Supply Chain

By 

WILL KENTON

  Reviewed by 

SOMER ANDERSON

Updated Jul 7, 2020

What Is a Supply Chain?

A supply chain is a network between a company and its suppliers to produce and distribute a specific product to the final buyer. This network includes different activities, people, entities, information, and resources. The supply chain also represents the steps it takes to get the product or service from its original state to the customer.

Companies develop supply chains so they can reduce their costs and remain competitive in the business landscape.

Supply chain management is a crucial process because an optimized supply chain results in lower costs and a faster production cycle.

Understanding Supply Chains

A supply chain involves a series of steps involved to get a product or service to the customer. The steps include moving and transforming raw materials into finished products, transporting those products, and distributing them to the end-user. The entities involved in the supply chain include producers, vendors, warehouses, transportation companies, distribution centers, and retailers.

KEY TAKEAWAYS

• A supply chain is a network between a company and its suppliers to produce and distribute a specific product or service.
• The entities in the supply chain include producers, vendors, warehouses, transportation companies, distribution centers, and retailers.
• The functions in a supply chain include product development, marketing, operations, distribution, finance, and customer service.
• Supply chain management results in lower costs and a faster production cycle.

The elements of a supply chain include all the functions that start with receiving an order to meeting the customer's request. These functions include product development, marketing, operations, distribution networks, finance, and customer service.

Supply chain management is a very important part of the business process. There are many different links in this chain that require skill and expertise. When supply chain management is effective, it can lower a company's overall costs and boost profitability. If one link breaks down, it can affect the rest of the chain and can be costly.

By cutting back on delays in product delivery, successful supply chain management also helps boost customer service.

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Supply Chain

Supply Chain Management vs. Business Logistics Management

The terms supply chain management and business logistics management—or simply, logistics—are often used interchangeably. Logistics, which is one link in the supply chain, is different.

Logistics refers specifically to the part of the supply chain that deals with the planning and control of the movement and storage of goods and services from their point of origin to their final destination. Logistics management begins with the raw materials and ends with the delivery of the final product.

Successful logistics management ensures that there is no delay in delivery at any point in the chain and that products and services are delivered in good condition. This, in turn, helps keep the company's costs down.

How the Flow of Manufacturing Costs Works

The flow of manufacturing costs refers to the process of using materials and labor to complete a finished product that can be sold to a customer. A supply chain management system can reduce the cost and complexity of the manufacturing process, particularly for a manufacturer who uses many parts.

For example, a clothing manufacturer may first move raw materials into production, such as fabric, zippers, and other pieces used to make clothing. The manufacturer then incurs labor costs to run machinery and perform other work using the materials. Once the items are completed, they must be packaged and stored until they are sold to a customer. 

Reliable Suppliers

An efficient supply chain management process requires reliable suppliers. This means they produce a quality product that meets the manufacturer’s needs, and the product is delivered on time.

Assume, for example, that XYZ Furniture manufactures high-end furniture, and that a supplier provides metal handles and other attachments. The metal components need to be durable so they can be used on the furniture for years, and the metal parts shipped to XYZ should work as intended. The supplier must be able to fill the manufacturer’s orders and ship metal parts to meet XYZ’s production needs. These steps are necessary to produce a quality product that is shipped to a customer in a timely manner.

Supply Chain and Deflation

The evolution and increased efficiencies of supply chains have played a significant role in curbing inflation. As efficiencies in moving products from A to B increase, the costs in doing so decrease, which lowers the final cost to the consumer. While deflation is often regarded as a negative, supply chain efficiencies are one of the few examples where deflation is a good thing.

As globalization continues, supply chain efficiencies become more optimized, which keeps the pressure on input prices.