What is a Supply Chain?

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Definition:

A supply chain is a network that connects the people and businesses that transforms raw materials into finished products sold to an end user.

🤔 Understanding supply chain

A supply chain describes the network that transforms raw materials into finished goods. Supply chains can be relatively local or span the globe. A supply chain might begin with a corporation mining iron. Another company might convert that iron to steel. Then, another firm might transform that steel into parts. From there, another business may combine those parts into a product. A wholesaler would then distribute the products to retailers. Finally, a retailer connects the product to a buyer, or end user. Each link in the supply chain is essential, and a break in any link can cause problems through the rest of the process.

Example

Think about the computer, phone, or tablet you are using to read this article. That device is likely made from plastic, gold, silver, copper, rare earth minerals, and a bunch of other stuff. Each of those raw materials were mined at different places all over the world.

Each material was extracted, purified, refined, and shipped to various factories. Those factories transformed the refined materials into computer chips, casings, screens, buttons, wires, batteries, and everything else the device needs to communicate and display information.

Another factory received those parts and combined them into devices like the one in your hand (or on your desk). Then, entrepreneurs purchased those finished products and made them available to you. All the while, a system of railroad cars, pipelines, cargo ships, airplanes, and semi-trucks moved those raw materials, components, and products around the world, and, eventually, to your home.

Takeaway

A supply chain is like a food chain…

It might start with plankton, which gets eaten by small fish, which gets eaten by a bigger fish. Then, maybe an eagle catches that bigger fish, and drops the carcass from a tree. The decomposed fish feeds the grass, which feeds the rabbits, which feeds the wolves. The food chain is connected as the supply chain is connected. If any link in either of those systems were to break, the entire system might stop working correctly.

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What is a supply chain?

A supply chain is the network that turns raw materials into the things customers buy at the store. When a business evaluates its supply chain, it needs to consider where its suppliers get their supplies and how to get finished goods to its customers. By understanding its supply chain, a business can reduce the cost of its products and generate the most profit for itself.

Consider the supply chain for a loaf of bread at the supermarket. The company that sold the bread to the grocer had to bake and package it. But the materials for the dough and packaging don’t magically appear. Suppliers sell the baker the flour, yeast, milk, and eggs. Another supplier sells the plastic or paper bag that protects the product. But those suppliers have suppliers of their own. For instance, a flour mill turned wheat into flour. And that mill purchased the wheat from a farmer. The supply chain describes the entire network of suppliers that incrementally transform the most basic materials into higher and higher valued products.

What is the purpose of a supply chain?

Even something as simple as a chocolate chip cookie would be impossible for most of us to make without a supply chain bringing products together. Imagine trying to grow the cocoa beans, sugar cane, vanilla beans, and grain you would need. Meanwhile, also raising the chickens and cows to produce the eggs, milk, and butter. That would be a lot of work for one person.

A supply chain spreads that work among many hands, creating the means to enjoy all the things that we take for granted.

A full understanding of a business’s supply chain — and tight management of that supply chain — is a key component of how a modern company optimizes its profit.

What is included in the supply chain?

Almost every product begins with something grown from, or extracted from, the land. Therefore, the agriculture and mining industries form the first link in virtually all supply chains. These industries harvest plants and mine minerals, which get passed to the next link in the chain. Those commodities (raw material) get refined, smelted, or milled into things like gasoline, plastic, steel, and flour — among many other things.

From there, the manufacturing sector takes over. All of these products go to factories around the world, which transform the materials into higher-value components. Those components come together to form products that a customer will purchase.

The next link in the supply chain is the wholesale industry. These companies purchase final products and distribute them closer to the customers who want them. The retail sector is the final link in the chain, providing a variety of products for customers to purchase and enjoy.

What is supply chain management?

Supply chain management (SCM) refers to the efforts to coordinate the flow of goods, information, and money up and down the supply chain. While a supply chain refers to the connections between stages of production, SCM is the process of overseeing the operations and the logistics management involved in making the supply chain work. It allows supply chain managers to look beyond their business processes and to optimize their production and profit by coordinating with the other industries that ultimately serve the same end user.

SCM can include things like product development, contract negotiation, third-party logistics, managing the movement of goods, controlling inventory and the storage of goods, establishing relationships with vendors and distribution centers, ensuring product quality, managing feedback from consumers, and other activities. An effective supply chain management process can improve profits and create a competitive advantage for a company.

What is the difference between a supply chain and supply network?

A supply chain is a linear process in which each step of production flows from one link to the next. However, globalization and improved communications have reshaped many local supply chains into what are better described as supply networks. In the most basic supply chains, a corporation may have dedicated factories, exclusive sourcing contracts, subsidiary owned warehouses, and its own retail outlets for its product. This structure is called vertical integration, which allows the corporation to own the various businesses along its supply chain.

In the modern economic landscape, businesses might attempt to minimize costs by optimizing the global supply chain rather than owning its components. As a result, the links in the supply chain become more connected to each other, and multiple suppliers might feed into a supply chain. Competitors might even have overlapping suppliers. Information and product flows become connected through multiple channels, rather than by individual linkages. Such a system is better described as a network than a chain, and a supply network might have advantages over a linear chain.

For instance, with multiple suppliers in a network, the system is more robust and resilient to disruptions. While a strict supply chain with a single link for production would break if a factory were forced to close, a network of supplier relationships might be able to adapt to such a disruption more quickly and affordably. Therefore, a robust supply chain network might be viewed as a risk management strategy.

What is the relationship between supply chain and deflation?

Deflation is a phenomenon in which the general price level of all products in an economy decreases. The most common cause of deflation is a fall in demand during a recession.

In theory, however, deflation can also occur by reducing the cost of supply. Lower production costs can lead to lower prices for the consumer.

The hypothetical combination of falling prices and rising output — which could result from a far-reaching improvement to supply chains, among other potential boosts to general productivity — would be a form of what’s called benign deflation.

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