What a supply chain is
Definition
Supply chain: every stage a product passes through on its way to the customer, from raw materials, through the suppliers and the producer, to the shop or the doorstep.
- A loaf of bread has a chain that runs from a wheat farm, to a mill, to a bakery, to a distribution centre, to a supermarket shelf.
- Most of the chain sits outside the business, in firms it does not own, which is why the links between the stages need managing rather than assuming.
- The chain carries information as well as goods, because a supplier can only get the right amount to you on time if it knows what you expect to sell.
Note
Procurement and logistics are the two activities that operate inside the chain, and they are covered in the article on procurement and logistics.
What managing the supply chain involves
Definition
Supply chain management: coordinating every stage of the supply chain so that goods flow smoothly, arrive on time, and cost as little as possible along the way.
- It means treating suppliers as part of the operation, so sales forecasts, delivery schedules and quality standards are agreed and shared rather than guessed.
- Long-term contracts do a lot of the work here, because a supplier with guaranteed orders will invest in equipment and put your delivery first.
- Performance is monitored, so a supplier that starts arriving late or sending faulty batches is dealt with before it reaches the customer.
Working with suppliers so key processes run efficiently
- When a supplier knows the production schedule, materials arrive in the quantity needed on the day they are needed, so the line keeps moving.
- Fewer stoppages means fewer hours of paying staff and machinery to stand idle, and no rush of overtime afterwards to catch up.
- Agreed quality standards mean fewer faulty inputs, so less is scrapped, less is reworked, and the finished product is more consistent.
- The chain is only as strong as its weakest link, so one supplier failing disrupts every stage after it however well the rest performed.
Example
- UK car plants, including Nissan's Sunderland site, cut shifts during the computer chip shortage of 2021 because one small component was unavailable.
- Every other part was in stock and every worker was available, and the cars still could not be finished or sold.
Getting goods and services for the best price and value
- A business that plans its buying ahead can order in large, predictable quantities, which earns a lower price per unit rather than paying the going rate in a hurry.
- A long relationship strengthens the buyer's hand, because a supplier that wants the contract renewed will hold its price and improve its terms.
- Best value is not the same as lowest price, since it means the best combination of price, quality and reliability across the whole chain.
- Lower input costs lower the cost of each unit, which lets the business hold its price and take more profit, or cut its price to win customers from a rival.
Cutting waste for a streamlined process and fast production
- Ordering only what the forecast says will sell removes the unnecessary cost of materials that sit in a warehouse and then have to be written off.
- Cutting out duplicated checks, extra handling and unnecessary journeys between stages shortens the time a product spends in the chain.
- Shorter production times mean the business can react to a change in demand quickly, and can promise the customer a delivery date it will actually meet.
- Reliable supply and consistent quality bring the customer back, so a well-run chain protects sales as well as costs.
Example
- Tesco runs regional distribution centres where deliveries from hundreds of suppliers are broken down and reloaded for each store overnight.
- Each store gets one lorry carrying exactly what its till data says it sold, so fresh food reaches the shelf quickly and little is thrown away.
Exam technique
- For explain the value to this business of effective supply chain management, give benefits with reasons attached, rather than describing the stages the product passes through.
- Use the three strands the specification names: processes running efficiently, the best price and value, and less waste with faster production.
- End each benefit at money or at the customer, for example fewer stoppages means the order reaches the customer on the day it was promised.
- The mistake to avoid is treating supply chain management as simply picking cheap suppliers, when it is about coordinating every stage and the information between them.
Self review
- What is a supply chain?
- What does supply chain management involve day to day?
- How does working closely with suppliers keep production running?
- Why is best value not the same as lowest price?
- How does cutting waste in the chain speed up production?
