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Knowledge

What is supply chain?

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Published: Reading time: 10 min
o9 Solutions The Digital Brain Platform
o9 SolutionsThe Digital Brain Platform
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Introduction

The Stages of a Supply Chain

What is Supply Chain Management?

Why is Supply Chain Management Important?

Supply Chain Models

Challenges in the Supply Chain

Best Practices for Supply Chain Management

What are Some Risks in the Supply Chain?

How does a Supply Chain Affect Sustainability?

Supply Chain Best Practices by o9 Solutions

Published:

The supply chain is a network that carries raw materials and components from their point of assembly to their final sale to customers. It includes all the technology, organizations, resources, and information involved in the production, distribution, and delivery of goods or services to end consumers. 

Categories of stakeholders in the supply chain include:

  • Producers: Entities responsible for producing or cultivating raw materials for the manufacturing of goods.
  • Vendors: Businesses engaged in the buying and selling of materials within the supply chain.
  • Manufacturers: Entities involved in the process of transforming raw materials into finished goods.
  • Transporters or Logistics Providers: Organizations responsible for the efficient movement of goods across different regions.
  • Supply Chain Managers: Professionals overseeing smooth operations throughout the supply chain, from planning and raw material sourcing to manufacturing, delivery, and handling returns.
  • Retailers: Businesses that sell goods either through online platforms or physical stores.
  • Consumers: Individuals who purchase and utilize goods and services within the supply chain.

The Stages of a Supply Chain

The specific part of the supply chain responsible for transporting the finished product from the manufacturer to the consumer is identified as the distribution channel.

The sequential stages of a supply chain are as follows:

  • 1.

    Sourcing raw materials.
  • 2.

    Refining raw materials into basic components.
  • 3.

    Assembling basic components to form a product.
  • 4.

    Order fulfillment/sales.
  • 5.

    Product delivery.
  • 6.

    Customer support and return services.

The duration required for each process, from initiation to completion, is referred to as lead time. Supply chain managers oversee these processes, ensuring efficient coordination and monitoring lead time to enhance customer satisfaction.

Supply chains can be distinguished from value chains, as they contribute to the final product in distinct ways. While supply chains focus on meeting customer demands, value chains strive to grow a product's value beyond its inherent worth. The primary objective of the value chain is to provide the company with a competitive advantage in the industry. Although supply chain management and value chain management offer slightly different perspectives on the same fundamental process, they collaborate to address two interpretations of customer "demand."

What is Supply Chain Management?

Supply chain management involves supervising the movement of materials, information, and finances throughout the various stages of the process. This starts with the supplier and progresses through the manufacturer, wholesaler, and retailer, ultimately reaching the consumer.

The supply chain comprises three primary flows: product flow, information flow, and financial flow. These flows transpire across three key phases: strategy, planning, and operation. Effective supply chain management (SCM) entails the coordination and integration of these flows, fostering connectivity within and among companies.

Why is Supply Chain Management Important?

The supply chain is critical to ensuring operational efficiency and happy customers. Here’s how: 

Supply chain management improves customer service 

  • Clients expect the right amounts and types of products to be delivered at the right times. Effective supply chain management aims to ensure this. 
  • Supply chain management allows you to meet customer expectations and avoid escalating consequences.  For example, if an auto repair shop lacks the necessary parts, this could lead to delayed car repairs and significant customer disappointment. Good supply chain management processes would prevent this. 
  • Swift after-sale support is equally crucial, as delays in servicing products, like a malfunctioning home furnace during winter, can result in customer dissatisfaction.

Supply chain management reduces operational costs 

  • Supply chain management optimizes purchasing costs and helps you avoid prolonged inventory holdings that incur additional expenses.
  • This supports manufacturers who depend on efficient supply chains to avert material shortages that could halt production and mean financial losses. 
  • Overall supply chain cost reduction is critical, as it allows manufacturers and retailers to design networks that achieve customer service objectives at minimal expense, enhancing competitiveness in the market. 

Supply chain management improves financial position 

  • Supply chain management can lead to a significant increase in overall profits. Consider the impact of reducing U.S. cereal supply chain costs by just one cent per cereal box. Given that U.S. consumers consume 2.7 billion packages of cereal annually, this could result in industry-wide savings of $13 million over a five-year period with 13 billion cereal boxes across the optimized supply chain.
  • Supply chain managers are esteemed for their ability to minimize reliance on large fixed assets, such as plants, warehouses, and transportation vehicles. For instance, if experts in the supply chain can reconfigure the network to efficiently serve U.S. customers with only six warehouses instead of ten, the company can avoid the substantial cost of constructing four additional buildings.
  • Companies highly value supply chain managers for their role in accelerating product flows to customers. For instance, if a company can manufacture and deliver a product to a customer within 10 days instead of the usual 70 days, it can expedite invoicing by 60 days, significantly improving cash flow.

Supply Chain Models

Various business models govern the structure of supply chains, each emphasizing different aspects such as responsiveness and efficiency. Organizations should assess the merits of each model in light of their objectives and limitations to select the one that aligns best with their needs.

The key supply chain model types include:

  • Continuous Flow Model: Ideally suited for mature industries characterized by a certain level of stability.
  • Agile Model: Particularly effective for industries facing unpredictable demand and engaged in the production of made-to-order products.
  • Fast Chain Model: Excelling in scenarios involving products with a short life cycle, such as fashionable items.
  • Flexible Model: Well-suited for industries with a degree of stability and occasional, relatively predictable demand peaks.
  • Custom Configured Model: Emphasizes customization in its approach.
  • Efficient Chain Model: Thrives in highly competitive markets where pricing significantly influences outcomes.

These models may exhibit overlap, and it is essential for the supply chain manager to tailor them to the specific needs of the unique supply chain under consideration.

Challenges in the Supply Chain

Contemporary supply chains are intricate and pose various common challenges. These include:

- Lack of transparency: Inadequate information sharing among stakeholders can lead to delays, inefficiencies, and difficulties in addressing disruptions or optimizing the overall supply chain performance.

- Waste resulting from an inadequate production cycle: Businesses that miscalculate their supply, demand, or capabilities may find themselves with excess inventory, leading to wastage.

- Dissatisfied business partners and customers: The primary objective of supply chain management (SCM) is to fulfill customer expectations. However, sometimes it’s essential to realistically manage expectations.

- Lost or delayed goods: Goods that become misplaced at any point in the supply chain not only disrupt the entire process but can also have adverse effects on customer satisfaction.

- Increasing customer expectations: Advances in technology and business practices raise customer expectations, posing a challenge that requires effective management to ensure successful fulfillment.

- Resilience to sudden changes in the supply chain: External factors can introduce unforeseen changes to a supply chain. Therefore, it is advisable to adopt best practices that involve preparedness for the unexpected and the ability to pivot when necessary.

Best Practices for Supply Chain Management

Adapting to the dynamic pace and expansive reach of the global marketplace is crucial for supply chain professionals. To achieve this, consider the following best practices:

  • Embrace lean SCM and logistics techniques to enhance flexibility and minimize inventory waste.
  • Minimize unnecessary stock and move products quickly based on demand. Lean principles help in achieving this, making your supply chain more flexible and efficient
  • Foster collaboration within the supply chain network, emphasizing optimization across the entire chain rather than focusing solely on individual company processes. Cultivating strong relationships with suppliers is particularly vital.
  • Focus on shortening cycles to counteract the tendency for supply chains then elongate as they become more intricate. Streamlining processes is essential to meet customer expectations effectively.
  • Leverage supply chain technology to integrate and enhance collaboration among various components of the supply chain.
  • Implement well-defined metrics that enable accurate assessments of the chain's efficiency, facilitating informed decision-making by managers.

What are Some Risks in the Supply Chain?

Resilience refers to an organization’s capacity to endure, adapt, and prosper when confronted with both anticipated and unforeseen internal and external disruptions. Specifically, within the realm of operational resilience, which encompasses supply chains, it involves businesses maintaining robust production capabilities capable of accommodating fluctuations in demand and sustaining stability amid disturbances, all without compromising quality.

In the realm of supply chain management, organizations can adopt a three-step approach to address long-term uncertainties and potential upheavals:

  • Firefighting: This relates to short-term, day-to-day measures aimed at identifying previously unnoticed gaps in the supply chain performance. While these tactics are not resilience-building per se, they can be employed in conjunction with more intricate, long-term reforms.
  • Integrating and streamlining operations: This involves three critical actions for constructing resilient supply chains:
    - Establishing a central hub to consolidate organizational responses.
    - Simulating and planning for extreme disruptions in supply and customer demand.
    - Reassessing just-in-time inventory strategies.
  • Achieving structural resilience: While quick responses are more attainable, attaining long-term resilience involves employing the following techniques: 
    - Constructing a digital twin of the most critical aspects of the supply chain to facilitate simulations and test cases.
    - Creating and testing "what if" scenarios.
    - Enhancing data sharing with suppliers.
    - Considering ring-fencing a small portion of the supply chain team.

Factors like fostering transparency across multiple tiers of suppliers are pivotal for effective supply chain risk management. For instance, a player in the aerospace industry bolstered its supply chain resilience by leveraging digital tools, enhancing skill sets, and clarifying processes.

How does a Supply Chain Affect Sustainability?

Managing an operation's environmental impact holistically can help in addressing environmental, social, and governance issues more broadly. And the first step is often to understand the potential impact of driving eco-efficiency.

Manufacturers in the Global Lighthouse Network (GLN), a collaborative initiative by McKinsey and the World Economic Forum, that have embraced digital transformation have found that supply chain sustainability and competitive excellence may well go hand in hand. GLN data collected since the beginning of the project indicate that upward of 60 percent of “lighthouse” factories saw sustainability impact as part of the effect enabled by Industry 4.0 transformations. That research highlighted three sustainability-focused manufacturing leaders based on their commitment to environment sustainability: Ericsson, Henkel, and Schneider Electric.

Within supply or value chains, resource clean sheeting can help in designing cost-effective, carbon abated products. Designers, engineers, and purchasers could use this approach to identify factors that affect costs and emissions for a given product or service along the entire value stream and throughout its life cycle.

More broadly, a number of companies are thinking about how to decarbonize their supply chains, focusing on Scope 3 emissions—that is, emissions generated up and downstream in the value chain. This category of emissions can account for 80 percent of many companies' overall climate impact. Consider the results that Interface, a carpet manufacturer in Europe, has seen since setting its mission-zero target in the early 1990s… it has since reduced its operations' greenhouse gas footprint by 96 percent and cut the carbon intensity of its products by 69 percent.

Consumer goods companies in particular are making strides in preparing for a sustainable future by transforming company operations across the entire supply chain. Henkel, a consumer goods company based in Germany, provides one example of how a sustainability focus can flow through a supply chain. In an interview, the chief supply chain officer for Henkel's laundry and home care business describes how the division decreased its CO2 footprint by 65 percent in the past 15 years, improving operational performance and lowering costs and CO emissions.

Supply Chain Best Practices by o9 Solutions

o9 is trusted by the world's leading companies and enterprises. Our supply chain approach excels in providing businesses with actionable insights, allows easy collaboration, and leverages built-in models.

Take the first step to achieve insights into your supply chain management and logistics. Make better decisions based on both data and research.

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Gartner® Magic Quadrant™ 2023

o9 Solutions recognized as a Leader in the 2023 Gartner® Magic Quadrant™ for Supply Chain Planning Solutions. Download for free the full Magic Quadrant.

About the author

o9 Solutions The Digital Brain Platform

o9 Solutions

The Digital Brain Platform

o9 Solutions is a leading AI-powered platform for integrated business planning and decision-making for the enterprise. Whether it is driving demand, aligning demand and supply, or optimizing commercial initiatives, any planning process can be made faster and smarter with o9’s AI-powered digital solutions. o9 brings together technology innovations—such as graph-based enterprise modeling, big data analytics, advanced algorithms for scenario planning, collaborative portals, easy-to-use interfaces and cloud-based delivery—into one platform.

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