Supply chain (commerce)

The supply chain is the complete system of people, resources, companies, organizations, technology, skills, and services needed to create, produce, sell, transport, and deliver products to consumers. It is the lifeblood of the economy on the local, national, and global levels. The supply chain includes every step of the process of providing goods, from growing or procuring raw materials such as crops or mined metals to the final delivery of the completed items or products for sale or use. Each individual type of product has its own supply chain, although some may overlap. For example, multiple products can be made from one type of raw material, be manufactured in the same factory, and be transported in the same trucks, trains, and ships.

Since the financial stability of those involved in the process depends on the successful delivery of goods to consumers, all those involved generally invest effort in protecting a supply chain. However, the multiple steps in the process mean that a supply chain can break down in many ways. Natural disasters, pandemics, labor shortages, tariffs, wars, and changes in demand may all disrupt a supply chain. Broken supply chains result in shortages, lost income for companies, and higher costs for consumers.

Background

The supply chain concept began forming in the late 1800s, although the term “supply chain” did not come into use until about one hundred years later. Prior to the industrialization that took place in the nineteenth century, goods available for sale were limited to local areas and regions. Many items were produced by the end users. For example, people raised crops that they used themselves or sold or traded to neighbors, and tools, clothing, furniture, and other items were handmade. In some cases, a small local supply chain existed. For example, a farmer might grow and harvest wheat and then take it to a miller. The miller might grind it into flour and sell it to a store owner, who would sell the finished product to customers.

Better means of transportation expanded the supply chain in the latter part of the 1800s. The construction of railways that crossed large expanses of territory meant that goods could be transported more easily and quickly. Instead of selling products locally, stores and manufacturers were able to ship their products cross-country, and the supply chain grew accordingly.

International supply chains expanded during the first half of the twentieth century. As the volume of goods transported to be sold in other places increased, companies began focusing on improving the processes that were part of the supply chain, such as inventory management, travel logistics, and advance planning. The military’s need to transport massive amounts of food, weapons, and supplies to overseas troops during the two World Wars helped facilitate improvements. It also increased the use of processes such as transport analytics and the development of technology to mechanize the process.

Beginning in the 1960s, the next several decades brought several significant changes to supply chain management. Trucking companies such as United Parcel Service (UPS), the German company DHL, and Federal Express (FedEx) increased the role of trucks in transporting goods. At the same time, IBM’s development of the first computerized systems to track inventory and forecast future needs helped improve supply chain management. Then, in 1975, JC Penney introduced the first real-time warehouse management system (WMS) for monitoring inventory. It allowed the company to tell how much of an item it had available and where it was in its warehouses at any time. This increased efficiency by cutting down on how much time workers spent looking for products to fill orders.

Increased availability of computers in the 1980s and 1990s provided additional ways for companies to monitor and control all facets of the supply chain. As more technological ways were developed to oversee this increasingly complex and vitally important function, the process was given a name. In 1982, British logistician Keith Oliver became the first to publicly refer to the process of creating, providing, and transporting goods from raw materials to saleable finished products as a supply chain. He also created the term “supply chain management” for the methods companies use to monitor and facilitate the delivery of goods.

The expansion of the Internet in the last years of the twentieth century and early decades of the twenty-first century brought additional changes to the supply chain. Companies could now easily sell items from anywhere to people in other parts of the world. Businesses increasingly relied on technology to control the logistics of the supply chain, which became fully globalized. Into the mid-2020s, technology continued to advance the supply chain through Artificial Intelligence, automation, and the introduction of block chain technology.

Overview

The supply chain is a multi-step process. The first step is acquiring raw materials to make a product. Those materials are then refined or processed into a form that can be used to make a product. For example, petroleum is converted into plastic. Various parts are then put together to make a finished product or component of a product. This is done with metals and plastics when they are combined to make a semiconductor chip, and then the chips are combined to make a vehicle. Transportation is involved in several steps along the way, including getting the raw materials to the processor, the partially complete product to a manufacturer, and possibly delivering components for final assembly. This will likely involve international transport at some point, as some raw materials are only available in certain parts of the world, and companies move manufacturing to countries with preferred laws and tax policies.

While the manufacturing process is underway, another portion of the supply chain is accepting and processing orders, such as an automobile dealership taking orders for a new car. Once the final product is complete, it needs to be transported to the place of sale. In the case of an automobile, this can require transport across the ocean on a ship, the country on a truck, or both. The final steps in the supply chain involve completing the sale and transfer of the product to the customer. In most cases, there are also follow-up steps, such as ensuring that the customer is satisfied with the product and the transaction.

Models

Several supply chain models are used to bring goods to market. The goal of all the models is the same: to deliver completed products as timely and efficiently as possible. However, products and markets are not the same. Companies also have different standards and requirements, so each model takes a different approach to moving products through the supply chain.

Companies evaluate and choose models based on the type of product they sell, customer expectations, and cost-efficiency. They also combine and create hybrid models to meet their needs.

Continuous Flow Model

Companies that deal in products with a consistent, stable demand often choose the continuous flow model, which is well-suited for companies with a steady client base with little or no seasonal change in demand for their products. This model keeps a constant flow of products going to market but does not respond well to sudden changes in demand. Packaged processed foods and canned and bottled beverages are often handled with the continuous flow model.

Fast Model

The fast model is used for products with a short window for sales opportunities. This model focuses on constantly bringing new products to market quickly and is often used in the fashion industry, where trends and seasonal items quickly change.

Efficient Model

The efficient model focuses on tightly controlling the costs throughout the supply chain. It is often used by companies in highly competitive markets, where both pricing and quality are important to consumers. Companies that need to be comparable to their competition in price and quality to maintain their market share—such as cereal manufacturers—often use this model.

Agile Model

The agile model allows companies to respond quickly to new trends and developments in the market. It combines real-time market changes, shared responsibility for meeting supply chain issues across the various contributors to the process, and dedication to monitoring the market and responding to changes quickly and efficiently. Some companies in the fashion industry use this model to stay competitive.

Custom-Configured Model

Companies that allow customers to choose design aspects of their products usually use the custom-configured model. A combination of the continuous flow and agile models, this model works best for situations in which demand for the base product remains the same, but customer preferences for some aspects of it vary. For example, a company that makes tote bags might use this model. The design of the bags does not change, but the color combinations and additional features, such as monogramming, are chosen by the customer.

Flexible Model

The flexible model is used by companies that experience regular peaks and lows in the demand for their products. These companies have times during the year when demand is very high, but unlike trendy or seasonal products, the demand never completely goes away. For example, back-to-school time increases the demand for products such as pencils, paper, computers, and bedding for dorms, but people continue to buy stationary, computers, and bedding in smaller quantities year-round. Companies gain this flexibility by using multiple manufacturing providers to ensure that enough product is available at the right times.

Challenges

The size and scope of global and national supply chains mean that they are vulnerable to numerous challenges from different sources. The more complex the process, the more risk there is that the supply chain can break down. Since supply chain issues directly affect a company’s financial health, supply chain managers are constantly on the lookout for potential problems.

Supply chains can fall victim to or falter because of large-scale problems with lost or damaged goods. A train derailment, tornado that damages a warehouse, or ship lost at sea can easily disrupt the supply chain. This can happen at various stages of the process, from the loss of raw materials to the destruction of completed goods.

Another large-scale disruption to the supply chain can occur when something interrupts the manufacturing process, such as the destruction of factories by natural disaster or war. As was the case during the COVID-19 pandemic, it can also happen because businesses are shut down to control the spread of disease. The effects of massive shutdowns of manufacturers reverberated long after businesses reopened from pandemic-related closures.

Another supply chain challenge is changing customer expectations. In many cases, companies continually strive to improve their supply chain to be able to deliver products more quickly. This faster, more efficient delivery sometimes has the unintended consequence of increasing customer expectations. For example, as one company moves from taking a week to deliver items to getting them to customers in two days, customers begin to expect all deliveries to come that quickly, increasing pressure on the supply chains of all companies in that industry.

The ability to manage inventory can also be a supply chain challenge for companies. It is important to balance the need to have enough product to meet customer orders against the potential of having too much unsold inventory. Companies that fail to adequately monitor and control inventory and match it against customer demand can find themselves with product going to waste.

Companies strive to meet these challenges by keeping their supply chains as short and efficient as possible. They work closely with suppliers to ensure that the necessary raw materials and components are ready at the right time to keep the supply chain moving. Transportation companies must make sure that products can get to market quickly. They also invest in technology to facilitate monitoring of the supply chain and responding to issues. Industry experts contend that companies should learn from situations like the COVID-19 pandemic and the strain it placed on the supply chain. They must develop new, flexible, and innovative ways to ensure that supply chains remain resilient.

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