Reading: Components of a Supply Chain

The interconnected teams and organisations that comprise the supply chain provide a range of different functions. The supply chain for every organisation is different. In fact, each product can have different supply chain needs and challenges, resulting in distinct players. In general, the supply chain spans a fairly common set of functions that are accomplished in very different ways.

Sourcing and Procurement

Sourcing is the process of finding, evaluating, and engaging suppliers to provide goods and services to a business. Procurement is the process of purchasing goods and services. In a B2B sale, the procurement function typically manages both sourcing and procurement.

In the earliest days of the automobile, Henry Ford decided to own or control the full supply chain—from the mines that provided the ore to the factories that made the glass. Raw materials—iron ore, coal, and rubber, all from Ford-owned mines and plantations—came in through one set of gates at the plant while finished cars rolled out the other.^[1] Today it is exceptionally rare for a company to try to own all the raw materials for a physical product. Even software products use preexisting software frameworks and code.

Businesses have demonstrated success in managing external suppliers and have found it beneficial to source some materials and services, allowing them to focus on particular areas of specialisation. A business may choose to source raw materials that it does not own. It may also choose to outsource services that it could do itself, but has found it advantageous to source externally. Outsourcing is the process of contracting out a business process to another party.^[2]

When sourcing a product or service, businesses typically conduct a thorough analysis of their needs, evaluating material requirements, service requirements, and financial requirements. Next, the company will research potential suppliers, understanding what offerings exist in the market and how well they align with the company’s requirements. Often companies select suppliers based on existing relationships or on the results of the analysis they have done. At other times, the company may decide to go to a competitive bid and solicit proposals from several firms (Government entities are usually required to go through a public bidding process).

Whether it is through a formal bid process or through another market analysis, the supply chain team will analyse the capabilities of potential suppliers and craft a sourcing strategy. The company may prefer to build a deep relationship with a single supplier or work with multiple suppliers to benefit from different capabilities or reduce the risk of dependency. Then the team will negotiate contracts with the suppliers that align with the business needs.

Hewlett-Packard (HP) developed a framework for evaluating and managing suppliers called the TQRDC framework. Supplier contracts and evaluations addressed five factors: technology, quality, responsiveness, delivery, and cost. By negotiating supplier contracts with clearly defined goals and commitments for each of the five areas and evaluating performance over time, HP was able to engage more collaboratively with its suppliers to improve processes, relationships, and results continuously.^[3]

Demand Planning, Order Fulfilment, and Inventory

Demand planning begins early in the new-product development process to develop the business case; however, as the product reaches the market, the accuracy of the demand forecast becomes increasingly important.

The supply chain organisation contracts with suppliers to meet the projected demand. If the forecast is too high, the company not only loses revenue but may also incur costs for products that are never sold. If the marketer projects demand too low, then the company cannot fulfil orders, resulting in product shortages. This also results in lost revenue and negatively impacts the shopping experience of buyers. It’s difficult to forecast demand and get it just right.

Supply chain management can help with the forecasting and fulfilment process. If suppliers have visibility into the company’s forecast and sales data, they can react immediately when demand is high or low. Otherwise, suppliers will continue to produce and deliver at a level that is not aligned with the latest sales data or the revised forecasts. They will either be building or depleting inventory.

Inventory is an asset that is intended to be sold in the ordinary course of business. Inventory may not be immediately ready for sale and can fall into one of the following three categories:

• Be held for sale in the ordinary course of business
• Be in the process of being produced for sale
• Be materials or supplies intended for consumption in the production process^[4]

When managing the supply chain, many businesses opt for a just-in-time (JIT) inventory management approach. This means that the company will maintain very little inventory on hand at each stage of the supply chain. Let’s revisit a real example to see why this might be a good idea.

In our Monster Beverage channel example, we can see the product flow in the column on the left. If the manufacturer produces enough concentrate for the production of 100,000 Monster Beverages each week and sends them off with the transportation company, then over time, 100,000 beverages will be available to consumers each week. What if consumers only demand 40,000 beverages each week? Initially, there will be an extra 60,000 beverages in supermarkets, but they will quickly reduce their purchases to match demand. Next, the extra inventory is likely to build up with the bottlers, and lastly, in the warehouse. The manufacturer could overproduce for several weeks or more before realising that there is too much product and inventory.

If Monster uses a JIT inventory process, then new orders from the manufacturer will only be generated as stock is pulled from the warehouse, because the bottler requires it to fulfill orders from the supermarket. Each of the organisations in the supply chain will know when demand is slowing or growing and will be able to react more quickly to changes in demand.

Warehousing and Transportation

In the global economy, it is a significant challenge to transport and store commercial products. The supply-chain and logistics firm MWPLV International completed a comprehensive analysis of Walmart’s distribution network and found the following:

• Walmart and Sam’s Club distribution centres total 124.2 million square feet. If airlifted to Manhattan, they would cover nearly 19 per cent of the total borough of Manhattan.
• Approximately 81 per cent of the merchandise sold at Walmart is shipped through Walmart’s distribution network. The balance is serviced through direct store delivery, in which the manufacturer ships directly to the store.
• 42 regional distribution centres are 1.0–1.5 million square feet. Each has a mechanised conveyor system that sorts products to the correct loading dock for shipment. Each regional centre employs around 1,000 employees.
• The regional distribution centres are, on average, 124 miles from the Walmart stores that they serve.

A distribution centre is a warehouse or storage facility where the emphasis is on processing and moving goods to wholesalers, retailers, or consumers. As we see from the Walmart distribution network, warehouses are not only storage facilities. They are increasingly equipped with technology systems that support the efficient counting, management, and transportation of goods. In the warehousing and transportation process, the goal is to efficiently move the right product to the location where a customer will purchase it.

How are all of these products tracked? Each product has a unique identifier called a stock-keeping unit (SKU). The SKU is scanned and tracked at each step in the process from receiving, through storage, to retrieval and shipping. Once loaded onto the truck, the entire order is sent between the warehouse, the shipper, and the receiving company using another data format called Electronic Data Interchange (EDI). EDI allows the trucking company to know exactly what it is shipping, and it gives the sending and receiving companies detailed, real-time tracking and status reports.

Logistics and Information Management

The physical movement of goods is called logistics, and as you can guess, it is a staggeringly complex and important function. Imagine trying to keep track of all of this information—from the initial order forecast to production, warehousing, and transportation. It’s obviously not a job that a human, or even a team of humans, could easily do on a large scale. As global supply chains have grown more complex, businesses have created systems to manage and optimise their supply chains. In 2019, the market for supply chain management software exceeded $15 billion. ^[5]. Put simply, companies are buying expensive systems to help manage the complexity of the supply chain.

Have you ever tracked a package that you were sending or receiving and seen its progress through the supply chain? This is achieved using track-and-trace software that monitors the progress of physical goods through the supply chain process, typically using a radio-frequency identification (RFID) tag. Radio-frequency identification (RFID) utilises electromagnetic fields to identify and track tags attached to objects automatically. The tags contain electronically stored information. Passive tags collect energy from a nearby RFID reader’s interrogating radio waves. RFID tags are used in many industries. For example, an RFID tag attached to an automobile during production can be used to track its progress through the assembly line, and RFID-tagged pharmaceuticals can be tracked through warehouses during the supply chain process.

Information throughout the supply chain process is captured in systems that allow supply chain professionals to analyse results and identify improvements that will lead to more reliable, faster, and less expensive delivery to customers throughout the supply chain.