The Supply Chain: From Raw Materials to Order Fulfillment

Supply Chain

Investopedia / Michela Buttignol

What Is a Supply Chain?

A supply chain is a network of individuals and companies who are involved in creating a product and delivering it to the consumer. Links on the chain begin with the producers of the raw materials and end when the van delivers the finished product to the end user.

Supply chain management is a crucial process because an optimized supply chain results in lower costs and a more efficient production cycle. Companies seek to improve their supply chains so they can reduce their costs and remain competitive.

Key Takeaways

  • A supply chain is a network of companies and people that are involved in the production and delivery of a product or service.
  • The components of a supply chain include producers, vendors, warehouses, transportation companies, distribution centers, and retailers.
  • The functions of a supply chain include product development, marketing, operations, distribution, finance, and customer service.
  • Today, many supply chains are global in scale.
  • Effective supply chain management results in lower costs and a faster production cycle.

Supply Chain

Understanding a Supply Chain

A supply chain includes every step that is involved in getting a finished product or service to the customer. The steps may include sourcing raw materials, moving them to production, then transporting the finished products to a distribution center or retail store where they may be delivered to the consumer.

The entities involved in the supply chain include producers, vendors, warehouses, transportation companies, distribution centers, and retailers.

The supply chain begins operating when a business receives an order from a customer. Thus, its essential functions include product development, marketing, operations, distribution networks, finance, and customer service.

When supply chain management is effective, it can lower a company's overall costs and boost its profitability. If one link breaks, it can affect the rest of the chain and can be costly.

What Are the Main Supply Chain Models?

Many types of supply chain models are available. The model a company selects will depend on how the company is structured and what its specific needs are. Here are a few examples:

  • Continuous Flow Model: This traditional supply chain model works well for companies that produce the same products with little variation. The products should be 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. In a continuous flow model, managers will need to regularly replenish raw materials in order to prevent production bottlenecks.
  • Fast Chain Model: This model works best for companies that sell products based on the latest trends. Businesses that use this model need to get their products to market quickly to take advantage of the prevailing trend. They need to rapidly move from idea to prototype to production to consumer. Fast fashion is an example of an industry that uses this supply chain model.
  • Flexible Model: Companies that manufacture seasonal or holiday merchandise often use the flexible model. These companies experience surges in demand for their products followed by long periods of little to no demand. The flexible model ensures they are able to gear up quickly to begin production and shut down efficiently as soon as demand tapers off. In order to be profitable, they must be accurate in forecasting their need for raw materials, inventory, and labor.

What Are Supply Chain Management Best Practices?

Here are some of the best practices that are seen in successful supply chain management systems:

  • They support continuous improvement.
  • They aim for increased velocity.
  • They encourage collaboration among the individual businesses in the supply chain.
  • They seek new technologies that improve their processes.
  • They have metrics in place that allow employees to measure the success or failure of each step in the supply chain.

What Is Supply Chain Management vs. Business Logistics Management?

The terms supply chain management (SCM) and business logistics management—or simply, logistics—are often used interchangeably. However, logistics is really 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.

Successful logistics management ensures that there is no delay in delivery at any point in the chain and that products and services are delivered in good condition. This, in turn, helps keep the company's costs down.

What Is the Flow of Manufacturing Costs?

Efficient supply chain systems get each piece of the product where it is needed, when it is needed. This means controlling the flow of manufacturing costs.

The flow of manufacturing costs is most relevant to businesses that produce products that require many different parts from many vendors. For example, a clothing manufacturer may need deliveries of fabric, zippers, trim, and thread to arrive all at the same time. If some supplies arrive too early, they must be stored at the business' expense. If some arrive late, the machines stand idle while they wait.

Reliable Suppliers Are Key

An efficient supply chain management process requires reliable suppliers. This means they produce a product that meets the manufacturer’s specifications and deliver it 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 last for many years. They must meet the design and quality specified by the manufacturer, and they must 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. As efficiencies in moving products from point A to point B increase, the costs in doing so decrease, which lowers the final cost to the consumer. While deflation is often regarded as a negative, supply chain efficiencies are one of the few examples in which it is a good thing.

As globalization increases, supply chain efficiencies become more optimized, which keeps the pressure on input prices.

How Did COVID-19 Affect the Supply Chain?

One of the most severe economic problems caused by the COVID-19 pandemic was damage to the supply chain. Its effects touched 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.

At the same time, demand for products changed abruptly. Shortages developed as consumers hoarded essentials like toilet paper and baby formula. Masks, cleaning wipes, and hand sanitizers were suddenly in demand. Shortages of computer chips delayed the delivery of a wide range of products from electronics to toys and cars.

Shifting Priorities

A survey in late 2020 by Ernst & Young of 200 senior-level supply chain executives pointed to three essential findings:

The pandemic had a deep negative effect, cited by 72% of supply chain executives. Automotive and industrial supplies companies were worse-hit.

"Visibility" is the top priority, and the word is meant literally. The executives want to focus on adding technology such as sensors that give them a better view of their orders throughout the process.

The pandemic accelerated the transition to digitization, with most of those surveyed saying that digital transformation combined with increased automation will accelerate over the next few years.

What Is Supply Chain Management?

Supply chain management (SCM) is oversight and control of all the activities required for a company to convert raw materials into finished products that are then sold to end-users.

SCM provides centralized control for the planning, design, manufacturing, inventory, and distribution phases required to produce and sell a company's products.

A goal of supply chain management is to improve efficiency by coordinating the efforts of the various entities in the supply chain. This can result in a company achieving a competitive advantage over its rivals and enhancing the quality of the products it produces, both of which can lead to increased sales and revenue.

What Are the Steps in a Supply Chain?

The key steps in a supply chain include:

  1. Planning the inventory and manufacturing processes to ensure supply and demand are adequately balanced.
  2. Manufacturing or sourcing materials needed to create the final product.
  3. Assembling parts and testing the product.
  4. Packaging the product for shipment or holding in inventory until a later date.
  5. Transporting and delivering the finished product to the distributor, retailer, or consumer.
  6. 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, whether that means mining diamonds, curing leather, or manufacturing sheet metal.

That is the first step in the process. From there, the raw materials are hauled to a wholesaler, who sells them in batches to manufacturers. Once delivered, the manufacturer uses the materials to create a product, which is then delivered to a retailer. Finally, it is sold to a consumer.

That's the big picture, but note that each step in the process is complicated by the need to prepare, package, ship, and unpack the product at each of its successive destinations.

Article Sources
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  1. WhatIs. "Supply chain."

  2. Wired. "The Chip Shortage Is Easing-but Only for Some."

  3. Ernst & Young. "How COVID-19 Impacted Supply Chains and What Comes Next."

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