Source: adapted from K. Fernandez-Stark, S. Frederick and G. Gereffi (2011) The Apparel Global Value Chain: Economic Upgrading and Workforce Development, Duke University Center on Globalization, Governance and Competitiveness.
Value chains can be considered from two axis; functions (horizontal axis) such as procurement, fabrication, and distribution, as well as the level of added value per unit of output (vertical axis) that is derived from each of these functions. Through their economic development paths, countries usually improve their competitiveness within global value chains through functional, product, and process upgrading. While functional upgrading involves developing a more comprehensive array of activities over different segments of the value chain, product upgrading focuses on designing, fabricating, and distributing higher value (more sophisticated) products. Last, process upgrading focuses on improving the fabrication and distribution chain through capital investments. There are usually four functional upgrading stages:
- Fabrication (1; value chain entry). In this basic stage, the manufacturer provides simple fabrication processes, often using imported inputs (parts and raw materials). This is usually to take advantage of lower labor costs and had particularly occurred in export-oriented economies. It is either the outcome of outsourcing and offshoring investments made by multinational corporations or the setting of domestic firms subcontracting on their behalf.
- Supply chain (2; functional upgrading). The manufacturer is involved in a broader range of activities. This can involve moving upstream along the supply chain, such as for the procurement of parts and raw materials. The manufacturer is therefore building its own network of suppliers and can have better control of the quality, quantity, and frequency of inputs. Also, this can involve moving downstream along the supply chain to assume tasks such as packaging and shipping to the buyer.
- Product design (3; functional upgrading). In this case, the manufacturer assumes the additional pre-fabrication activities, namely design or product development.
- Product brand (4; functional upgrading). At this stage, a manufacturer is able to develop its own products and sell them on regional or global markets. This particularly involves the development of recognized brands.
In addition to the four main stages of functional upgrading, two additional upgrading forms can be latched:
- Product upgrading (5). Eventually, a manufacturer becomes able to undertake the fabrication of increasingly complex products as well as the development of additional capabilities to innovate.
- Process upgrading (6). The main goal is to improve productivity through new fabrication methods, which commonly involve capital investments (e.g. fabrication equipment). Additional supply chain strategies can be developed so that fabrication becomes highly responsive (lower lead times) and flexible.