A strong supply chain is one of the most important aspects of any business. Companies differ in what they sell and how they sell it, but supply chains are an area of commonality. Why? Nothing makes it into the hands of customers without a supply chain. Think about the items you interact with on a daily basis. Your phone, toothbrush, furniture, television, laptop. All these things had to be manufactured, packaged, shipped, sold to you, and ultimately used by you. The supply chain is the entire system of producing and delivering a product. And it’s the fuel that stokes the engines of any business. In this article, we’ll look at the importance of supply chain management in the context of different industries. We’ll also break down some supply chain-specific lingo that comes up frequently in consulting projects.
What Is Supply Chain Management?
If supply chain is the network of production activities, supply chain management (SCM) refers to the oversight of those activities for maximum efficiency. The concept of supply chain management was formalized in 1982, but it held relevance long before then. Early colonial shipping companies realized they needed to reduce transportation time at sea. A century later, Henry Ford popularized the first efficient automobile assembly line. Today, modern supply chain management can be broken out into different subcategories. “Global SCM” constitutes how exactly companies integrate manufacturing across country borders, accounting for things like tax and regulatory differences. “Systems, Apps and Products SCM” is a newer part of the supply chain definition that pertains to software usage. AI-based software lets supply chain managers monitor interruptions as they happen in real-time, which helps accurately forecast inventory. Lastly, there’s “Logistical SCM” and “Purchasing SCM.” Supply chain logistics mean anything related to coordination efforts, while purchasing refers to cost management and value capture.
Supply Chain Examples
The world economy is massive enough for us to write a whole book on different types of supply chain examples! That said, there are a few prominent ones – generic, food, and retail – that help illustrate some common supply chain processes.
Generic Supply Chain
A generic supply chain splits into what we call “upstream” and “downstream” activities. Upstream activities relate to raw material procurement. Downstream activities occur later and relate to exchanges between manufacturing and end customers. Let’s imagine a generic supply chain for baseball bats. As a first step (upstream), wood needs to be procured as raw material. From there the wood needs to be manufactured and polished into bats (downstream manufacturing). Finally, the bats need to be transported to stores or warehouses – and sold to customers either in person or online (downstream shipping and sales). This of course is an oversimplification of the process, but paints a clear picture.
Food Supply Chain
The food supply chain gets a bit more complicated because it involves perishable items that we grow ourselves. As of late, the food supply chain has received extra attention. The modern consumer wants to know where their food comes from! Things will vary by food group, but a food supply chain involves production, processing, distribution, consumption, and disposal. Artificial foods aside, production begins on a farm, before moving to large plants for processing. Food distribution usually involves independent wholesalers that rely on truckers to get large quantities to grocery store shelves. Finally, the supply chain shifts to the consumer, who buys, consumes, and disposes of the food waste.
Retail Supply Chain
Let’s revisit the baseball bat example to shed more light on the retail supply chain. A retail supply chain often involves complexity related to upstream suppliers. Put differently, the company that manufactures the bat may not be the company that sells the bat. Rather, the bat company might sell to a chain of sporting goods stores. The sporting goods stores then have the burden of selling to the end-user baseball player. To make this work for everyone, the sporting goods store marks up the price. This ensures they still make a profit in excess of whatever they paid to procure the bat. Substitute any retail item for the baseball bat, and you’ll see a similar phenomenon. The supplier effect also adds the element of forecasting to the retail supply chain i.e., the sporting goods store needs to have a decent idea of the demand for baseball bats. Otherwise, they leave profits sitting on their shelves, so to speak, in the form of unsold bats.
Supply Chain Concepts
Now that you’re an expert on supply chains in the wild, let’s look at some supply chain terminology. Experts use these terms when characterizing or diagnosing supply chains, so treat this section as a glossary of sorts.
The science behind the movement of things from one supply chain stage to the next. Often a target of efficiency gurus.
Pretty self-explanatory. Disruption means any shock or impact that adversely affects a link in the supply chain.
Green logistics is a term for policies and measures geared toward reducing the carbon footprint of a supply chain.
From “last mile logistics,” last mile means the final (and usually short) segment of delivery for a product or service. Last mile logistics can be unexpectedly costly if customers are in hard-to-reach locations.
Refers to the time between the onset and completion of a step or entire production process. For example, from order to delivery, the lead time on a large group of t-shirts might be a month.
In supply chain terms, “piggybacking” means taking advantage of existing infrastructure to reduce your own cost. For example, piling truck containers on a railroad train that is already heading to your destination.
Under the umbrella of disruption, a supply shock is an unexpected, sudden effect on the availability of something. A regulatory example might be taxing the import of a good.
Aterm that became notorious during the pandemic as it relates to vaccines. Cold chain means managing the temperature of a perishable good during its journey through the supply chain.
In the case of recycling, food disposal might be an example. Reverse logistics references supply chains that need to “re-acquire” inventory after the fact and find a destination for it.
Shrinkage accounts for loss that might occur over the duration of the supply chain. Breakage or theft would be examples.
What Have We Learned From The Covid Supply Chain Disruption?
It’s impossible to talk about supply chains nowadays without discussing the impact of the pandemic. During quarantine, the demand for many household goods spiked off the charts. And that demand stretches supply chains that are accustomed to a very different level of production. But now a year into the pandemic, we’ve learned from the supply chain disruption. Proactive stress testing of the supply chain will help prepare for future shocks.
Supply Chain Risk Management
Supply chain risk management was an afterthought in the time leading up to the pandemic. Instead, supply chains were lean, unprotected, and optimized for maximum efficiency. But as boxing great Mike Tyson once said, “everyone has a plan until they get punched in the mouth.” The pandemic has punched supply chains in the mouth – and then some. Deloitte says we are now finally seeing companies beef up their supply chain risk management. What does that take? Leveraging advanced technologies like IoT, AI, and robotics that ensure end-to-end visibility is a good start.
Supply Chain Planning
Supply chain planning ties closely to supply chain risk management. Strong supply chain planning means accurately anticipating demand, and stocking up on resources accordingly. We touched on the importance of this in industries like retail, where unsold inventory can mean significant losses. There’s no one right way to conduct supply chain planning, which is what makes the practice tricky. There are a host of variables at play when it comes to demand, and oftentimes the best companies can do is get close.
Creating A Sustainable Supply Chain
Given their sheer scale, many global supply chains are not very eco-friendly. As climate change becomes more pressing, sustainable supply chains of the future must mind their carbon footprints. The good news is that sustainability and productivity do not need to be mutually exclusive in supply chain strategy. Here we outline a few key pillars of a sustainable (and productive) supply chain.
Sustainable Supply Chain Model
Sustainable supply chains should be green, transparent, and circular. Green in this context means critically thinking about the waste created along every step of the way. Even during the product design phase, think about raw material inputs that minimize environmental destruction. Transparency in this case means not only internally, but also externally. It’s best to be an open book about supply chain strategy – it will drive improvements! And finally, circular supply chains take things one step further by turning waste into other products or inputs. Just like how we as individuals recycle plastic or glass bottles.
Now take a breath. Supply chain management can be a complex topic to digest. But as we’ve discussed at length, the supply chain is critical to the future of business. It is the one truly global practice that links together companies of all kinds. And not only is supply chain management crucial to on-time delivery and the bottom-line, it comes with many ripple effects. To the environment, to employees, to pricing, to suppliers – the list goes on and on. Each link in the supply chain really represents its own mini business, complete with its own operations and incentives. History has shown us that, among other things, effective supply chain management distinguished the great from the good companies. History also has a way of repeating itself. If anything is certain, it’s that supply chain strategy is here to stay.
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