Supply chains can vary in
length and complexity depending on the specific industry and sector they
operate in and the end user's demands. By allowing supply and demand to
function independently, supply chains reduce costs, expedite economies of
scale, and maximise productivity.
The Tiering of Supply Chains
Within the supply chain,
individuals and organisations can specialise in value-adding activities that
provide a competitive advantage to the entire chain. It is often the case that
each part of the supply chain relies on the others to such an extent that it
can be viewed as a series of interconnected actions or movements of products
and services essential for their mutual existence. From an organisational point
of view, there will be two parts to the supply chain:
- Inbound or Upstream, where products
or services have been purchased and delivered to the organisation.
- Outbound or Downstream, where
products or services have been sold and are being delivered to
customers.
The Inbound side of the
supply chain could consist of multiple layers of Suppliers who supply products
or services. These typically comprise raw materials, subassemblies, parts or
Services. The Suppliers can be grouped into “Tiers” according to their place
within the inbound supply chain:
- 1st Tier, which supplies directly
to the organisation.
- 2nd Tier Suppliers
who supply 1st Tier Suppliers.
- 3rd Tier Suppliers
who supply 2nd Tier Suppliers.
The nature of supplies from
each Tier of suppliers may include Raw materials, Subassemblies, Work in
Progress, Finished Products, or Services, with variations based on the specific
industrial sector. Third-tier suppliers provide Raw materials to second-tier
suppliers, who supply components to the first Tier. The first Tier then
delivers finished products to the organisation. The classification of finished
products provided to customers by the organisation depends on how the customers
utilise the products.
An organisation's customers
can be split into Tiers, as Suppliers can be on the inbound supply chain. An
organisation might serve only the 1st Tier, a combination of 1st and
2nd Tier customers, or a mix of all three. However, customers
are typically made up of the following:
- 1st Tier customer
who purchases products or services from a manufacturer.
- 2nd Tier customers
who might purchase finished products from a manufacturer to act as
Wholesalers of the 1st-tier manufacturer's products or services.
- 3rd Tier customers who
act as retailers of the second-tier wholesaler's products or services, so
that end customers can purchase various products and services from
locations with high footfall or within high-density conditions.
Supply Chain Objectives
Adding value to products or
services as they progress through the supply chain is crucial for their
ultimate benefit to the end user. This is the fundamental reason supply chains
exist: to enhance the value of products or services, generating demand from
individuals who utilise or require them. Without a market, the supply chain
would cease to exist.
Nevertheless, the primary
objective of the supply chain is to fulfil demand most advantageously for the
end user in terms of commercial viability. Demand primarily stems from the
necessity for products or services and the price that the end user is prepared
to pay. The supply chain enables organisations to specialise and augment the
value of products or services that the end user is willing to invest in.
Typical supply chain organisations are made up of:
- Raw Material Suppliers such as oil,
wood, ore and minerals.
- Manufacturers who transform raw
materials into subassemblies or finished products.
- Manufacturers who purchase
subassemblies to manufacture finished products.
- Wholesalers who purchase finished
products in bulk.
- Retailers who purchase various
products or services to sell to the end user.
In the examples mentioned
above, all supply chain entities mentioned need the capability to engage with
the end user directly. This is particularly evident with the rise of internet
sales platforms, which allow raw materials suppliers like farmers to sell their
produce directly to the end user. The end user can be either the public or the
restaurant industry, effectively bypassing the involvement of manufacturers,
wholesalers, and retailers.
The primary objective of the
supply chain is to facilitate the production of goods or services in response
to the demand created by the end user. This is achieved through the
specialisation of manufacturers, wholesalers, and retailers, who enhance the value
of the products or services and determine a price that the end user is willing
to pay. The added value can manifest in various ways, such as ensuring the
availability of the right products or services at the right location and time
and aligning with the end user's preferences and willingness to pay.
Supply Chain Partners
Supply chains contribute the
essential resources of time, place, and price to a product or service, which
must meet the end user's demands. By leveraging the supply chain, organisations
can enhance their competitive advantage by adding value to their offerings.
Ultimately, the end user drives the market for products or services, as their
willingness to pay determines the demand. Without this demand, the supply chain
would cease to exist. There are five areas within the supply chain where
organisations can either make decisions individually or as a collective of
suppliers/customers in partnership with the organisation. These are:
- Production: An organisation can decide on the
type of manufacturing process for its products, focusing either on price
or utility. Prioritising price involves producing products in large
batches through continuous or semi-continuous processes, resulting in
lower costs for the end user. On the other hand, emphasising utility means
creating products in smaller batches or as bespoke items, highlighting
quality, location, and availability. The importance of pricing versus
quality, location, and availability depends on the specific industrial
sector and the end user's needs. Users may be willing to pay a higher
price for products that meet their quality, location, and availability
requirements, thus placing less emphasis on pricing.
- Inventory: The organisation's inventory
levels are determined by balancing the costs associated with maintaining
inventory and the potential lost sales opportunities due to
unavailability. Inventory enables the organisation to disconnect demand
from sales order fulfilment. The organisation's sales strategy influences
the amount of investment in inventory. If the service is considered a key
sales driver, the organisation will maintain enough inventory to achieve a
delivery service level of over 99% "On Time In Full." Higher
service levels require higher inventory levels, leading to increased
inventory costs. Conversely, if service is not a primary sales driver,
inventory levels will be lower, resulting in lower costs. Organisations
aim to enhance customer service levels while minimising inventory levels
and costs, leading to supply chains adopting a "Pull" approach
rather than "Push." Inventory levels are driven by actual demand
rather than anticipated patterns, with some organisations striving to
eliminate inventory through cross-dock operations. In this model, only the
necessary inventory is ordered and processed to meet immediate demands, a
trend particularly prominent in the food industry to reduce waste and
improve inventory management accuracy.
- Transportation: The mode of transport used will
have a significant bearing on the costs of the supply chain. The
speed and flexibility of transport modes determine their costs. Air
transport is the fastest but also the most expensive, while sea transport
is low-cost with limited flexibility. Road transport falls in between,
offering medium cost with high flexibility. Organisations must carefully
consider which mode of transport to use, as transport costs can account
for up to 40% of total supply chain costs. However, the need for quick
transit times must be balanced against the advantage of having inventory
reach its destination sooner. Typically, high-cost inventory is
transported using faster, more expensive modes of transport. At the same
time, lower-cost raw materials are moved using slower, more cost-effective
modes.
- Location: The primary factors influencing
an organisation's decision on where to locate itself are the expenses
related to land, buildings, and materials required to reach the site.
Companies dealing with raw materials typically choose locations near the
source of these materials. Conversely, high-end retail stores are often
situated in areas with high foot traffic to capitalise on increased sales
opportunities from passing customers and densely populated areas.
Environmental considerations can also play a role in determining a
company's location. While large industrial zones are usually situated away
from residential areas, businesses must also be accessible to employees
commuting to and from work. As goods progress through the supply chain,
their value typically increases in terms of transportation costs.
Therefore, although transportation expenses remain a concern, the focus
shifts towards ensuring the availability of products to end-users as they
move along the supply chain.
- Information: The rapid advancement of
technology has significantly increased the information available for
planning and managing the supply chain and inventory. This has improved
service levels and reduced costs by enabling more accurate planning and
forecasting. Information is now considered the lifeblood of the supply
chain, and organisations are sharing more information than ever before.
Peer-to-peer (P2P) processes have automated the payment of supplier
invoices, eliminating the need for complex manual tasks. However, this has
required suppliers to enhance their service levels in other areas, such as
ensuring timely dispatch and increased order accuracy. Using barcoding in
warehouse management systems has also contributed to developing a more
accurate supply chain. Commercial risk levels are directly proportional to
the uncertainty surrounding planned events. Reducing uncertainty makes
planning more specific, decreasing commercial risks and lowering costs.
The increased accuracy and availability of meaningful information have
enabled more precise planning, reducing commercial risks and associated
costs in business trading activities.
The Evolution of Supply
Chains
As the Industrial Revolution
progressed, organisations shifted away from traditional industries like coal
mining or farming towards more mechanised industries. The pace of the supply
chain gradually accelerated in terms of delivering products or services to the
end user.
Throughout the late 18th and
19th Centuries, industrial expansion broadened the range of products or
services available for end users to purchase. Despite the increase in speed and
availability of products and services, demand remained relatively stable,
allowing supply chains to easily manage that era's demand patterns.
It was a common strategy for
organisations to seek vertical integration with their supply chains to exert
more control over the inbound supply chain. Quality management, cost control,
and inventory availability were the driving forces behind Vertical Integration,
as organisations acquired their suppliers and suppliers' suppliers to create a
closed inbound supply chain.
However, with the growth of
global wealth and demand for products or services from the mid to late 20th
Century into the early 2000s, vertically integrated supply chains struggled to
meet end users' insatiable and fluctuating demand. This demand increasingly
focused on individual requirements, while the rapid pace of technological
advancements significantly shortened product lifecycles, necessitating supply
chains to become Lean and Agile to adapt to these variable demand patterns.
Supply Chain Integration
In contrast, modern-day
supply chains have moved away from the vertically integrated model of the 19th
and early 20th centuries. Instead, they have embraced a strategy of breaking up
the supply chain into separate, wholly-owned organisations specialising in
providing specific products or services. This shift has led to outsourcing
certain functions and a proliferation of third-party service providers who
excel in delivering services traditionally handled in-house. Such third-party
service providers can be classified as:
- Producers: A producer refers to an
individual, organisation, or nation that engages in the creation,
cultivation, or provision of goods or commodities to sell them. These
producers possess advanced skills, knowledge, and experience that enable
them to specialise in producing specific products or services. While some
producers prioritise price, others emphasise the' quality, availability,
and variety of their offerings. Nonetheless, independent producers'
expertise and adaptability enable them to effectively meet their markets'
evolving demands. This adaptability is crucial for maintaining
profitability in the business realm. Typical customers of producers
include wholesalers, retailers, and manufacturers. Distributors typically
do not serve end users to safeguard their existing market. Because end
users do not make substantial purchases, that would justify the
operational costs associated with assembling and dispatching orders.
Consequently, dealing with end users would result in unprofitability.
- Distributors: Distributors buy goods or
services in large quantities and then sell them in smaller amounts to
Wholesalers. They usually focus on specific market segments where they
leverage their knowledge to introduce new and innovative products or
services to their clients, typically Wholesalers, Retailers,
manufacturers, or occasionally end users. Distributors may also engage in
Sales and Marketing initiatives for their Suppliers. However, this varies
depending on the nature of the market segments in which the Distributor
operates.
- Wholesalers: Wholesalers typically focus on
smaller retailers and end users who make substantial purchases, ensuring
that it is beneficial for the wholesaler to handle their orders. Unlike
distributors, wholesalers usually provide a more comprehensive selection
of products or services. They may even offer specialised sales and
marketing services. However, wholesalers' primary objective is to serve as
a comprehensive source for their customer base, acting as a convenient
"one-stop shop." End users encompass various entities, such as
retailers. These sole traders specialise in combining the wholesaler's
offerings with other products or services, or even the general public, if
their purchases are significant enough to warrant the wholesaler's
attention.
- Retailers: Typically, they focus on selling
goods or services directly to consumers, who are typically part of the
public. They provide a diverse selection of goods or services in locations
that prioritise convenience for the public, such as town centres or retail
parks with ample parking. Retailers buy products or services in large
quantities to meet weekly demand trends. As a result, the expense of order
fulfilment can be high for suppliers, but this is balanced out by the
regularity with which retailers place orders for their products or
services.
- Service Providers: Service providers typically make
small, one-off purchases to meet their immediate needs, like the general
public's. They usually do not keep large stocks of products or services.
If they do, the quantities are minimal. Service Providers often rely on retailers
for individual purchases or wholesalers for slightly larger orders.
However, they prioritise availability, price, location, and timing when
purchasing, even if it means paying a premium. Retailers and Wholesalers
capitalise on this by enhancing these aspects to cater to the end user's
specific needs, offering specialised services to improve customer
convenience. As products or services move through the supply chain, the
value-added increases to meet the requirements of the next customer in
line, resulting in smaller average order sizes. Products or services'
prices and sales volumes rise as they are customised to suit the end
user's needs. The supply chain's value lies in its ability to generate
demand for products or services that align with the convenience needs of
the end user, leading to increased value as they are tailored to meet the
demands of different market sectors.
Large organisations and
vertically integrated supply chains share similar characteristics, particularly
their inability to adapt quickly to change. However, while vertically
integrated supply chains may be suitable for stable markets with slow rates of
change, they could be better suited for rapidly changing markets where products
come and go, lifecycles are shortening, and end users demand higher service
levels at reduced costs.
Inventory Management
An organisation maintains
inventory to fulfil customer orders as they are received. This safeguards the
supply chain against unpredictable customer demand patterns, which can occur
weekly, monthly, yearly, or seasonally.
The decision to hold
inventory involves weighing the financial value of the inventory against the
potential loss of sales due to longer lead times required to source the
inventory after receiving customer orders. Organisations typically maintain
higher inventory levels when fast service and delivery are crucial. In comparison,
lower levels are held when product or service availability is not the primary
concern, but unit pricing is. Inventory can be classified as:
- Raw materials: These are generally held in bulk,
and the unit price is at its lowest. Inventory is held in anticipation of
maximising the use of production facilities to reduce manufacturing costs
by levelling off demand patterns and producing more during periods of low
demand to fulfil the higher demand periods.
- Parts are generally held as C-class
Inventory items, where the demand could be moderate to high, and the unit
price of the products is towards the lower end of the Inventory unit
pricing spectrum. Inventory is traditionally classified by unit price and
demand patterns, with A-Class Items having the highest unit prices and C
Class having the lowest. Typical demand patterns across an organisation's
inventory tend to be that 80% of demand value is typically met from the
A-Class Items, which are the products that Inventory Managers tend to
spend the bulk of their time managing. D-Class Items are obsolete and are
classified as scrap.
- Subassembly: an assembly of parts constructed
for fitting into finished products and typically held in sufficient
quantities to meet Production needs.
- Finished Products: are products where the unit price
is towards the higher end. They are produced and stored to fulfil sales
orders. The amount held will be determined by the organisation's sales
policy, where inventory levels tend to be higher, and availability is the
highest factor. However, the unit price is of lesser concern. Conversely,
where the unit price is of the utmost concern, Inventory levels tend to be
reduced. Increased reliance on inventory demand data is made to set
inventory levels accordingly to maximise stock turn ratios, which lowers
the average value of inventory held by the organisation, while hopefully
maintaining delivery performance.
As previously mentioned,
inventory value typically increases as it progresses along the supply chain to
the end user. This increase in value is a result of factors such as
availability, price, location, and time, all of which are tailored to meet the
end user's needs.
At the beginning of the
supply chain, when the inventory consists of raw materials, its value tends to
be at its lowest. The overall inventory is generally reduced as the raw
materials are transformed into parts, subassemblies, and finished products. The
focus shifts to ensuring the availability of raw materials, parts, and
subassemblies, as production lines are maintained at a level that minimises
production costs. This is achieved by maximising the utilisation of assets such
as buildings and equipment to enhance production efficiency.
As the emphasis shifts from
availability to the value of inventory held in anticipation of customer orders,
the importance placed on parts, subassemblies, and finished products changes.
The volume of items carried is typically reduced as they move towards
consumption by the end user. However, the overall value of inventory levels may
be higher due to the increased unit price of the goods, considering their
enhanced value.
Inventory plays a crucial
role in the supply chain by allowing the separation of demand and fulfilment,
benefiting both the end user and the supply chain's flexibility. As the amount
of inventory decreases, the supply chain becomes more adaptable. However, it is
crucial to consider the organisation's sales policy when determining inventory
levels. Factors such as availability, price, location, and order fulfilment
time can provide a significant marketing advantage for which customers may be
willing to pay a premium.
On the other hand, in
specific market sectors, price becomes the primary concern. The amount of
inventory held can make a difference between profitable sales fulfilment and
lost sales due to inventory unavailability. In these organisations, effective
inventory control is crucial for success. Accurate and available demand data
can be leveraged to meet sales demands profitably.
Supply Chain Technology
Technological advancements
have significantly increased the information available for planning and
managing the supply chain and inventory. This has led to improved service
levels at reduced costs, as planning and forecasting can be done with greater
accuracy. Information is now considered the lifeblood of the supply chain.
Organisations now share more
information than ever, with P2P systems automating the payment of supplier
invoices. This automation has eliminated the need for complex manual tasks and
required suppliers to enhance their service levels in other areas. Timely and
accurate order dispatch has become crucial for P2P processes to function
effectively. The use of barcoding in warehouse management systems is an example
of how technology has contributed to the accuracy and development of the supply
chain.
Commercial risks are
influenced by uncertainties surrounding the certainty of planned occurrences.
Reducing these uncertainties increases the level of certainty in planning,
subsequently decreasing the commercial risks and associated costs of conducting
business. With the advancement in the accuracy and accessibility of relevant
information, companies can now plan more effectively, decreasing commercial
risks and costs associated with trading activities.
Supply Chain Location
Their location affects an
organisation's cost of land and buildings. If these assets are situated in
areas with a scarcity of such resources, their value disproportionately
increases as the demand for them rises. Manufacturing organisations typically
focus on minimising their overhead costs, so they locate themselves in areas
where land and building prices are at their lowest.
The primary factor
determining a manufacturing organisation's location is the ease of transporting
materials to the site. Organisations involved in raw material processing often
situate themselves near the source of these materials, which also tends to be
in areas with lower land costs and buildings. This is because most people
prefer to avoid living in areas with increased pollution, and manufacturing
sites can have a negative visual impact on the surrounding landscape. As a
result, the demand for land and buildings in these areas is lower, leading to
lower costs.
On the other hand, high-end
retail outlets are typically located in areas with high footfall, maximising
product sales through increased exposure to passing trade and densely populated
areas. Consequently, the price of land and buildings in these areas tends to be
higher due to the greater demand for them.
Mid-range retailers,
wholesalers, and distributors typically establish their operations in retail or
industrial parks. These locations offer lower land and building costs than town
centres or areas with high demand, resulting in lower overall expenses for
these businesses.
As products progress through
the supply chain, their value increases relative to transportation costs. While
transportation costs remain a concern, they become less significant compared to
the importance of making the products available to end users. Therefore, the
focus shifts towards ensuring the product's utility and accessibility for the
end user rather than solely considering transportation costs.
Bulk transportation methods
are commonly employed for materials with high volume but low value. These
methods offer the lowest cost per mile of transport. On the other hand, at the
opposite end of the supply chain, the emphasis is on speed and flexibility in
delivering finished products to the market. This often leads to the use of more
expensive but flexible transport modes.
However, there is an
exception to this general trend. When moderately priced finished products are
transported from low-cost production areas, such as China, by sea, there is a
trade-off between transport costs and the low unit cost of production. The commercial
risks of sea transportation increase when demand patterns suddenly change,
resulting in extended sales order lead times. Additionally, fluctuations in
currency values can raise the unit prices of finished products while they are
in transit.
Apart from cost
considerations, other factors can influence an organisation's decision on where
to locate its operations. Environmental factors play a significant role, as
large industrial areas are often situated away from residential areas due to
the noise, pollution, and negative impact on the landscape caused by
manufacturing operations. However, organisations also need to consider
accessibility for their employees, ensuring they can easily commute to and from
their workplace.
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