221 Reading: Components of a Supply Chain
The interconnected teams and organizations that comprise the supply chain provide a range of different functions. The supply chain for every organization is different. In fact, each product can have different supply chain needs and challenges, leading to different 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 the goods and services. In a B2B sale, the procurement function will usually manage both the sourcing and the procurement functions.
In the earliest days of the automobile, Henry Ford made a decision 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 shown success in managing external suppliers and have found that it is beneficial to source some materials and services in order to focus on particular areas of specialization. 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 advantageous to source externally. Outsourcing is the process of contracting out a business process to another party.[2]
In sourcing a product or service, businesses will generally conduct a thorough analysis of their needs, evaluating the material requirements, the service requirements, and the financial requirements. Next, the company will research potential suppliers, understanding what offerings exist in the market and how well they seem to match with the company’s requirements. Often companies select suppliers based on existing relationships or on the results of the analysis they have done. Other times the company may decide to go to a competitive bid and solicit proposals from a number of firms (Government entities are usually required to go to public bid).
Whether it is through a formal bid process or through another market analysis, the supply chain team will analyze 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 a number of different 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 goals and commitments identified for each of the five areas, and evaluating performance over time, HP was able to engage more collaboratively with its suppliers to continuously improving processes, relationships, and results.[3]
Demand Planning, Order Fulfillment, and Inventory
Demand planning begins early in the new-product development process in order to develop the business case, but as the product goes to market, the accuracy of the demand forecast becomes much more important.
The supply chain organization 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 fulfill orders, resulting in product shortages. This also results in lost revenue and negatively impacts the buyers’ shopping experience. It’s difficult to forecast demand and get it just right.
Supply chain management can help with the forecast and fulfillment 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]
In managing the supply chain, many businesses prefer to use a just-in-time (JIT) inventory management approach. This means that the company will keep very little inventory on hand at each step in 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 there will be 100,000 beverages each week available to consumers. What if consumers only demand 40,000 beverages each week? Initially, there will be an extra 60,000 beverages in supermarkets, but quickly the supermarkets will 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 beginning to realize 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 organizations 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 our global economy, it is a huge task 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 centers total 124.2 million square feet. If airlifted to Manhattan they would cover nearly 19 percent of the total borough of Manhattan.
- Approximately 81 percent 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.
- There are 42 regional distribution centers that are 1.0–1.5 million square feet. Each has a mechanized conveyor system that sorts products to the correct loading dock for shipment. Each regional center employs around 1,000 employees.
- The regional distribution centers are, on average, 124 miles from the Walmart stores that they serve.
A distribution center is a warehouse or storage facility where the emphasis is on processing and moving goods onto 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 it will be purchased by a customer.
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 on 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.
Amazon’s One-Day Delivery
You can view Amazon’s delivery process in the video below. Note that at 10:47, the video shifts to discuss the working conditions in Amazon’s fulfillment warehouses.
You can view the transcript for “How Amazon Delivers On One-Day Shipping” here (opens in new window).
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 optimize the supply chain. 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 done using track-and-trace software that monitors the progress of physical goods through the supply chain process, often by means of a radio-frequency identification tag. Radio-frequency identification (RFID) uses electromagnetic fields to automatically identify and track tags attached to objects. 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 in the supply chain process.
Information throughout the supply chain process is captured in systems that allow supply chain professionals to analyze results and identify improvements that will lead to more reliable, faster, and less expensive delivery to customers throughout the supply chain.
- National Science Foundation [NSF]. (n.d.) Manufacturing: the forms of things unknown. https://www.nsf.gov/about/history/nsf0050/pdf/manufacturing.pdf ↵
- Oxford English Dictionary (3rd ed.). Oxford University Press. September 2005. ↵
- http://www.bmpcoe.org/bestpractices/pdf/hp.pdf ↵
- http://www.accountingtools.com/dictionary-inventory ↵
- McCrea, B. (2020, September 4). The Continuing Convergence of the Public Cloud and Supply Chain Management Software. Supply Chain 247. https://www.supplychain247.com/article/the_continuing_convergence_of_the_cloud_and_supply_chain_software. ↵