the steps involved in creating the product and continuing until the product reaches its final end-use destination.

Upstream Sector of the Value Chain

Feedstocks include various basic chemicals or petrochemical products such as methanol, ethanol, ethylene, propylene, and ammonia. It also includes both natural and synthetically produced minerals. The impact of unanticipated changes in availability and/or pricing due to weather, production capacity, or shifts in demand can be assessed in a value-chain. The same would be true when new capacity is projected to come on stream.

The raw materials segment is comprised of the additives that are incorporated into a given formulation. It includes resins, solvents, pigments plus other additives as required to deliver the desired performance in the formulated product. The value-chain dissects the individual cost contribution for each.

Reasons behind shifts in raw material costs can be linked to the economy and the need to increase prices to keep pace. They can also be tied to tariffs, shortages due to weather events, climate shifts, or transportation, including ocean shipping delays. Value-chain analysis should reveal those raw material costs that are having the greatest impact on final product cost and, if necessary, corrective action.

Figure 2* represents an example of the raw material segment of a value -chain. It identifies the total costs for each of major raw material elements that comprise the product formulation. Additional cost details for each components within each of the 4 formulation elements are also shown.

* Cost elements shown in figures 2 and 3 are for example only

Manufacturing Costs Analysis 

Manufacturing costs include the total cost of raw material plus all the costs involved in converting the raw materials into a finished product. Among these costs are mixing, blending, milling, direct and indirect labor, sales, administration and R&D burden costs (SARD), packaging, handling costs plus freight. 

As shown in Figure 3, value-chain analysis captures the individual elements of manufacturing cost in relation to the cost of goods sold (COGS). The profit being applied to the manufactured product is identified in this analysis revealing the current (upstream) operating margin for the product. 

Among the reasons for doing an upstream value-chain analysis include:

• Identify targets for cost reduction to improve product profitability.

• Assess the impact of pursuing alternate sourcing options for specific raw materials.

• Evaluate the viability of increasing profit margins through an increase in selling price.

• Compare outsourcing options for manufacturing versus current internal manufacturing costs.

Downstream Sector of the Value Chain

Downstream value-chain analysis follows the journey a manufactured product takes as it moves through the channels-to-market until reaching its final end-use destination.

In the coating industry, there is a variety of market scenarios that have distinctly different downstream value-chain profiles. Figures 4 and 5 illustrate downstream value-chains with two different channel-to-market scenarios.

(1) Retail market where the product goes through distribution including sales via big-box stories (Figure 4). 

(2) Coatings through a distributor who then contracts the actual coating to an applicator or service company (Figure 5).

In this scenario, the upstream costs for the coating are dominated by the special packaging necessary to address the requirements of the retail market. As a consequence of the high packaging cost, pressure is placed on cost reduction from other downstream elements. Value-chain analysis identifies the options available to management to compensate for this high cost.

The retail market channel including big box stores or large national chains such hardware stores are positioned to maintain pricing pressure on the coating manufacturer cost down. 

For the example in Figure 5, the product moves to market through a distributor who then contracts the actual coating to an applicator or service company. It shows significantly elevated pricing as the product proceeds through the downstream portion of the value chain. CW