Chain of Production: A Detailed Exploration
The chain of production refers to the various stages a product goes through from its raw form to the final product delivered to the consumer. This process involves numerous industries, labour, and expertise, with each stage adding value to the product. In the UK economy, and globally, understanding the chain of production is crucial for businesses, as it provides insight into how raw materials are transformed into products and services, ready for consumer use.
The furniture production example, highlighted in the original article, illustrates the flow of production stages—starting with natural resources and ending with a finished product. The journey involves extraction, processing, manufacturing, and distribution, with each step adding significant value. In this expanded article, we will dive into each stage of the chain of production, examine its significance, and explore how different sectors contribute to value addition and the broader economy.
Primary Sector: Extraction and Harvesting
The primary sector represents the beginning of the chain of production and focuses on the extraction of raw materials from the natural environment. For example, in furniture production, this involves forestry management and logging.
Example: Timber Harvesting
In the UK and many other parts of the world, sustainable forestry practices ensure that timber can be harvested without depleting natural resources. The extraction of timber involves cutting down trees and preparing the raw wood for further processing. This sector requires expertise in agriculture, environmental management, and sustainable practices to balance production with environmental preservation.
Other sectors in the primary stage of production include mining (for metals), fishing, and farming (for crops and livestock). These activities form the backbone of most industries, supplying the raw materials needed for further processing and manufacturing.
Secondary Sector: Manufacturing and Processing
The secondary sector takes raw materials from the primary sector and transforms them into finished or semi-finished products through manufacturing or processing. This stage adds considerable value as it involves technical expertise, industrial equipment, and skilled labour.
Example: Sawmilling and Timber Seasoning
Once trees have been harvested, the raw timber is processed in sawmills, where it is cut into usable pieces for carpenters and furniture makers. Timber is also seasoned, either naturally or through kiln drying, to ensure it is durable and free from moisture that could damage the wood over time.
This stage is not limited to furniture production. In the UK and globally, the secondary sector includes industries such as automobile manufacturing, textiles, food processing, and steel production. Factories and industrial plants are crucial components of this stage, converting raw materials into products ready for distribution or further refinement.
Tertiary Sector: Distribution and Retail
The tertiary sector is where goods and services reach the consumer. It involves the logistics, transportation, marketing, and retailing of finished products. In the chain of production, the tertiary sector is where the final stage of value is added, through customer service, branding, and retail operations.
Example: Transporting and Selling Furniture
Once the furniture is built by carpenters, it is transported to retailers or directly to customers through various distribution channels. This step involves logistics companies, warehousing, and retail outlets, whether brick-and-mortar stores or online marketplaces.
The service sector plays a critical role in value addition by ensuring that products reach consumers in good condition and within the expected timeframes. For example, transport companies ensure furniture is delivered without damage, and retailers provide customer service to help buyers select the right products for their homes. These added conveniences contribute significantly to the perceived value of the product.
Adding Value in the Chain of Production
Value addition is a fundamental concept in the chain of production. It refers to the increase in value that is applied to a product at each stage of production. In the case of furniture, the timber may initially have limited value when harvested. However, by processing the timber, constructing the furniture, and delivering it to the customer, value is progressively added.
VAT and the Chain of Production
In the UK, as in many other countries, the government imposes a Value Added Tax (VAT) on the added value of products at each stage of the chain of production. VAT is paid by businesses at every stage of production where value is added, and the final tax burden is passed on to the end consumer.
For instance, in the production of a chair, a sawmill may add value by processing the raw wood, and VAT is levied on this value. Then, the carpentry shop adds value by constructing the chair, and VAT is applied again to this additional value. Finally, when the chair is sold to the end consumer, the total VAT on all value-added is collected.
Service Industry and Value Addition
While the chain of production traditionally refers to the manufacturing of goods, the service industry also follows a similar process of value addition. Consider the hospitality industry—restaurants, for example. When raw ingredients are purchased, they are transformed by skilled chefs into meals that are significantly more valuable than their original components.
Beyond restaurants, service sectors like healthcare, education, and IT support follow this value-addition model. Professionals provide services that enhance the original value of goods or solve complex problems for consumers, justifying higher prices for the enhanced outcomes they deliver.
Digital Economy and the Evolution of the Chain of Production
With the rise of the digital economy, the chain of production has evolved significantly. Digital products, such as software, mobile apps, and online services, do not rely on traditional manufacturing processes. However, they still follow a chain of production, from idea development to coding, testing, and eventual release to users.
In the digital economy, value is added at various stages of production, including research and development, design, and user experience optimisation. Companies invest heavily in creating a polished final product that meets consumer demand. This modern chain of production underscores the importance of innovation and intellectual property in value creation.
Globalisation and Outsourcing in the Chain of Production
Globalisation has profoundly affected the chain of production, allowing companies to outsource different stages of production to countries where labour and materials are cheaper. For example, a furniture manufacturer in the UK may source raw timber from sustainable forests in Scandinavia, process the wood in Eastern Europe, and assemble the final product in the UK.
Outsourcing reduces costs but also introduces complexities. Companies must manage relationships across borders, ensure quality control, and comply with international trade regulations. However, by strategically outsourcing certain parts of the production process, businesses can remain competitive in an increasingly globalised market.
Ethical Considerations in the Chain of Production
As companies outsource production and streamline their processes, ethical considerations become more prominent. Issues such as fair trade, workers’ rights, and environmental sustainability are becoming central to consumers and businesses alike.
Many companies are under pressure to ensure that their production chains are free from unethical practices such as child labour or environmentally harmful activities. Consumers increasingly demand transparency about how products are made, from the sourcing of raw materials to the treatment of workers at all stages of production.
Example: Fair Trade in Coffee Production
In industries like coffee production, the “chain of production” now often includes fair-trade certification, which ensures that workers at the beginning of the chain—farmers—are compensated fairly. This has led to greater awareness and ethical business practices across various industries.
Conclusion
The chain of production represents the interconnected steps that transform raw materials into valuable products ready for consumers. Whether it’s the timber industry, digital services, or the restaurant business, the process of adding value at each stage remains crucial. Understanding this chain allows businesses to optimise production, reduce costs, and add as much value as possible, ultimately benefiting both the company and the consumer. Additionally, with the rise of globalisation, digitalisation, and ethical concerns, companies must remain agile and conscientious to stay competitive in the evolving marketplace.
Understanding the chain of production not only allows businesses to improve efficiency and profitability but also enables consumers to make informed choices about the products they purchase. By recognising the value added at each stage, we gain insight into the true cost and worth of everyday goods and services.
The chain of production consists of the various stages involved in the production of a particular product.
The chain of production for furniture may include the following steps:
- Growing of trees and lumbering of timber
- Sawing up timber in a sawmill
- Seasoning of timber
- Construction of furniture by carpenters
- End product
The chain of production involves a series of stages, which add value to the end product. The trees in the forest will only have a limited value, but when the value is enhanced by sawing, seasoning, and construction they will be worth several times more.
As well as the various stages in the chain of production, we also need to consider a chain of distribution involving transport and communication, as the goods make their way to the end retailer.
Adding value
Adding value is the process of making the product more valuable to the purchaser. For example, if the sawmill buys trees for £10,000 and sells them for £25,000 it will have added £15,000 worth of value. Value Added Tax is typically levied on the value added by producers at each stage of production and is eventually passed on to the end consumer.
Value is also added in service industries e.g. in a restaurant the service of the cook and waiter/waitress make the raw ingredients that originally made up the meal much more desirable.