Supply Chain

Supply chain

Quick definition: A supply chain is the sequence of processes involved in producing and distributing a commodity.

Key takeaways:

The following information was provided during an interview with Michael Klein, global director of industry strategy and marketing for retail, travel, and consumer goods.

What is a supply chain?
How does a supply chain work?
What are the different types of supply chains?
Why is supply chain management important?
Why are supply chains important in marketing?
What are some common supply chain challenges?
How will supply chains continue to evolve in the future?

What is supply chain?

Putting products on a store shelf or an ecommerce webpage is a sophisticated process. Consumers might not always understand what leads to products being in the right place, at the right time, and in the right quantity.

A supply chain is the sequence of processes involved in producing and distributing a commodity. The commodity could be a physical product or in some instances, a form of service. The techniques that bring that commodity from production to distribution are usually a connected network of resources, technologies, activities, individuals, and business organizations.

How does a supply chain work?

Each supply chain network will have its nuances and unique elements, but a standard supply chain typically follows the same general process.

A manufacturer receives an order for several units of a specific product. If a retailer manufactures its goods, those orders will come from a corporate office. Otherwise, orders may come from a supply chain manager or inventory management department. When a manufacturer receives an order, it either sends out buyers to procure the raw materials needed to fulfill the order or pulls the appropriate amount of product from the manufacturer’s warehouse.

It’s important to understand that there are two types of manufacturing: discrete manufacturing and mass manufacturing. Discrete manufacturing is when a manufacturer only makes enough goods to fulfill a specific purchase order. Mass manufacturing is when a manufacturer makes large quantities of goods, places them in a warehouse, and then sells products to various third parties.

After the manufacturer fulfills the purchase order, they place the products in a warehouse or a distribution center. From there, transporters relocate them to a retail site or retail distribution center. Once the goods are in the retailer’s facility, it is up to the retailer to coordinate planning, inventory allocation, and order fulfillment. Retailers must have a system that ensures each of their physical locations has the right amount of inventory and that inventory is also available in the right distribution centers or stores to fulfill ecommerce orders.

What are the different types of supply chains?

Depending on the type of merchant, a supply chain can begin in several different places and take several different forms. However, a supply chain typically ends either in a distribution center, where products are processed and shipped to customers, or on the store shelf.

Some supply chains start on farms where farmers produce raw materials. Brands that manufacture their own goods must start by sourcing raw materials from producers and then coordinate the distribution of those goods to manufacturing sites. Manufacturers turn raw materials into finished products. Then, distributors work to send the finished goods to the right places, at the right time, and in the right quantities — a process called order fulfillment. Other supply chains start with manufacturers or brand warehouses that purchase finished goods without worrying about handling raw materials.

Merchants, like grocery stores and some retailers, may employ a hybrid supply chain model. They may purchase portions of goods from manufacturers while working with other specialized manufacturers for raw materials to create private-label products.

These approaches both have benefits and disadvantages. For example, if a retailer doesn’t start with raw materials, they often can’t control manufacturing processes, schedules, or product offerings. On the other hand, these same retailers have the opportunity to buy from many different vendors and offer a wider variety of products to end users.

Why is supply chain management important?

Proper supply chain management can make or break a retailer’s profitability. If retailers don’t have the right products in the right place at the right time, they won’t be able to meet customer demand, they’ll lose money from missed sales opportunities, and they won’t provide value for stakeholders because they can’t provide the correct amount of inventory.

On the other hand, if retailers order too much supply and overestimate demand, they must engage in a very heavy markdown strategy. That means losing money for the company.

Why are supply chains important in marketing?

Though it may not be obvious initially, there is a bridge between marketing and supply chains — merchandising. Merchandising departments are responsible for deciding what goes on the shelf and work very closely with supply chain professionals to manage order fulfillment, replenishment, and how goods arrive at distribution centers and retail locations.

Marketers rely on merchandising departments and supply chains to manage supply and demand. For instance, marketers don’t want to create customer demand for products if there isn’t a significant supply. When the need is greater than supply, customers — and marketers — are unhappy.

What are some common supply chain challenges?

The biggest source of supply chain risk is supply chain disruption — which can come in many forms.

One type of disruption is the fluctuating availability of materials. Industries saw this widespread disruption, especially during the coronavirus pandemic. Product availability may depend on the availability of certain microchips, lumber, or fresh goods. If those raw materials aren’t readily accessible, manufacturers can’t produce the product.

Another possible disruption is the level of quality of raw materials. If manufacturers receive raw materials that don’t meet their requirements, all processes farther down the supply chain become delayed while waiting for better materials.

Natural disasters, though a less common disruption, can also interrupt the supply chain. They can destroy raw materials or prevent goods from being transported.

Issues with inventory management can also delay the supply chain. If the wrong number of goods are manufactured or recorded, distributors may not be able to fulfill purchase orders, or excess products may go to waste.

How will supply chains continue to evolve in the future?

Many supply chains are embracing digital transformation and will continue to do so. Before digital business processes became common, supply chain managers depended on paper purchase orders and other printed documents for inventory. Now, digital tools — along with artificial intelligence (AI), machine learning (ML), and robotic solutions for automation — are changing how products are manufactured and distributed. These evolving technologies will drastically improve supply chain processes.

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