A supply chain is a coordinated network that includes all the companies, facilities and business activities involved in sourcing, developing, manufacturing and delivering products. Each business relies on its supply chain to be able to build products and bring them to market; a business may itself be a crucial link in other companies’ supply chains.
Your company’s performance and brand reputation depend on your supply chain’s cost, speed, quality and reliability. The timely flow of information across the supply chain is critical to align product development, procurement, manufacturing and shipping.
Video: What Is Supply Chain Management (SCM)?
What Is a Supply Chain?
A typical supply chain integrates functions such as designing a product, procuring needed raw materials and parts, estimating demand, planning the product introduction, arranging supply, selecting sales channels, delivering support and providing customers with visibility into orders.
A pharmaceutical industry supply chain, for instance, would link a drug maker with companies involved in supplying raw materials, manufacturing, packaging, regional warehousing, wholesale distribution, retail (in hospitals, clinics, pharmacies and online), recycling and returns. A retailer’s supply chain might involve variations on this basic structure, while also routing some products to a giant ecommerce marketplace.
- The supply chain spans from the initial design of a product all the way to managing the returns process.
- Supply chain management (SCM) is a broad term applied to managing all of a company’s supply chain activities, including the flow of goods from suppliers, usually within a company’s enterprise resource planning (ERP).
- Companies are prioritizing supply chain visibility by delving into the financial and operational health of their suppliers and their suppliers’ own supply chains.
Why Is a Supply Chain Important?
Your supply chain affects many aspects of your business:
Profitability: For many companies, the cost of planning and managing the supply chain can reach 10% to 20% of overall revenue, according to management consulting firm Oliver Wyman. Excessive costs here negatively affect profitability.
Cash flow: Poorly run supply chains can tie up cash—with excess inventory or expedited shipping charges, for example—that could be better used in other ways.
Competitive advantage: Especially with today’s customer demand for next-day and even same-day delivery, a high-performing supply chain can provide a competitive advantage.
Risk management: The supply chain is a major source of risk, since anything from bad weather to an unanticipated spike in product demand can disrupt operations. Reputational risk runs especially high; these kinds of disruptions can tarnish a company’s track record for dependability.
Revenue: A well-run supply chain can help businesses respond faster to demand, resulting in higher revenue.
Supply Chain Examples
Walmart is renowned for its supply chain. The retailer runs a vast international supply chain with its own fleet of trucks and more than five miles of conveyor belts in each of its 150+ distribution centers, supporting more than 11,000 stores and online storefronts. Another colossal example is Boeing, whose airplanes have more than 3 million parts, any one of which might need to be quickly replaced almost anywhere in the world to get a flight back on schedule.
On a smaller scale, supplements company Physician’s Choice relies on a global supply chain of material suppliers, manufacturers and shippers. The company saw disruption due to COVID-19 and responded by finding new sources of raw materials and components and stepping up communications with partners.
How Supply Chains Are Changing
The nature of supply chains has changed over time. Originally, many supply chains were linear in nature, consisting of a chain of companies that each provided one link in a sequence from raw materials to components to manufacturing to distribution. Some companies operated vertically integrated supply chains, performing many of these functions themselves, while some companies are now trying to figure out how to localize or nearshore their supply chains.
More recently, the concept of the virtual supply chain has emerged: To minimize cost and quickly adapt to changes in the business environment, companies use a dynamic, interconnected network of partners that includes multiple sources for each step in the supply chain. Companies also increasingly rely on technology to manage supply chain operations and coordinate with partners.
Many of today’s supply chains have become extremely complex, involving hundreds of companies in multiple countries. Raw materials, components and products at various stages of manufacturing may cross multiple national borders during different stages of production before they are finally shipped to customers.
Supply Chain Processes
The Global Supply Chain Forum’s framework of supply chain processes underscores the sheer breadth of supply chain management—from product development at one end to returns management at the other.
Product development and commercialization: Involving supply chain specialists as early as possible in product development and go-to-market strategies can improve time to market, cost and launch readiness, management consultants say.
Demand management: On the demand side of the supply-and-demand balance, accurate forecasting and strategic pricing can help align projected sales with available production capacity and inventory.
Supplier relationship management: Mutually beneficial relationships with key suppliers can smooth supply chain operations, with purchase and sales agreements providing the baseline understanding on each side.
Customer relationship management: This critical function identifies the customers and customer groups that a business will target as part of its mission, segmenting customers based on value and working to increase the loyalty of key customers.
Manufacturing flow management: Manufacturing flow management coordinates activities within a company and across suppliers to move various products into, through and out of plants.
Order fulfillment: This is not just about fulfilling orders, but doing so in the most profitable manner, including such considerations as geographic distribution of facilities and local taxes and import/export requirements.
Customer service management: In the supply chain, customer service managers negotiate with their peers in other supply chain management roles to be sure their customers’ deliveries arrive on time and to specification.
Returns management: Managing “reverse logistics” efficiently is a key cost and customer service consideration, but returns management also tries to identify the root cause of returns, reduce their number and handle reusable assets such as packaging for even greater cost control.
Supply Chain Management
Supply chain management (SCM) is a broad term applied to managing all of a company’s supply chain activities, including the flow of goods from suppliers. Today, SCM is often handled within a company’s enterprise resource planning (ERP) suite, if the ERP vendor offers an integrated SCM module.
Supply Chain Management vs. Business Logistics Management
These two terms are sometimes used interchangeably. Yet most supply chain experts view logistics as a subset of the supply chain that focuses on the movement and storage of goods—functions such as shipping, customs, warehousing, returns and environmental protections.
Supply Chain vs. Value Chain
Harvard economist Michael Porter introduced the term “value chain” in the mid-1980s, to extend the supply chain concept beyond the processes in building and shipping products. He defined the value chain as all the activities included in delivering value to customers. In Porter’s model, the value chain involves functions such as finance, market research and other support activities as well as operations, logistics, marketing and sales. Today, the terms “supply chain” and “value chain” are often used interchangeably.
Supply Chain Models
Some companies design their supply chains based on defined models; which they choose depends on business priorities. These models generally revolve around two key questions:
- Efficiency: Does your company prioritize lower costs?
- Responsiveness: Do you prioritize response to customers?
While supply chains may seek to increase both efficiency and responsiveness, one driver usually outranks the other. The three models that prioritize low costs are:
Efficient supply chain model: Businesses that sell commodities might take this approach because they face intense price competition but lack ways to differentiate their products. The model emphasizes end-to-end efficiency through forecast accuracy and high rates of use for all supply chain assets.
Fast supply chain model: This model may suit companies that sell trendy products with short lifecycles; it includes a focus on product development and demand forecasting.
Continuous flow model: In industries with stable supply and demand, companies may focus on high levels of customer service and smart inventory management.
Models that prioritize responsiveness may be more useful in industries where companies need to quickly respond to changes in demand. Here are three common models:
Agile supply chain model: This may be useful for companies that make products to unique specifications for each customer and manufacture in small batches in response to each purchase order.
Custom-configured model: This model helps companies make multiple versions of products, for example by combining parts in different ways.
Flexible model: This model addresses companies faced with high demand peaks, including those caused by customer emergencies. Speed and the ability to tailor products take priority over cost.
Supply Chain Roles
At some companies, the supply chain has risen in importance to become a C-suite responsibility, headed by a chief supply chain officer. Other supply chain roles include logistics manager, materials manager, purchasing manager, procurement manager, planner and master scheduler. In smaller companies, a single person may perform many of these roles.
Supply Chain Resilience
Supply chain resilience is the supply chain’s ability to respond and recover quickly from disruption. Resilience has become a watchword for 21st century supply chains, since global economic, political, and societal events can significantly affect both supply and demand. In many cases, protecting supply chains against these risks has involved seeking multiple suppliers for critical parts, while increasing investment in gathering real-time information from suppliers.
Supply Chain Best Practices
Following supply chain best practices can help your business prevail in good times and bad. Companies addressing the supply chain challenges of 2020 are upping their supply chain game in several ways, according to a CFO survey by management consultants PwC.
Many companies are increasing their operational flexibility by diversifying beyond single-source arrangements—instead, tapping multiple suppliers of materials, components and software. More flexibility and downside protection are also being incorporated into contracts among supply chain partners.
In addition, companies are re-prioritizing supply chain visibility in two important ways: by delving into the financial and operational health of their suppliers and by gaining visibility into their suppliers’ own supply chains. Finally, the drive to automate supply chains and incorporate analytical tools is accelerating, so that companies can gain greater understanding of customer demand, monitor their own supply chain response in real time, and analyze all they learn to improve decision-making.