Chapter 1

What is a supply chain?

Resources / What is a supply chain?

Supply chain operations are critical to retailers, but consumers likely give them little thought at all. When a consumer purchases a product from a retailer, they probably don’t wonder how it got there; from raw materials into a finished product, then transported to warehouses and from there on to a shop shelf (or dispatched directly to the customer).

This is what’s known as the supply chain. We’ll discuss this in more detail subsequently, but the supply chain facilitates the progress of products from raw materials to the finished products that consumers buy. The complexity of a supply chain means that it can be broken down into various aspects, including the procurement of raw materials, manufacturing finished products and ensuring they reach consumers via distribution centers.

Needless to say, all of this amounts to a serious undertaking: it requires effective forecasting and demand planning to anticipate consumer buying patterns, logistics management to maintain the flow of goods, and inventory management to ensure that items reach customers in a timely manner.

In this guide, we’ll look into supply chain operations in more detail. To begin with, we’ll explain at greater length what a supply chain is and what it does, before elaborating on supply chain operations themselves. Then, we’ll discuss the difference between operations management and supply chain management.

After that, we’ll look at why supply chain management (SCM) is so important to businesses and consumers alike, the various supply chain models and the challenges commonly encountered along the way. Finally, we’ll conclude by looking at how to manage a supply chain effectively, smoothly and efficiently.

Impact_on_Supply_Chain

As we’ve just discussed, the term ‘supply chain’ covers the various stages involved in providing products to consumers. Supply chains are often international; adding an extra layer of complexity to some aspects of it.

The supply chain process can incorporate the following aspects: 

  • Sourcing raw materials
  • Manufacturing basic components
  • Assembling completed products
  • Marketing and selling finished products to consumers
  • Delivering orders to customers

There are, of course, various decision making processes along the way. First, companies have to know where to source the raw materials (or finished products) they need, and which suppliers might provide them. 

Once finished products are ready to roll, businesses need to think about how they’re going to store them, and then how to get them into the hands of consumers – both logistically (in terms of delivery and dispatch) and also through marketing campaigns.

The importance of effective inventory tracking and close oversight, meanwhile, must not be overlooked. According to the National Retail Federation, inventory shrinkage – in other words, items which are damaged, lost or stolen – cost US retailers an average of 1.33 per cent of their sales in 2017, resulting in overall losses of $46.8bn. Theft, fraud and simple human error can cause losses and thus hurt profitability – that all-important bottom line.

Supply chain managers therefore have a variety of complicated tasks on their hands. There are various stakeholders involved at the different stages of the process, and in a post-Covid world the importance of supply chain resilience has become even more apparent. A supply chain that functions smoothly and reliably can provide a major competitive advantage.

Difference between value chain and supply chain

As an aside, let us clarify here the differences between a supply chain and a value chain, as some people tend to confuse the two. Supply chains cover the various stages of getting products to customers, whereas value chains refer to the various activities businesses undertake in order to add value and gain a competitive advantage.

The supply chain is the interconnection of all the functions, parties, resources, and activities involved in getting the product from the supplier to the customer. Supply chain operations are concerned with achieving this as quickly and cost-effectively as possible, ensuring customer satisfaction at the same time.

The value chain involves going the extra mile to achieve a competitive advantage. The idea is to add value at every step, from sourcing a quality product to delivering it to the customer in a timely fashion. For example, using branded packaging or a white-glove delivery service.

What is the difference between operations management and supply chain management?

Before we go any further, however, it’s worth clarifying the differences between supply chain management and operations management. The two are often confused, because there are some overlapping areas – in particular, the primary objective of both is to bolster efficiency and, ultimately, profitability as well. However,  operations and supply chain management refer to distinct sets of processes.

What is supply chain management?

Supply chain management is – as the name suggests – concerned with managing the supply chain and its various facets: procuring raw materials, manufacturing, storing, and selling finished products, and then ensuring that they reach consumers. The supply chain business process  includes tracking production planning, liaising with suppliers and service providers, and overseeing the smooth functioning of logistics.

Efficiency, consistency and security

So, what is the purpose of supply chain management? Well, efficiency is a crucial concern of SCM, but it’s not the only one. Supply chain planning and management is also concerned with consistency – making sure that the various aspects of the supply chain function in a reliable way, and security (including cybersecurity). Supply chain managers must also ensure adequate allocation of supplies, demand forecasting, inventory management, warehousing and delivery.

Supply chain managers must also coordinate their efforts with those of suppliers and logistics firms. At the same time, they must subject these partners to rigorous scrutiny in order to ascertain whether or not they’re meeting the required standards of quality, security and reliability.

What is operations management?

Of course, SCM is an important aspect of improving business efficiency, as the supply chain and logistics are so central to the way many businesses operate. It is, however, concerned purely with the supply chain itself. Operations management goes beyond this and concerns itself with ensuring efficiency across the board, looking at all aspects of business processes.

Operations managers are tasked with responsibility for planning, coordinating and monitoring business operations. To do this job properly, they need to be able to balance the needs of competing stakeholders and undertake detailed analysis of the relevant metrics. They must maintain high standards, supply accurate forecasts and ensure that customer needs are being met.

Why is supply chain management important?

As we’ve just discussed in the previous section, the smooth running of the supply chain is central to the way a lot of businesses run. For these businesses, if their supply chain seizes up, this is likely to have severe consequences. Repeated supply chain dysfunction can have devastating implications for a lot of businesses.

We mentioned in passing earlier that efficient supply chains tend to result in happier customers. This is because it’s easier for these customers to buy the products they need, as supply and dispatch of goods is running smoothly. This means that their overall experience of using the business concerned is better, and in turn, this means they’re more likely to recommend it to others. 

According to Optoro’s Tobin Moore, customers who are happy with their experience in using a business’s return process are 71% more likely to buy from that same business again in future. It stands to reason that this kind of customer satisfaction also spurs more growth through word-of-mouth and referrals. Think of happy customers as unpaid brand ambassadors.

Order management is a complicated business, and it needs a capable pair of hands to ensure that everything runs as smoothly as possible. Supply chain disruptions are inevitable, but the task of SCM is to restrict them to a minimum. Effective supply chain management systems make it possible for shipping and fulfillment teams to meet the needs of consumers.

Supply chain managers, then, have a lot of responsibility when it comes to maintaining good relationships with customers. As well as ensuring that products reach consumers quickly, there also needs to be reliable visibility. In other words, customers must be able to ascertain where their products are while they’re still waiting for them. This helps to provide them with extra reassurance.

We should remember that good supply chain management and good customer service are interconnected: you can’t have the latter without the former. SCM therefore has an important role to play with regard to minimizing issues for customers and thereby lessening pressure on customer service teams. 

The responsibilities of supply chain managers aren’t just customer-side, however. As we’ve discussed, they must also take responsibility for maintaining good relationships with suppliers. It should go without saying that supplier management needs to be handled with great care as deteriorating relations can cause any number of complications.

A business’s ability to deliver for its own customers is dependent on its suppliers, which is why strong working relationships with the latter should always be a leading priority. In particular, communication is key to successful business partnerships. Managers must make clear to suppliers what is needed from them, and determine that they can provide it.

Types of supply chain models

There are six supply chain models. These are as follows:

  • Agile supply chains: Designed to provide a degree of leeway where it’s needed, but also to provide solidity and stability in normal demand conditions.This model requires all parts of the supply chain to be in sync with each other, so that businesses can respond quickly to new trends if needed.
  • Custom-configured supply chains: Bespoke configurations to suit the needs of individual businesses.This works well for multiple product configurations or customer personalization options. It’s a combination of the agile and continuous flow models.
  • Flexible supply chains: Allow firms to alternate between specific arrangements based on varying customer demand.For example, swimwear will experience higher demand in summer, but you’ll want to keep some in stock year-round.
  • Efficient supply chains: Best suited to businesses prioritizing end-to-end order fulfillment in especially competitive markets.This requires robust inventory management and optimization of resources in order to reduce costs along the supply chain.
  • Fast supply chains: Most effective for those whose products tend to have short life cycles. This model applies when a business changes its product lines frequently, and needs to get them onto shelves before a newer trend takes over.
  • Continuous flow supply chains: Best for businesses looking to meet continually high demand. This model is designed to ensure continued, scheduled delivery of goods, and is typically suited to established brands with stable demand patterns.

These models can be grouped into two general categories: those orientated towards responsiveness (agile, custom-configured and flexible supply chains) and those orientated towards efficiency (efficient, fast and continuous flow supply chains). 

Challenges of supply chain management and operations

The complexity of supply chains inevitably means that a lot of things can go wrong with them. One thing is for sure: there’s rarely a dull moment in supply chain management. There are multiple challenges which businesses will need to be prepared for. We’ll focus on some of the most important of these here.

One of the most important things to remember about supply chains is that seemingly minor problems and inefficiencies can cause much bigger problems further along the line, and even the most detailed plans can go awry. If there is waste in the supply chain, or if productivity in one area is sub-standard, this can adversely affect profitability. 

We’ve discussed the importance of customer and supplier relationships, and how the two are interconnected as part of the same ecosystem. If a business allows relationships with its suppliers to deteriorate, customers are likely to be inconvenienced too. By contrast, if there’s genuine goodwill and loyalty between a business and its suppliers, customers should benefit through better reliability and product quality.

Other reasons for supply chain issues include:

  • Higher costs, including customs charges and increased fuel costs.
  • Maintaining multiple channels at once (ie, e-commerce and physical stores).
  • Natural disasters affecting part of the chain.
  • Lack of data or tracking.
  • Staff shortages, especially long-haul drivers.
  • Inventory shrinkage.

It is inevitable that some items will get lost or held up, somewhere along the way. Nevertheless, an efficient and robust supply chain – with reliable tracking and authentication – can do much to reduce the risk of goods going missing or being delayed. 

For this to happen, supply chains must be transparent. This can be difficult as there are so many different aspects to them – especially when you factor in globalization – with multiple business units involved. Communication is the key to supply chain transparency: everyone must be able to ascertain what’s happening upstream, and this knowledge needs to be communicated to the relevant internal and external stakeholders.

Calculating lead time in supply chain management

If you don’t calculate lead time effectively, you’ll either run short of high-demand products, or run out of storage for a stockpile. The shorter the lead time, the faster the goods can be sold—but your calculation needs to be spot-on. Here’s how to work it out:

Reordering Delay + Supply Delay = Lead Time

The reordering delay is the time a supplier takes to accept, process, and manufacture your order. The supply delay is the amount of time for the shipment to reach your warehouse after ordering.

Let’s say you decide, based on last year’s successful sales, that your brick-and-mortar store is going to sell a particular holiday decoration that’s made in China. It takes the manufacturer five days to process the order and create the required items, plus 14 days to ship to your warehouse. It takes one further day to transfer the boxes from the warehouse to your store.

5 days + 15 days = 20 days

So, if you want the items to be in store right after Halloween, you’ll have to place the order at least 20 days beforehand.

How to reduce lead time in your supply chain

Reducing lead time can help you streamline operations, improve productivity, and increase revenue. Accurate forecasting (which we’ll cover in the next section) is the best way to do this, as you’ll learn the optimum time to place an order.

Efficient inventory management processes, such as automated stock replenishment or the Just-In-Time strategy, also help you to cut lead times. You could also consider ordering partially-assembled products and finishing them off in-house, provided you have robust warehouse processes.

Good supplier management cannot be overstated. Strong relationships mean you’ll be kept informed if there is a potential problem, and you can give incentives to encourage suppliers to prioritize your business. Using locally sourced goods will also shorten lead time.

Why is forecasting important in supply chain management?

Forecasting is a crucial aspect of SCM, as it tells you what to order, when to order it, and in what quantity. It helps you mitigate against supply chain risks and the problems of having too much or too little stock.  

Supply forecasting means considering potential disruption in the global supply chain. Demand forecasting requires you to analyze past sales figures and customer behavior, while price forecasting factors in likely fluctuations in the market.

Logistics vs. supply chain: Key differences

Logistics is an essential component of supply chain management. Whereas SCM covers a wide range of activities and governs overall operational performance, logistics is about the movement and storage of goods and services within the company.

With a focus on the efficient and cost-effective delivery of goods to the end customer, logistics ensures that the right products are in the right place at the right time. It involves managing and tracking the people and resources needed to achieve this aim.

Push vs. pull supply chain

A push-based supply chain strategy is where your products are “pushed” from production to retailers, based on forecasting. You order or manufacture a high quantity because you’re sure it’ll sell. It’s beneficial for meeting consumer demand, but if you make an error in prediction, you could be stuck with excess inventory.

A pull-based supply chain, on the other hand, is entirely demand-driven. Similar to the Just-In-Time strategy, goods are only produced and procured when they’re needed. It’s useful when there’s limited demand for a certain product, or when you want to reduce storage costs. But a sudden spike in demand could cause a stockout.

You can, of course, use a combination of the two models.

Procurement vs. supply chain: Main distinction 

Procurement is one of the links in the supply chain. It’s the process of acquiring all the goods and services a business needs in order to deliver finished products. This includes sourcing vendors, predicting demand, negotiating prices and contracts, communicating with suppliers, and settling invoices.

Where procurement is about ensuring the constant flow of supplies, the supply chain covers the end-to-end process of getting the products into the customers’ hands.

Traditional supply chain vs. supply chain network

The parts of a traditional linear supply chain often function in silos, with limited visibility and data sharing. They can only react slowly to changing conditions, rather than using real-time data and forecasting for a proactive approach.

Thanks to digital technology such as machine learning and AI, many organizations can now transform business supply chains into supply networks, which are ecosystems of tightly-linked partners. With integrated systems and processes, information and materials flow seamlessly between these links—enabling businesses to stay agile and responsive.

How to manage a supply chain effectively

Managing a supply chain is a major undertaking. It requires diligence, an ability to stay on top of industry trends, a thoroughly strategic mindset, an appetite for hard work and close attention to detail. The challenges of SCM are only growing in complexity, in tandem with the continuing expansion of global markets.

Nevertheless, there are some general rules which you should follow to manage your supply chain operations effectively. As we’ve mentioned, communication is vitally important. You must communicate with your stakeholders, suppliers, and customers in a clear and consistent way. Any uncertainty or a lack of clarity can do a great deal of damage, leading to confusion, delays and, potentially, lower productivity and profitability.

We also mentioned the importance of keeping up with new trends. This includes not just new types of methodology but also new technology. Systems that help you manage supply chain integration can cover a range of bases, including inventory planning, real-time reporting, visibility and fraud prevention. 

An overreliance on historical data can be more of a hindrance than a help, as far as supply chain management is concerned. Real-time planning can allow more effective responses in the event of unforeseen disruption; with real-time visibility throughout the supply chain, businesses can enhance inventory control and thereby improve efficiency.

A lot of businesses are taking advantage of the revolution in artificial intelligence and automation, and this process is rapidly transforming supply chains worldwide. Brightpearl’s workflow automation system allows businesses to process more orders with the same number of staff, cut down on mistakes (thus keeping customers happy), and facilitates faster and more flexible deliveries.

Supply chain FAQs

What is supply chain management?

Supply chain management is the control and optimization of the supply chain process, which sees your goods make the journey from supplier to customer. It covers supplier communication, procurement, logistics, transportation, and every other aspect of getting the goods to the right place at the right time. 

With the right supply chain solutions, you can minimize costs and maximize customer satisfaction.

What is lead time in the supply chain?

In the supply chain, lead time is the amount of time between placing an order with a supplier or manufacturer, and the product arriving at your warehouse or store. 

If you’re selling online or using dropshipping, you also need to factor in customer lead time, which is the time it takes for an order to arrive at the customer’s address.

What are the factors that can affect supply chain management?

Factors that affect SCM include internal problems like poor planning and inefficient processes, which can lead to stockouts, wastage, and delayed deliveries to customers. These can be solved by using the right software for supply chain management and other retail operations.

Other factors, such as a shortage of raw materials, a weather event or a pandemic, may be beyond your control, which is where risk management comes in. For example, mitigating against a spike in the cost of transportation by using local suppliers.

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