What is a supply chain? A guide for growing businesses

‘Supply chain’ is a shorthand term for all the logistical processes that a business uses to create a product and deliver it to the consumer. It includes everything from raw materials and assembly to storage, transport, and shipping.

Supply chains are usually managed centrally by a business, but can involve multiple suppliers, geographical locations, contracts, and negotiations, and can be expanded to include partner companies’ own supply chains.

Every stage of the business supply chain process is crucial. Any disturbance or disruption impacts the subsequent stages of the process, ultimately leading to delayed customer orders, shuttered operations, or financial liabilities if not mitigated quickly.

What are the key components of a supply chain?

Suppliers

Suppliers or vendors can be involved at any stage of the supply chain. This includes businesses sourcing raw materials, warehouses storing inventory, and import/export specialists that help businesses move materials and goods through international customs.

Manufacturers

Manufacturers turn raw materials into products or services. Alternatively, they may collect materials from the source and prepare them for another supplier to turn into finished products. This can include physical materials such as fabrics, plastics, wood, metal and chemicals, food, or intangible items like data.

Distributors

Distributors are intermediaries between manufacturers and retailers. Once the product has gone through the process of making raw materials into finished products, distributors send them on to consumers, wholesalers, importers, brokers, or agents. These items might be distributed in small quantities or in substantial amounts, depending on how exclusive or rare the product is.

Retailers

Retailers sell to the public online or in physical stores. They can sell items of any kind and in any location. If the retailers a business works with sell in person, this is the final stage of the supply chain. However, if retailers sell exclusively online, one more stage remains: logistics.

Logistics Providers

The distribution and delivery of goods can happen between retailers and the final customer, as well as between all the various stages of the supply chain. For example, a logistics provider will help transport raw materials from a supplier to a manufacturer.

What is the difference between value chains and supply chains?

A value chain is the process whereby a business adds value to raw materials by processing them into a finished product. The term was coined by Michael E. Porter from Harvard Business School, who believed all the small activities a business performs throughout its production must be analyzed to identify opportunities for competitive advantage.¹

In contrast, a supply chain’s only goal is getting products to the customer, whether it is a consumer or a business.

For an artisan furniture maker, for example, the value chain could include procuring quality wood, carpentry, design, and the finishing touches that make a premium product. This is what will differentiate this business from its competitors, adding value throughout the various stages that will (hopefully) give the business an advantage in its market.

The value chain has several stages:

• Inbound logistics. This is the process of buying materials and resources from suppliers. For the artisan furniture maker, this could include wood, tools, and varnishes.
• Operations. Businesses then use their factory space, warehousing, tools, assembly lines, and other processes to turn these materials into finished products.
• Outbound logistics. When the products are ready, they need to be sent out to retailers and customers. This involves shipping, transporting, storing, and other steps that go into fulfilling orders for customers or retailers.
• Marketing and sales. Every business needs its own strategies and approaches designed to attract new customers and retain existing ones.
• Service. This includes in-person and virtual customer service, as well as long-term customer support.

There can be other elements involved in the value chain, such as infrastructure, technology and intellectual property; the people and skills in a business’s workforce; and natural elements like sunlight, weather, and soil quality if producing an organic product.

The value chain is what makes a business unique, memorable, and effective. For example, an analysis of Starbucks’ value chain conducted by Investopedia reveals a brand which selects, roasts, and packages its coffee beans at source, invests heavily in branding, and has a specific training scheme for its baristas². A business which selects different coffee and serves it in a unique way would have an entirely different value proposition.

The importance of a well-managed supply chain

Successfully managing supply chain disruptions can help prepare businesses for challenges including material shortages, problems with logistics, delays, and fluctuating prices. It’s likely that businesses will face these problems at some point, and the longer the supply chain, the greater the risk. Supply chains crossing international borders can carry additional issues and complexity.

Operational costs can also be high if not managed well. Different suppliers will require different contracts and agreements, and some may limit the quantities of goods they will transport or distribute. Others may want to renew their contracts at higher prices. With the end goal being getting products to the customer quickly, all the above can make it difficult to meet customer demands.

The keys to effective supply chain management are to optimize processes, negotiate contracts with favorable terms, and to develop contingency plans for the inevitable delays and shortages.

Practices for optimizing the supply chain

Artificial intelligence, machine learning, and business intelligence (BI) platforms can automate many stages of the supply chain, such as automated quality checks or inventory optimization, and help to drive products from one stage to the next with minimal intervention. AI solutions can also help keep customers engaged and informed about the status of their orders.

Collaborative relationships with suppliers and partners can also mitigate risks to supply chains. The more positive and productive the relationships are, the longer lasting the contracts will be.

Nevertheless, supply chains do change over time and will require regular review and refinement. For example, it might become increasingly expensive and impractical to use a manufacturer in a particular country, or a new logistics firm might offer more sophisticated delivery technology. Businesses need to be ready to nimbly make changes to save costs, improve productivity, and speed up the supply chain where necessary.

What factors can affect a business supply chain?

Disrupted supply chains can be costly to operations and damaging to customer relationships. A range of factors can cause delays, including rare but impactful events like war, political crises, extreme weather, and pandemics. Internal issues can be just as problematic, such as inventory issues, miscommunications, and vendors shutting down.

Both internal and external issues can be difficult to predict. New technology can disrupt whole industries, forcing businesses to continually adapt to maintain market position. Fluctuations in prices, supply and demand, and seasonality can have a significant impact on profit margins and inventory management.

What was previously an affordable raw material could become prohibitively expensive, sometimes overnight. International relations can also make it impossible to operate in specific countries, or otherwise make business relationships more costly or unreliable.

Managing supply chain disruptions

Supply chain risks can have short-term and long-term effects. A temporary shortage of a raw material will probably have short-term consequences, but continued political uncertainty is likely to create long-term disruption.

To prevent supply chain issues, businesses should have a continuity plan. This should outline potential risks, the impact they could have, the best responses, who will fulfill specific roles and responsibilities, and a plan for any necessary communication which will need to go out to customers, staff, and vendors.

Different disruptions call for different responses to supply chain risk management. These include proactive management, i.e. anticipating problems, and reactive management, when staff tackle problems as they happen.

What are some supply chain risks?

Below are some of the main risks to supply chains:

Inventory risks. These include running out of stock, raw materials, and packaging - anything a business needs to produce its end products.

Transportation risks. This is when a business can’t get its goods where they need to be, whether it’s on to another stage of the supply chain or directly to the customer.

Geopolitical and economic risks. These are large scale external risks – often so-called ‘black swans’ like recessions or international conflicts.

Possible mitigation strategies include effective and detailed inventory management, generating regular reports on vendor productivity, and expert help in lobbying to change legislation and international regulation.

How does inflation affect supply chains?

Inflation can have a direct impact on costs across the business supply chain, from packaging to fuel. It also drives fluctuations in global trade, where some goods become significantly less desirable or cost-effective due to shifts in demand in response to rising prices.

Appropriate strategies to mitigate supply chain disruption include:

• Price hedging. Techniques that cushion a business from potential losses if the price of an asset surges or drops dramatically. These include insurance policies and using forward contracts to lock in prices.
• Long-term contracts. Long-standing arrangements with vendors can keep prices down and cushion a business from price fluctuations.
• Diversification. Diversifying income streams and suppliers can protect businesses if one were to collapse. Serving just one specific industry, client, or market makes any business vulnerable.

The future of supply chain management

Looking to the future, supply chain managers are likely to embrace sustainability, renewable energy, and ethical sourcing, with the goal of creating business strategies that are viable in the long term.

Business supply chain management will also adapt to the rise of big data, which can be organized into predictive models and detailed segments for analysis. Supply chains are not typically local by nature, which means increasing globalization can help businesses expand their number of accessible markets, as well as opening them up to new challenges as they scale.

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