What Is the Supply Chain?

Being a consumer is easy. Click, swipe, insert, tap, scan, whatever—the product is yours. Making the product and getting it to you, on the other hand, is not quite as straightforward. We’re referring, of course, to this whole supply chain situation. What is the supply chain? Here’s an oversimplified primer.

 

The Basic Concept

Per our custom when it comes to money-related matters, we used Investopedia as a guide for the summary below. Wikipedia, of course, was also in the mix.

Supply chain refers to the set of activities required to transform raw materials into a finished product and deliver that product to an end customer.

A typical supply chain starts with the natural resources from which raw materials are extracted. After the materials are assembled into a product, transport of the product through a web of storage and distribution facilities ultimately brings it to the customer (whose purchasing behavior drives the entire chain in the first place).

In our complex world, supply chains can be equally complex, encompassing numerous businesses such as supply vendors, manufacturers, warehouses, transportation companies (across multiple modes), distribution centers, and retailers. Because many of these businesses outsource certain functions to third parties, the chain may start to look much more like a network. And holding up much of this network is good old-fashioned human labor.

A related word you may come across in this sphere is logistics. Depending on whom you ask, the concept of logistics is either interchangeable with supply chain or a subset of the supply chain that refers specifically to the movement, storage, and distribution of raw materials and finished goods from their point of origin to their final destination. Don’t sweat it if you don’t fully grasp this distinction—we don’t either.

 

The Importance

It goes without saying that proper functioning of the supply chain is critical for proper functioning of an economy. Given the complexity involved, there is ample opportunity for inefficiencies to develop. Limiting such inefficiencies is key to maintaining a timely production cycle and keeping costs down. The cost savings can then be passed on to the customer or simply maintained as profit.

With the above in mind, supply chain management (SCM) has become a science unto itself. The overarching goal is to match supply and demand without accumulating or exhausting inventory.

One way of thinking about SCM is to divide it into five parts: planning, sourcing (of raw materials), manufacturing, delivery, and returns (of defective or unwanted products). As such, opportunities for optimization include ensuring a reasonably priced source of raw materials, managing manufacturing costs, managing transportation costs, improving distribution flows, etc. Technology can often perform such analyses better than humans, explaining the proliferation of SCM technologies.

Ultimately, the competitiveness of a company may boil down to the success of these optimization efforts.

 

When Things Go Wrong

As a consumer, you’re unlikely to even think about the supply chain when things go as expected. That said, when the supply chain breaks down, you’ll notice. (Or at least you’ll notice that a lot of people are suddenly talking about the supply chain.) What exactly are the consequences of such a breakdown?

Compromise of the supply chain—for example, substandard raw materials and/or the need to rush a product to market after unexpected delays—can lead to a suboptimal product. The result can be unhappy customers, the need for a recall, or unwelcome lawsuits.

Furthermore, since efficiencies in the supply chain keep costs down, inefficiencies will do the opposite. In other words, if the cost of getting the product to the customer increases, the final cost to the customer will also increase. That’s called inflation.

 

So the next time you’re about to buy something, take a moment to appreciate the intricacy of our modern supply chain. Make sure to think about the large number of hardworking men and women who help make it all happen. Then go ahead and click and start complaining about how everything is so expensive.