Value chain: what it is and what to do instead

The idea worth keeping

Not as boxes to fill, but as questions that fall out of the maths of the goal:

• Which part of the profit number moved?
• Which step in the chain creates that part?
• Did a change in one step (say, sourcing) quietly raise cost in another (say, markdowns)?

Why reaching for it fails in an interview

• It is generic. Nine named activities fit every firm and say nothing about this one.
• It misses the driver that matters. In fashion, a saving in sourcing can cost more in markdowns later, and a box-by-box walk does not connect the two.
• It sounds rehearsed. Reciting "inbound logistics, operations, outbound logistics" is a textbook list, not analysis.

What to do instead: a worked case

1. 1

   Pin the question

   Find what cut gross margin by about 3 points and how to win it back.

2. 2

   Write the maths of the goal

   • Gross profit = full-price units x full price + marked-down units x sale price minus units bought x unit cost
   • Gross margin = gross profit / sales
3. 3

   Use what you know about the business

   • In fashion, the main lever on margin is how much stock sells at full price; whatever is left goes on sale.
   • Long lead times force buyers to commit to styles months ahead, so they guess trends worse and mark down more.
   • Cheaper far-away suppliers usually mean longer lead times, so a sourcing saving can be eaten by markdowns.

   The structure that falls out of it

   • Full-price sell-through
     • Share of units sold at full price
     • Lead time from order to shop
   • Markdown depth
     • Average discount on sale stock
   • Unit cost
     • Supplier price
     • Freight

   Hypothesis: I expect more stock is going on sale, possibly because of a change in sourcing that lengthened lead times.

4. 4

   Find the facts that decide it

   • Before: 1,000,000 units bought at 10.50. 80% sold at 25 and 20% at half price: 20 million + 2.5 million = 22.5 million of sales, gross profit 22.5 minus 10.5 = 12 million, a margin of about 53%.
   • After: units bought at 10 from a new, cheaper supplier. 60% sold at 25 and 40% at half price: 15 million + 5 million = 20 million of sales, gross profit 10 million, a margin of 50%. Lead times grew from 8 to 20 weeks after the move, which saved 0.5 a unit (0.5 million a year) while extra markdowns cost 2.5 million of sales.
5. 5

   Say so what

   The margin fell because more stock now goes on sale, and the cause is the move to a cheaper but slower supplier: it saved 0.5 million and cost 2.5 million in markdowns. Move fast-changing trend lines back to nearer suppliers and keep the far supplier for basics that rarely change. The risk is higher unit cost on trend lines, which the full-price sales should more than cover.

Build the acumen behind it

The worked case used two things a list cannot give you: the five moves, and knowing how this kind of business makes money. These pages teach both.