How do supply chains work?

In what we know as the globalised market, businesses find themselves operating in different world zones, collaborating with an increasing number of suppliers, brokers and companies.

This challenging ecosystem is known as “supply chain”, and in our modern times it is the cornerstone for any business’ success.

From a global perspective, businesses have to tackle increasingly complex challenges, such as the acceleration in technological change, continuously growing client expectation and sharper competition from the global market. In this dynamic context an efficient supply chain is not simply a competitive advantage, but an essential requirement to stay relevant and sustainable.

Supply chain optimization does not just involve the transport of goods from A to B, but implies perfect synergy between a series of interconnected processes, which includes demand planning, inventory management, production, distribution and ultimately client satisfaction.

This highly articulated system involves suppliers, manufacturers, distributors and final customers, necessitating careful management, accurate forecasts and strategic planning.

What is a supply chain?

A supply chain is a complex system of activities, people, businesses, organisations, information and resources all involved in the production and distribution of goods or services from suppliers to the final customer.

As implied by the name, this “chain” involves a range of diverse players, including suppliers, distributors, resellers and producers, who work together to satisfy market demand.

Thus, supply chain management means the coordination and optimisation of all the phases within the process, such as production, procurement, logistics, distribution and inventory management.

In our globalised reality, supply chains can indeed become international, involving suppliers and commercial partners in different parts of the world, even at very long distances.

The main goal is to maximise efficiency, reduce costs, improve product quality and ensure client satisfaction.

How does it work?

Supply chains function via a series of interconnected processes which involve various activities and players.

Here is an overview of how they generally work:

  • Demand planning: this step involves forecasting the future demand of a product or service. Businesses generally analyse past data and market trends to forecast what quantity of a certain product will be requested.
  • Sourcing and Procurement: businesses identify and then collaborate with trustworthy suppliers to obtain raw materials and the necessary components for the production of goods and services. Contracts negotiation, supplier relationship management and quality evaluation are integral components of this process.
  • Production: once raw materials have been sourced, the companies need to produce the goods or services. This phase involves labour organisation, plant management and quality control to ensure that the products meet established standards.
  • Distribution and logistics: following production, the products need to be distributed to the sales points or directly to the clients. This process may involve warehouse management, goods transport via truck, ship or air, and inventory management to avoid excess or shortages.
  • Inventory management: this is vital within the supply chain. Overstocking may increase warehousing costs, whilst understocking may mean a loss in sales. Inventory management tools help to optimise the equilibrium.
  • Point of sale or final client: products reach the end user via wholesale/retail/online sales points. Client satisfaction is a key goal; thus, businesses need to ensure high quality products and on-time deliveries.
  • Feedback and optimisation: businesses collect client feedback and monitor supply chain performance via KPIs (key performance indicators). This data is used to bring continual improvement to the processes, optimising efficiency, reducing costs and improving service quality.

It is important to note that the supply chain may vary greatly depending on the industry and the types of products or services in question. Furthermore, digital technologies and information systems have permitted increased automation and better management of workflows with a supply chain.

How many supply chain models are there?

There are various supply chain models, each designed to satisfy specific needs and company goals. These models may vary according to industry or the product/service type, the complexity of the procurement systems or indeed other factors.

However, some of the more common supply chains are:

  • Continuous-flow model: designed for companies which produce standardised goods in high volumes. This supply chain model is extremely efficient and aims to minimise costs through mass production. Production, distribution and inventory management activities are highly optimised to ensure a continuous flow of products through the supply chain. Businesses which use this model are usually within the automotive or food industries, where large scale production is vital to reduce unit costs and maximise profits.
  • Fast model: aims at quickly satisfying client demand, particularly in sectors where product life cycles are short or where the client requests speedy delivery. This model focuses on flexibility and the ability to react quickly to market demand changes. Businesses which adopt this model are often producers of top-end fashion, consumer electronics or seasonal products, with rapidly deployable production capabilities and agile logistics to satisfy demand peaks and reduce delivery times.
  • Efficient model: focused on the reduction of operation costs and resource optimisation. This model is particularly suited to companies which operate in highly competitive markets with low profit margins. Efficiency is achieved via careful inventory management, production process optimisation and intensive supplier negotiations to gain competitive costs. Businesses which follow this model continually seek ways to improve operational efficiency and reduce waste.
  • Custom-configured model: is suitable for companies which produce highly tailored goods. In this model products are created according to the specific request of single clients. This necessitates a highly flexible and collaborative supply chain, with tight communication between clients, manufacturers and suppliers. Production runs are often on a commission basis and delivery times may vary according to client requirements. Luxury items, bespoke furniture or personalised software are all sectors that often adopt this model to satisfy the unique requirements of their clients.

Each supply chain model has advantages and challenges, and the choice of model depends on the specific requirements of the business, the type of product or service offered and the reference market. Some companies may use a combination of these models to optimise their supply chain according to changing market conditions.

To sum up, a well-managed supply chain can bring significant advantages in terms of efficiency, costs and client satisfaction; it is vital that the associated challenges are both recognised and managed to ensure optimal function and mitigate potential risks.

Prudent management, technological innovation and flexibility are the key tools for tackling the highs and lows of today’s supply chains.

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