Supply Chain

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What is the 'Supply Chain'

A supply chain is a network between a company and its suppliers to produce and distribute a specific product, and the supply chain represents the steps it takes to get the product or service to the customer. Supply chain management is a crucial process, because an optimized supply chain results in lower costs and a faster production cycle.

BREAKING DOWN 'Supply Chain'

Business logistics management refers to the production and distribution process within the company, while supply chain management includes suppliers, manufacturers and retailers that distribute the product to the end customer. Supply chains include every business that comes in contact with a particular product, including companies that assemble and deliver component parts to the manufacturer.

How the Flow of Manufacturing Costs Works

The flow of manufacturing costs refers to the process of using materials and labor to complete a finished good that can be sold to a customer. A supply chain management system can reduce the cost and complexity of the manufacturing process, particularly for a manufacturer that uses many component parts. A clothing manufacturer, for example, will move raw materials into production first, such as fabric, zippers and other pieces that are used to make clothing. The manufacturer then incurs labor costs to run machinery and perform other work using the materials. Once the items are completed, they must be packaging and stored until they are sold to a customer. A supply chain management system can forecast when materials are needed and can plan production, and the system can also help minimize the amount of material and component parts that sit on the factory floor waiting to be used in production.

Examples of Reliable Suppliers

An efficient supply chain management process requires suppliers that are reliable. This means that they produce a quality product that meets the manufacturer’s needs, and the product is delivered on time. Assume, for example, that XYZ Furniture manufactures high-end furniture, and that a supplier provides metal handles and other attachments. The metal components need to be durable, so that they can be used on the furniture for years, and the metal parts shipped to XYZ should work as intended. The supplier must be able to fill the manufacturer’s orders and ship metal parts to meet XYZ’s production needs. These steps are necessary to produce a quality product that is shipped to a customer in a timely manner

Factoring in Economic Order Quantity

Many firms that use supply chain management apply the concept of economic order quantity (EOQ). EOQ is a tool to determine how to order materials, parts and inventory to minimize costs and meet production needs. EOQ considers the cost to place an order and the time it takes to receive the order. For example, XYZ needs 100 brass drawer handles a week for production, and it takes three weeks for the handles to arrive after they are ordered, at a cost of $10. EOQ can determined the ideal order size and the timing of the order.