The Supply Chain

What is Supply Chain?

Graphics courtesy of PNG KitOpens in new window In any society, goods must be physically moved or transported between the places where they are produced and the places where they are processed or consumed. For example, Coca-Cola moves from point of manufacture to the point of final consumption by the customer. A logistics supply chain develops when many exchanges of goods produced take place between producers and consumers.

Supply chains are the critical infrastructure for the production, distribution, and consumption of goods and services in today’s global economy. As such, supply chains may span thousands of miles across the globe, involve numerous suppliers, retailers, and consumers, and be underpinned by multimodal transportationOpens in new window and telecommunication networks.

The Supply Chain Defined

The meaning of the term supply chain may vary from company to company. The supply chain is often referred to as involving buying (purchasing/procurement), materials management and physical distribution, amongst other things. We define supply chain as follows:

A shirt manufacturer, for example, is part of a supply chain that extends upstream through the weavers of fabrics to the manufacturers of fibres, and downstream through distributors and retailers to the final consumer.

Each organization in the supply chain is dependent upon the others. No one in the channel is an independent operator — each is linked to and dependent on the next (just as is the case with a physical chain, where one weak link can break the whole chain).

The supply chain is a pipeline of participants that produces optimal value-added benefits for the customer. Therefore, it is important to note that for many industries, the supply chain is the largest single expenditure in the cost of products sold and is a major critical success factor, impacting on profitability and competitive advantage. The total supply chain costs must therefore be carefully managed.

The Structure and Components of Supply Chains

The term supply chain comes from a picture of how the partnering organizations are linked together. The Figure 9.4 above illustrates a typical supply chain. Note that the supply chain involves three segments, as described below:

1.     Upstream

The upstream is where sourcing or procurement from external suppliers occurs. In this segment, supply chain managers select suppliers to deliver the goods and services the company needs to produce their product or service.

Also in theupstream, supply chain managers develop the pricing, delivery, and payment processes between a company and its suppliers. Included here are processes for managing inventoryOpens in new window, receiving and verifying shipments, transferring goods to manufacturing facilities, and authorizing payments to suppliers.

2.     Internal

Internal is where packaging, assembly, or manufacturing takes place. Supply chain managers schedule the activities necessary for production, testing, packagingOpens in new window, and preparing goods for delivery. They also monitor quality levels, production output, and worker productivity.

3.     Downstream

Downstream is where distribution takes place, frequently by external distributorsOpens in new window

In this segment, supply chain managers coordinate the receipt of orders from customers, develop a network of warehouses, select carriers to deliver products to customers, and develop invoicing systems to receive payments from customers.

The flow of information and goods can be bidirectional. For example, damaged or unwanted products can be returned, a process known as reverse logisticsOpens in new window. In the retail clothing industry, for example, reverse logistics would involve clothing that customers return, either because the item had defects or because the customer did not like the item.

Tiers of Suppliers

Several tiers of suppliers are shown in Figure 9.4. As the diagram indicates, a supplier may have one or more subsuppliers, a subsupplier may have its own subsupplier(s), and so on. For an automobile manufacturer, for example:

The Flows in the Supply Chain

There are typically three flows in the supply chain: material, information, and financial.

1. Material flows are the physical products, raw materials, supplies, and so on forth that flow along the chain. Material flows also include reverse flows (or reverse logistics) — returned products, recycled products, and disposal of materials or products. A supply chain thus involves a product life cycle approach, from “dirt to dust.”
2. Information flows consist of data related to demand, shipments, orders, returns, and schedules, as well as changes in any of these data.
3. Financial flows, finally, involve money transfers, payments, credit card information and authorization, payment of schedules, e-payments, and credit-related data.

Significantly, different supply chains have different numbers and types of flows. For example, in service industries there may be no physical flow of materials, but frequently there is a flow of information, often in the form of documents (physical or electronic copies).

In fact, the digitization of software, music, and other content may create a supply chain without any physical flow. Notice, however, that in such a case, there are two types of information flows:

To manage the supply chainOpens in new window, an organization must coordinate all of the above flows among all of the parties involved in the chain.