What Is a Supply Chain?

What Is a Supply Chain?

Let me tell you directly: a supply chain connects the steps needed to transform raw materials into a finished product ready for you as a consumer. It starts with raw material producers and ends with the final delivery to you. You should know that effective supply chain management is pivotal for reducing costs and enhancing production efficiency. Companies continuously strive to optimize their supply chains to maintain competitiveness and profitability.

Key Takeaways

Understand this: a supply chain is a network that connects various companies and individuals in the process of creating and delivering a product to consumers, starting with raw materials and ending with order fulfillment. Effective supply chain management lowers costs, boosts production efficiency, and helps businesses maintain competitiveness by ensuring an unbroken and timely flow from raw materials to finished products. The COVID-19 pandemic highlighted the vulnerabilities of global supply chains, leading to significant delays and shortages in various sectors as supply chain networks faced restrictions and abrupt changes in demand. Supply chain management differs from logistics, though they are interconnected; logistics focuses specifically on the movement and storage of goods, while supply chain management oversees the entire process from raw material to consumer sale. Reliable suppliers are crucial for efficient supply chain management, as timely and specification-compliant deliveries are essential to prevent costly disruptions.

Components and Functionality of a Supply Chain

A supply chain includes every step that's involved in getting a finished product or service to you, the customer. These steps may include sourcing raw materials, moving them to production, then transporting the finished products to a distribution center or retail store where they can be delivered to you. It includes producers, vendors, warehouses, transportation companies, distribution centers, and retailers. The supply chain starts when a business gets an order, and its key functions are product development, marketing, operations, distribution, finance, and customer service. Effective supply chain management lowers costs and boosts profits, but if one part breaks, it can disrupt the whole chain and be costly.

Exploring Different Supply Chain Models

The supply chain model that a company selects will depend on how the company is structured and its specific needs. Consider the continuous flow model: this traditional approach works well for companies that produce the same products with little variation, where products are in high demand and require little to no redesign. This lack of fluctuation means managers can streamline production times and keep tight control over inventory, and they must regularly replenish raw materials to prevent production bottlenecks. Then there's the fast chain model: this works best for companies that sell products based on the latest trends, so businesses must get their products to market quickly to take advantage of the prevailing trend, rapidly moving from idea to prototype to production to consumer—fast fashion is a clear example. Finally, the flexible model: companies that manufacture seasonal or holiday merchandise often use this, experiencing surges in demand followed by long periods of little to no demand, so they gear up quickly to begin production and shut down efficiently as soon as demand tapers off, with profit depending on accurate forecasting of raw materials, inventory, and labor.

Best Practices in Supply Chain Management

Successful supply chain management systems benefit from several practices. They support continuous improvement, aim for increased velocity, encourage collaboration among the individual businesses in the supply chain, seek new technologies that improve their processes, and have metrics in place that allow employees to measure the success or failure of each step in the supply chain.

Comparing Supply Chain Management and Business Logistics

The terms supply chain management (SCM) and business logistics management—or simply logistics—are often used interchangeably, but logistics is one link in the supply chain. Logistics deals with the planning and control of the movement and storage of goods and services from their point of origin to their final destination. Good logistics management prevents delivery delays and ensures products arrive in good condition, helping to lower costs.

What Is the Flow of Manufacturing Costs?

Efficient supply chain systems deliver each product part to its needed location on time, requiring control over manufacturing costs. The flow of manufacturing costs is most relevant to businesses that produce products that require many parts from several vendors—for instance, a clothing manufacturer might need deliveries of fabric, zippers, trim, and thread that must all arrive at the same time. If some supplies arrive too early, they must be stored at the business' expense, and if some arrive late, the machines stand idle while they wait.

Reliable Suppliers Are Key

Efficient supply chain management needs reliable suppliers who meet specifications and deliver on time. Assume that XYZ Furniture manufactures high-end furniture and that a supplier provides metal handles and other attachments—the metal components must be durable so they last for many years, meet the design and quality specified by the manufacturer, and work as intended. A reliable supplier will fill the manufacturer’s order and ship the parts on time.

Does the Supply Chain Cause Deflation?

The increased efficiencies of supply chains have played a significant role in curbing inflation. Costs decrease as efficiencies in moving products from point A to point B increase, reducing the final cost to you, the consumer. Deflation is often regarded as a negative, but supply chain efficiencies are one of the few examples where it's a good thing. Supply chain efficiencies become more optimized as globalization increases, and this keeps the pressure on input prices.

The Impact of COVID-19 on Global Supply Chains

One of the most severe economic problems caused by the COVID-19 pandemic was damage to the supply chain, with effects touching nearly every sector of the economy. Supplies of products of all kinds were delayed due to ever-changing restrictions at national borders and long backups in ports. Demand for products changed abruptly, with shortages developing as consumers hoarded essentials like toilet paper and baby formula, and masks, cleaning wipes, and hand sanitizers suddenly in demand. Shortages of computer chips delayed the delivery of a wide range of products from electronics to toys and cars.

Changing Supply Chain Priorities Post-Pandemic

A survey by Ernst & Young of 200 senior-level supply chain executives points to three essential findings: the pandemic had a deep negative effect, as cited by 72% of supply chain executives, with automotive and industrial supplies companies hit the worst; visibility was the top priority, as executives wanted to focus on adding technology such as sensors that gave them a better view of their orders throughout the process; and the pandemic accelerated the transition to digitization, with most of those surveyed saying that digital transformation combined with increased automation would accelerate going forward.

Frequently Asked Questions

What is supply chain management? It's the oversight and control of all the activities required for a company to convert raw materials into finished products that are then sold to users, providing centralized control for the planning, design, manufacturing, inventory, and distribution phases required to produce and sell a company's products. A goal is to improve efficiency by coordinating the efforts of the various entities in the supply chain, which can result in a company achieving a competitive advantage over its rivals and enhancing the quality of the products it produces—both can lead to increased sales and revenue.

What are the steps in a supply chain? The key steps include planning the inventory and manufacturing processes to ensure that supply and demand are adequately balanced, manufacturing or sourcing the materials needed to create the final product, assembling parts and testing the product, packaging the product for shipment or holding it in inventory until a later date, transporting and delivering the finished product to the distributor, retailer, or consumer, and providing customer service support for returned items.

What is an example of a supply chain? A supply chain begins with the sourcing of raw materials, which are then hauled to a wholesaler that sells them in batches to manufacturers; the manufacturer uses the materials to create a product which is then delivered to a retailer, and finally, it's sold to a consumer.

The Bottom Line

A supply chain is what lets you plug in your new television or bite down on that hamburger you’ve made at home—it's a network made up of producers and manufacturers, vendors, warehouses, transportation companies, and retailers. The process begins when a product is created and it ends when you purchase it. Many supply chains are global in scale. Each step in the process is complicated by the need to create, prepare, package, ship, and unpack the product at each of its successive destinations, but it can result in lower costs when it's done effectively, and this benefit can be passed on to you as a consumer.