What is a Supply Chain? Everything You Need to Know

What is a Supply Chain? Everything You Need to Know
American Express
What is a supply chain, why do they matter and how proper management can help you minimize business risks and grasp opportunities.
From manufacturing to consumption, supply chain management impacts every area of your business, most specifically customer satisfaction and your ROI. We’ve put together a primer on supply chains – what they are, why they matter and how properly managing them can help you minimize business risks and grasp opportunities.
What is a supply chain?

A supply chain (SC) is the entire process of getting from manufacture to consumption. It starts with the gathering of raw materials, moves through production, transportation and distribution, and ends when the goods or services reach the customer.

Why are supply chains important?

On the simplest level, supply chains matter because they plan how you’ll get your product into the hands of your customer and how fast. An efficient supply chain will minimize production and distribution costs which translates into the ability to pass savings onto your customers while getting the products they desire in hand in a reasonable amount of time. That's why it's also important to consider supply chain finance in order to optimize the management of the working capital and liquidity invested in supply chain processes and transactions. This helps to keep your business competitive and increases customer satisfaction, both of which are good for business.

How do supply chains work?

While they vary in complexity depending on the size of the business, industry, product market and other factors, all businesses have a supply chain that covers the same essential five steps.

1. Consideration of the supplier. Start with the basic considerations at the start of the supply chain. What does your business provide and how is that sourced? How much of the supply chain is actually relevant to you? What are the practical limitations? For instance, if your company imports goods that have already been manufactured, then you don’t need to oversee the sourcing of raw materials to make those goods. However, the availability or otherwise of those materials will still affect you – consider dual-sourcing the goods to allow for interruptions in supply, increases in costs and issues with transportation.
"Our supply chain begins in Portugal," says Nicky Wacey, Founding Director of Tilbea, makers of award-winning maternity and nursing clothing. "We source our fabrics through an agent liaison from the same factory where our garments are produced. The rest of our supply chain consists of: manufacturing in Portugal, shipping (usually by air), delivery to an Amazon fulfilment centre where it's held in stock until purchased. The order is then fulfilled by the warehouse and delivered to the customer via Royal Mail."

2. Consideration of the customer. How are you tracking the shifting demands of the end-user? How do you implement those insights in your supply chain management (SCM) system?

3. Delivery and logistics. Having ensured reliable and adaptable sourcing, and implemented systems that allow you to monitor the market as it shifts, consider the logistics of how you get goods to market. As Daniel Levan-Harris, the Founder of Mango Logistics Group, points out: "From a warehouse perspective, the key is to have a good warehouse management system is place, which maximizes the pick numbers for the warehouse team within their given shift. Additionally all the key points of the delivery process are reported on from the data in our operating system to create a picture of the day's performance, allowing easy and regular measurement of actual service versus KPIs."

4. Run an audit. Run checks and monitor the performance of each part of your supply chain. An audit will showcase wins while also highlighting areas of opportunity. The system can’t be rigid. In a rapidly changing world, your supply chain needs to be resilient and agile enough to adapt to significant changes.

5. Partnership agreements. Nicky says that communicating with her supply chain partners and ensuring they participate in the plan is key: "We are constantly in contact with our suppliers, we usually speak to them two to three times a week to check on progress and to update our critical path." A good SCM system will digitally integrate communication with suppliers at each stage, but this is still often a case of people management. Who responds best to a casual email versus a sit-down meeting? This also gives you an opportunity to gain valuable expert insight into each stage of the supply chain.

Finally, it's important to note the importance of offering customers an insight into your supply chain. Remember, a lack of transparency in your supply chain can harm both your reputation and your bottom line.

And when it comes to managing payments to international suppliers, it's easy with American Express. With no set-up fees and the ability to make payments world-wide, American Express vPayment® is a safe and secure way of managing payments using single or multi-use virtual account numbers.

Supply chain types and models

There are six different supply chain models, designed to suit different types of business. These models are built on two distinct approaches.

Supply chains built for efficiency

These supply chains take efficiency as the primary goal by focusing on metrics such as low cost, optimum asset utilization and total cost of business operation. Industries that use this approach are mainly commodity manufacturers specializing in, for example, paper, steel, cement and fast fashion. There are three supply chain models built on this approach:
  • The "efficient" supply chain model – prioritises end-to-end efficiency, often used in highly competitive industries and markets.
  • The "fast" supply chain model – introduces an element of flexibility, making it a good fit for markets reliant on frequently changing products
  • The "continuous-flow" supply chain model – a traditional model, which is useful in high-demand but rarely fluctuating markets.

Supply chains built for responsiveness

Significant demand uncertainty is a driving component for industries that use supply chain models built on this approach. The use of market mediation cost is essential in such industries, prioritising matching changes in demand with changes in production capacity. The supply chain models that primarily use this approach are:
  • The "agile" supply chain model – designed to allow for an ebb and flow in demand, often used for customized or to-order products.
  • The "custom-configured" supply chain model – a mid-point between the agile and continuous-flow models, allowing custom configurations during production.
  • The "flexible" supply chain model – prioritises flexibility in responsiveness to the volume of demand in industries where this varies drastically.
Your approach will depend on your business needs, as well as the industry in which you operate, managerial focus, internal business processes and unique value proposition. All of these models possess responsiveness and efficiency elements, but primarily focus on either one for scaling.

Examples of supply chains

Supply chains proactively address different segmentations of data management, efficiency, compliance and sustainability of the product output. As such, they can vary widely between industries, regions and markets.

Basic supply chain

In organizing the flow of goods between businesses and consumers, a basic supply chain comprises the storing and shipping of inventory or materials.

Manufacturing supply chain

The process begins with the sourcing and extraction of natural resources in their raw state. These resources are then taken to the product supplier, who acts as the wholesaler. The resources are transported on-demand to the manufacturer(s), refined and processed into a finished product. A distributor picks up the product and delivers it to a retailer. The retailer then sells the product to the buyer or consumer. Once the consumer buys the product, a cycle is complete. Further demand stimulates a continuous cycle.

E-commerce supply chain

Here, the system engagement is a website where consumers select a product and place an order. A payment processor handles the order payment transaction, the warehouse receives the order and has it transported to the buyer's location. This supply chain cuts the retailer out of the network, transporting the product from the distributor to the final consumer.

Whether your supply chain is designed for efficiency or responsiveness, you never want to pay more than you need to when ordering from abroad. Whether you have an American Express® Card or not, you can make international payments instantly with American Express' vPayment for time-sensitive orders and shipments. You can also set the payment amount, time-frame for use, and the suppliers it can be used for.

Finances Online, 97 Supply Chain Statistics You Must Know

This article is intended for general informational purposes only and does not constitute legal advice or an opinion on any issue. It should not be regarded as comprehensive or a substitute for professional advice.