VALUE CHAIN ANALYSIS

Value chain

The value chain has been a critical factor in organizing development, production and marketing around the globe. The value chain has been structured to maximize profit for the involved organizations with little regard to the optimization of community value. The results have been predictable with favorable profit optimization largely offset by value destruction for society.

Transfer prices

Prices are critical in economic analysis and the determination of profit and value to any entity. Transfer pricing is used to put a value on goods and services as they move from one sub-entity to another within an organization, or between controlled entities. They are a tool that can be used to move profit between entities and may have inappropriate consequences.

Transfer pricing is a central component of value chain analysis ... but it is not easy to get right. Ford was one of the first companies to have a vertically integrated production organization, but transfer pricing caused all sorts of problems. Was it the steel mills or the engine plant that was making money for the company? Big questions, with no easy definitive answers.

The value chain adds a level of complexity to cost analysis and understanding the behavior of costs.