Understanding Value Chain Analysis For Driving Social Change

by | May 15, 2023

As an India Fellow, I got a chance to understand the value chains of ropemaking, tomatoes, ground nuts, and potatoes in Southern parts of India. I have realised that, if we are working towards enhancing the income of a group of people, it’s crucial to understand the value chain for improving the efficiency of our intervention.

What is a value chain?

A value chain denotes the value created at each step in creating a product or a service.

For example, one kilogram of mustard costs around Rs. 55 in Wadrafnagar, Chhattisgarh in the month of March. At the same time, the one-kilogram equivalent of mustard oil costs around Rs 148.5. In this example, a value of Rs 93.5 i.e. (148.5 – 55) has been added to mustard for it to become mustard oil.

A simple skeletal end-to-end agri-value chain looks like this:

To increase efficiency and reduce the costs incurred at each step, we analyze the value created at each step of the process. This is called value chain analysis. Reducing costs at each step will increase the profit margin for the businesses. It also helps a business in gaining a competitive advantage in the market.

In the above example, if we analyze the value addition part of the mustard value chain per kg of mustard oil, that might look like this (the costs taken in the table are representational):

Value chain actors involvedTasks involvedThe cost incurred for the task per kgThe cumulative cost incurred per kg
Farmers, Middle men, TradersPurchase of mustard from farmersRs 0Rs 55
Middlemen, TradersTransportation to oil unit (Wadrafnagar to Ambikapur – 90 km, supply of 2 tonnes at a time costs 3500 Rs. /trip)Rs 1.75Rs 56.75
Mill owners, Mill labourGrading and cleaning (Primary processing)Rs 5Rs 61.75
Mill owners, Mill labourDehullingRs 10Rs 71.75
Mill owners, Mill labourExpelling oilRs 50Rs 121.75
Mill owners, Mill labourFiltering oilRs 10Rs 131.75
Mill owners, Mill labourBottling and packagingRs 15Rs 146.75
TradersTransportation to the market e.g., Wadrafnagar (Wadrafnagar to Ambikapur – 90 km, supply of 2 tonnes at a time costs 3500 Rs)Rs 1.75Rs 148.5

If the market price of the oil is 180 Rs, the profit margin for each kg of mustard oil is Rs 31.5. Here, we have set the enterprise as a boundary of our analysis. We are not looking at the costs incurred by farmers.

Steps involved in value chain analysis

  1. Identify the steps and activities involved in the value chain.
  2. Analyze the cost of each activity.
  3. Identify gaps in the existing costs.
  4. Strategize further course of action for getting competitive advantage.

Value chain analysis helps us to calculate the cost incurred at each step and this will allow us to optimize our costs and increase the profit margin of the enterprise.

We can also list out secondary activities such as human resource management, accounting and analyse them within the value chain. For understanding and keeping it simple, let us concentrate on a part of the value chain mainly concentrating on primary activities. Refer Porter’s model of value chain analysis to know more.

Empowering communities

The issue at hand is how would we use the value chain analysis for the benefit of the community we are living in. If we look at the above table, we can identify various gaps and reduce the costs. The profit from these activities of value addition is mainly being taken by mill owners, traders, and middlemen and there is little to no influence of women in the value chain.

For the redistribution of this profit to the community we are working in, there are various tools developed by civil Societies and government. These approaches include collective action, farmer-owned enterprises such as Farmer Producer Organisations (FPO), and integrated value chain development.

If we study the value chain gaps, we can design interventions to increase income for farmers through:

  1. Reducing the input costs.
  2. Training and information about best practices to make process efficient, processing and financial linkages.
  3. Ensure that the farmers are able to get fair prices to their produce.
  4. Improve income by including farmers in the processing and marketing of value-added goods.

As a part of my fellowship, I have been working with women to increase their income through a value chain approach and enterprise development. These are my insights from my fellowship experience. I hope to delve more into other value chain approaches to facilitate social change.

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