When you fill your car up with petrol you probably don’t think much about where it comes from - where the crude oil was drilled, how it was refined, where it was shipped from and how it arrived in the petrol station you’re in. But these are all vital components of the supply chain that got the petrol from the producer to you.
A supply chain encapsulates the process of bringing a product or service from conception to market - all the raw materials, operations, logistics and distribution of a product or service from producer and supplier through to the retailer.
Supply chain definition
A supply chain incorporates all the people, companies and components required to take raw materials, turn them into a finished product and deliver it to the customer. It will include the producers who grow, raise or mine the raw materials, the transporters who bring them to the factory, the packaging and the distribution to the end user.
Understanding the steps in a supply chain
Exploring the supply chain process
There are multiple steps in a chain though some will be more complex than others depending on the nature of the goods. But there are some basic steps that apply to all of them:
- Sourcing or extracting raw materials
- Basic refining
- Turning refined products into the end product
- Sales and order fulfilment
- Getting the product to the customer
- Post-sales customer support
The amount of time it takes to go from the raw materials to supplier then customer supply is known as lead time.
Supply chain risks
Any supply chain is only as strong as its weakest link. If one part fails, it can impact everything that comes after it, leading to a host of problems - inability to source materials and finish a product, delays bringing the final product to market and ultimately disappointed customers.
Lots of factors can cause a breakdown in the chain. These include:
- Economy and inflation
- Global political unrest
- Cyber threats
- Climate change
- Material and product shortages
- Poor supplier performance
- Labour shortages
- Complex legal issues or regulations
- Natural disasters
Examples of supply chain steps
Here are a few examples of steps you may need to consider in your supply chain:
1. Supply chain planning and demand management
Understanding customer demand is key to creating an efficient supply chain and ensuring product availability. Businesses will typically analyse past sales data to forecast future sales growth and from that can extrapolate the future demand. They may also look at macroeconomic forces such as inflation and interest rates which may also impact demand planning. The goal of this is to ensure a sufficient supply while also avoiding excess inventory.
Procurement is another key step in any supply chain strategy and refers to the sourcing of all materials needed to make your product and satisfy demand. Essentially, it involves finding suppliers and building relationships with them, monitoring performance over the short-term and the long-term and putting in place contingencies if one supplier fails.
3. Planning production
A business will plan every step required to take materials and produce the finished article, from product design and manufacturing, to packaging and quality control, each stage is considered and analysed.
4. Inventory management
Inventory management is another important facet and requires a fine balance. It’s important to keep track of products so you know just how much you have to sell. Ideally it will be enough to meet customer demand but not so much that you’re sitting on excess inventory.
Main types of supply chain models
This works for a mature business where customer demand and flow has very little variation. The business understands the numbers and can accurately forecast its needs so that they have a continuous and steady flow of products and information.
This model is most often used with products that are fashionable for a short period of time and have a short product cycle, for example, the latest kid’s toy which is a sell out one Christmas but almost entirely forgotten by the next. Or fashion brands whose offerings change seasonally.
This type of supply chain focuses on delivering the best quality products to the customer but at the lowest possible labour and materials cost. The goal is to maximise efficiency and is suitable for extremely competitive industries.
An agile supply chain is one which can adapt quickly and efficiently to sudden changes in supply and demand. A business can make the necessary changes without any interruption to workflow or loss of productivity.
Ideally, a custom configured model is a combination of agile and continuous flow and can adapt quickly to changes across the chain. It would apply to car manufacturing, for example, where it would need to continuously adapt to different models and different features within those models.
A flexible supply chain is one which has contingencies built in in the event of any small disruption so a business can avoid delays and disruptions which result in extra costs and lost sales.
Supply chain management
Supply chains can be complex creatures to look after, and the processes above, from logistics to operations, all need to be documented and managed before the final product reaches the end customer. Supply chain management (SCM) is the practice of tracking and optimising the end-to-end process, ensuring it’s coordinated with suppliers and cost-effective from the bottom-up.
Key concepts of supply chain management
Supply chain managers are important throughout the product cycle. They work to meet customer expectations by ensuring all processes, from product development and production planning through to customer service and delivery run smoothly.
Effective SCM relies on supply chain leaders pulling everyone together across the supply chain network so information flows freely and business processes work.
There are three main flows in supply chain management:
- Information flow
- Product flow
- Finances flow
A supply chain leader may be cross-functional in all three and may need to work cross-industry too to achieve the day-to-day business objectives.
Benefits of effective supply chain management
One of the long-lasting effects of Covid-19 has been the ongoing disruption of global supply chains, highlighting the need for effective supply management more than ever. Businesses which have fared best and retained their competitive advantage are the ones who had considered supply chain management long before the pandemic hit and were able to adapt, find new suppliers and get products to customers in new and inventive ways.
Legacy supply chain software, relationships which are not customer-centric and outdated processes can also impede efficiency for many companies despite a gradual move towards cloud-based solutions and e-commerce. By proactively considering the role of each component in the supply chain companies stand a much better chance of ensuring there is just enough supply and demand.
Frequently asked questions
What is a basic example of a supply chain?
Company A makes luxury chocolates for supermarkets. The supply chain covers the sourcing of chocolate, cream, flavourings to produce the chocolates, the manufacturing of the product in its factory, packaging, transportation to the supermarket and the final sale to the customer.
Company B, is an ecommerce business that sells scented candles. They know demand increases around Christmas and follow good supply chain practice by working with their wholesaler well in advance to make sure they have enough stock for the extra sales they have forecast.
What is supply chain management?
Effective supply chain management is the process of making sure customers get the products they want when they want them. It’s crucial to individuals, businesses and governments. Not getting your hands on the latest Nikes isn’t life-or-death but not being able to procure cancer-treating medicines is.
What is the main purpose of the supply chain?
The purpose of the supply chain is to meet demand, to supply customers with the right products at the right time, how and when they want them in the most efficient and cost-effective way for the business.
An organised supply is essential to meet demand, manage inventory, optimise operations and get the product to the end user.
What is supply chain disruption?
This is any event which causes a disruption in the production, sale or distribution of products so that a business is unable to effectively meet customer demand. Supply chain disruption includes everything from third-party suppliers failing to deliver materials on time to natural disasters, rail strikes and pandemics.