What is Supply Chain Management?

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.

• 2^nd Tier Suppliers who supply 1^st Tier Suppliers.

• 3^rd Tier Suppliers who supply 2^nd 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 1^st Tier, a combination of 1^st and 2^nd Tier customers, or a mix of all three. However, customers are typically made up of the following:

• 1^st tier customer who purchases products or services as a manufacturer.

• 2^nd tier customers who might purchase finished products from a manufacturer to act as Wholesalers of the 1st-tier manufacturer's products or services.

• 3^rd-tier customer who acts as a retailer of the second-tier wholesaler's products or services for end customers to 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 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 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, as well as 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 manage that era's demand patterns easily. 

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 their offerings' quality, availability, and variety. Nonetheless, independent producers' expertise and adaptability enable them to meet their markets' evolving demands effectively. 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, 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 seasonal.

The decision to hold inventory involves weighing the financial value in 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 rather unit pricing. 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 and are, therefore, the products that Inventory Managers tend to spend the bulk of their time managing, D-Class Items are obsolete and are classified as scrappage.

• 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 whilst 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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