Understanding the Supply Chain | What is Supply Chain & How it Works

Introduction

In this article, we will explore the foundational concepts of the supply chain ecosystem, including its purpose, efficiency metrics, and core decision-making processes. Key areas of focus will include the goals of supply chain management, the pivotal decision phases, differing views of supply chains, and the significance of effective relationships across all parties involved.

What is a Supply Chain?

A supply chain is a network of various parties involved in fulfilling a customer request. It encompasses suppliers, manufacturers, distributors, retailers, and ultimately, the customer. The supply chain includes the flow of information, products, and funds among these entities.

For instance, considering a scenario at Best Buy where a customer intends to purchase a TV, the supply chain includes manufacturers such as Samsung or Sony, along with the additional layers of distributors and suppliers that contribute indirectly to the transaction.

It's important to note that not all supply chains will involve every component. As an example, Dell's server business only engages the supplier, manufacturer, and customer phases, effectively bypassing distributors and retailers. Regardless of the structure, the customer is a fundamental element, as all supply chain activities begin with a customer order.

Goals and Objectives

The primary objective of any supply chain is to maximize the overall value generated by the supply chain, often referred to as "supply chain surplus." This surplus is defined as the difference between the value perceived by the customer and the costs incurred by the supply chain. For example, if a customer values a Sony Ultra HD TV at $ 1,400, the supply chain must work efficiently to keep costs low while delivering that product.

Achieving supply chain surplus involves balancing customer value against supply chain costs, which encompass transportation, inventory management, and other logistical decisions. Furthermore, supply chain costs can be influenced by structural differences in various countries; for instance, the retail environment in the USA contrasts sharply with that of India, leading to varying operational efficiencies.

An example highlighting supply chain success is Walmart, which has effectively utilized design, planning, and operational efficiencies to fuel its growth, while companies like Webvan illustrate the pitfalls of ineffective supply chain management.

Supply Chain Design and Phases

There are three key decision phases in supply chain management:

Supply Chain Design: This involves high-level choices regarding configuration, resource allocation, and process functions at each stage. Decisions include whether to outsource functions, facility locations, transportation modes, and the selection of information systems for effective communication across partners.
Supply Chain Planning: Operating within the guidelines established in the design phase, planning requires forecasting demand, determining inventory levels, and deciding on marketing and promotional tactics. This phase aims to ensure supply meets demand efficiently, taking uncertainty and competitive pressures into account.
Supply Chain Operations: These are day-to-day activities focused on fulfilling customer orders effectively and at the lowest possible cost. This phase includes allocation of inventory, scheduling delivery, and managing orders to meet customer expectations.

The interplay between these phases is critical; decisions in one phase will have implications on the others, and a lack of integration can lead to high operational costs and poor customer satisfaction.

Views of Supply Chains

Supply chains can be analyzed through two primary lenses:

Cycle View: This view breaks the supply chain into cycles occurring between successive stages. Each cycle, such as the customer order cycle and replenishment cycle, defines the processes involved and the parties (buyers and suppliers).
Push-Pull View: This perspective differentiates between push processes (initiated in anticipation of demand) and pull processes (initiated in response to customer orders). For example, a retailer may stock inventory (push) while also reacting to customer preferences with orders (pull).

Understanding these two views helps in the strategic alignment of processes within the supply chain.

Macro Processes in Supply Chain Management

The supply chain management framework comprises three overarching macro processes:

Customer Relationship Management (CRM): This encompasses all processes surrounding customer interaction, such as marketing, order management, and pricing.
Internal Supply Chain Management (ISCM): This pertains to processes within the firm, including production planning, inventory management, and order fulfillment.
Supplier Relationship Management (SRM): This includes processes that manage relationships with suppliers, covering sourcing, performance evaluation, and collaboration on design.

Successful integration of these processes is essential for overall supply chain effectiveness. Poor communication between these departments can lead to inefficiencies and dissatisfactory customer experiences.

Conclusion

Throughout this exploration of supply chains, we have gained insight into what comprises a supply chain, its goals, decision phases, views of functionality, and the need for effective management of relationships across the board. Companies like Amazon, Walmart, and Apple exemplify successful supply chain strategies due to their rigorous attention to these elements. As the market continues to evolve, adapting to changing technologies and customer expectations will be vital for ongoing success.

Keyword

Supply Chain
Customer Value
Supply Chain Surplus
Supply Chain Design
Supply Chain Planning
Supply Chain Operations
Cycle View
Push-Pull View
Customer Relationship Management (CRM)
Internal Supply Chain Management (ISCM)
Supplier Relationship Management (SRM)

FAQ

What is the main goal of a supply chain? The primary goal of a supply chain is to maximize the overall value generated, known as supply chain surplus, by balancing customer value with supply chain costs.

What are the three decision phases of supply chain management? The three key decision phases are Supply Chain Design, Supply Chain Planning, and Supply Chain Operations.

What is the difference between the cycle view and push-pull view of supply chains? The cycle view defines processes and interactions between stages, while the push-pull view distinguishes between processes initiated based on forecasts (push) and those initiated in response to customer orders (pull).

What are the macro processes in supply chain management? The three macro processes include Customer Relationship Management (CRM), Internal Supply Chain Management (ISCM), and Supplier Relationship Management (SRM).

How can supply chain management impact a company's success? Effective supply chain management can lead to reduced costs, increased customer satisfaction, and better adaptability to market changes, significantly contributing to a company's overall success.