The Basics of Supply Chain

Within the few recent years, a new industry specialization has emerged, Supply Chain Management. These jobs and processes that have been getting done since the beginning of the industrial revolution are now tied to a drive to understand the entire flow of goods, information, and money, from the raw materials and the sources that harvest them all the way to the final product and the ultimate consumer. This need has arisen since it has become clearer that it provides business with a previously unseen business advantage.

While 20 years ago you could get a Logistics degree at some universities, that helped you manage the movement of goods within your organization. Lots of universities have now developed Supply Chain Programs, that expand the scope beyond just transportation management.

Currently, most of the Supply Chain jobs are owned by industry experts with extensive experience in their industry, but each day more entry level supply chain jobs are created that hire grads with specific supply chain degrees, to try to stay competitive with the Amazons and Apples of the world.

Amazon and Apple themselves have brought to light the benefits of Supply Chain management by focusing on the end to end flows to create a competitive edge. Today Amazon has demonstrated the multitude of competitive advantages that there are to having a cutting edge Supply Chain including raising consumer expectations and redefining the market layout itself.

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Photo by JESHOOTS.com on Pexels.com

Players in Supply Chain

Each Company’s supply chain is unique, and it may differ all the way to a product line level with many different chain links, that are interconnected with the market as a whole. A supply chain may include a big company that sells to competing enterprises, for example two of your favorite local restaurants might get their cooking utensils, produce, and condiments from the same local whole-seller. The same way competing cellphone brands, receive their screens and batteries from the same pool of suppliers. These companies however might differentiate themselves by some key technologies, processes, or products, such as a signature dish, or a processing unit unique to that company. Let’s look at some of the players that one might find across the supply chain. Once these have been identified we’ll see how they interact with each other.

As a point of information, I’d like to mention that some companies strive to “Own” the end to end processes, which might mean, that they’ve acquired all these players to have more control over the supply chain and the flows from end to end. Other companies, are happy specializing in their core efficiencies.

Raw Material Providers: At the beginning of the supply chain, one might find a plethora of raw materials that kick off the world’s supply chain processes. These companies focus on finding and harvesting resources for their industries, this includes upstream energy companies, mining operations, and farms.

Processors: This category of companies focus on taking raw materials, or components and turning it into products. These products may continue to get processed by other companies in longer supply chains, or they may be processed for the final consumer.

Whole-sellers: This category doesn’t produce particular products, but focuses on gathering specific types of completed products for sale to consumers, in both specialty (Clothing Stores, Jewelry Stores, Hardware Stores), and convenience stores (Gas Stations, Pharmacies, and Chains)

3rd Party Service Providers: This subset of companies focus on enabling other companies. Trucking companies that provide transport, staffing agencies that provide personnel, Cleaning companies that provide janitorial services, communication companies that provide networks of communication, etc.

Governments & Regulatory Bodies:While most wouldn’t consider the government part of their supply chain, it is important to note their contributions and effects on the supply chain. From providing infrastructure for businesses, regulating imports and exports, providing tax breaks, and mediating between company and consumer, government can be just as crucial for business decisions as any other aspect that directly affects the bottom line.

Now that we’ve established who the players are, let’s analyze the different types of bonds that tie all of these different supply chain steps together.

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Photo by Pixabay on Pexels.com

Inter-organizational ties: These ties arise simply from being part of the same company. For example, Any given food manufacturing company may own their own farms, where it plants and harvest their produce, then manages the logistics to its processing plants, then distributes them to its distribution centers, then processes them to the customer. Though all this process these food companies maintained complete control of the produce until it was delivered to the customer. Within the company however the produce might have been produced by its agricultural department, then transactionally sold to its processing plants, then sold again to its distribution centers to be sold to the final customer.

The main benefit here is control. These companies can decide how much it needs to spend in transportation, the quality of its processes, the distribution of its products to different Geo-markets, it’s packaging and materials etc to align all these things seamlessly with its company values, mission statement, and performance goals.

Transactional ties: These ties are straight forward. Money in exchange for goods and services. Companies constantly interact with each other in a transctional basis for the tools, products, and services that they need to survive. These transactions tie supply chains together on the basis of direct purchases.

The benefits of transactional ties is the flexibility. The Ad-Hoc nature of these transactions allows for comparing spot prices to save costs, and purchase products and services as needed. Some downfalls of this method is the lack of customization. Buying products in the open market is constrained to only the products that other companies have produced. This is perfect for simpler or standardized industry products, but it creates issues as the product requirements becomes more complex.

Contract ties: These ties are stronger than the transactional ties as they are based on negotiated and personalized agreements between multiple companies. They’re often defined in terms of compensation, mutual expectations, distribution of risks, and contingency agreements for non-conformance.

This is perfect for longer term functional relationships, where a company can predict their needs, and leverage their demand with specific parties for mutually beneficial long term transactions, often encompassing hundreds, thousands, or even millions of individual transactions.

Partnership ties: The third tier of ties would be a partnership, where contracts are simply the starting point, but there is a higher level of informational exchange, combination of processes, mutual trust, and shared investments/risks.

A partnership has many benefits, particularly performance opportunities, investment power, and competitive advantages only available from continuous vested collaboration. As with any relationship, there are greater risks associated with these transactions so they’re often reserved for limited and necessary partner with which trust has been built over time.

Now that we’ve seen the different ties, let’s put the players and pictures together.

Supply Chain Picture

For any given product, there are millions of supply chain permutations that could have happened. Take for example the picture above. This is a simplified model of a supply chain we’ll use as a base for a few examples.

A Computer Picture:In this scenario, the raw resources are things such as copper, lead, aluminum, gold cobalt, nickel, iron, plastics (not a raw material, but common enough for the example). These combine to make different components, such as cables, chips, motherboards, resistors, etc. Depending on the geographic location of the raw resources, it might be convenient to combine those raw resources locally and manufacture them into components, then export them around the world for assembly. For example, let’s say we find the raw resources necessary for our products in Africa, India, and Europe. We’d source the raw materials locally, and have manufacturing plants in each of these countries. Then we’d ship everything to a centralized storage warehouse in India for consolidation, then to China for primary assembly. In China, we might need to add to the company’s unique components a few additional components such as casings, ports, and storage units, that are too expensive for us to manufacture ourselves. Once all of this is pre-built, we can consolidate and send to the United States for final assembly where we might add the final case, screens, the instruction manuals, power chargers, accessories, put it in a nice box with the safety cardboard cutouts for protection, and then send it to it’s local distribution warehouses in Texas, California, Memphis, and Wyoming. These distribution warehouses take our computers, along with every other product line we produce. They buy pallets, wrappings, paper, stickers, etc break down the full truckloads into individual orders and distribute to the whole sellers in the area for final sale to the customers.

Supply Chain Customization:

Using this example, let’s explore some of the leverages and controls we have. At the beginning of the chain, the first leverage we might have is sourcing decisions. It is up to us whether we want to use different companies to provide us with our raw resources, or invest in the required capabilities to produce our own. For resources with similar quality standards we might want to focus on cost. A second leverage we might have at this point, is to move from transactional acquisition of raw resources to contract, or partnership based, depending on the contracts and agreements, these may open way to a plethora of options and benefits. At the next step is manufacturing, which comes with a lot of it’s own levers and controls. Everything from, location of manufacturing facility, to factory layout, to resource management, storage, and workflow processes affect the final product. Finally towards the end of the supply chain the distribution process comes with more levers such as distribution channels, carrier decisions, and delivery options.

It is crucial for successful supply chain decisions to be data driven as it is difficult to perfectly understand all the moving parts that make up the complex interlaced processes that make all of this possible, therefore in-depth data analysis and continuous improvement are mandatory for continuous evolution and growth of successful enterprises.

The combination of all of these unique players, connections, and decisions make up the complex supply chains that are responsible for turning raw materials into every manufactured product that make our lives a little easier every day.

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Hopefully this article has been helpful in understanding supply chain a bit better, please feel free to contact me with any questions or suggestions at Hugo@dailygametheory.com

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