Glossary > Supply Chain

Supply Chain

Reviewed By Eyal Orgil Published November 21, 2024

What is a Supply Chain?

A supply chain is a network of individuals, organizations, resources, activities, and technologies involved in the creation and sale of a product. It encompasses everything from the delivery of source materials from the supplier to the manufacturer to the eventual delivery to the end user.

Processes involved in the supply chain include:

Sourcing raw materials
Procurement
Production
Logistics
Inventory management
Distribution

Supply chains can be complex, spanning multiple countries and involving intricate relationships between several different companies. And since supply chain activities are your primary cost drivers, managing and optimizing them through supply chain management is one of the most important aspects of running your business.

Synonyms

Value chain
Supply network
Logistics network

The Building Blocks: Components of a Supply Chain

Broadly speaking, there are seven distinct elements making up a supply chain:

Suppliers
Manufacturers
Warehousing
Logistics
Retailers
Distributors
Consumers

Let’s dive more into each one and how they play a role in the overarching system.

1. Suppliers

Suppliers are the sources of raw materials or components. They’re positioned at the very beginning of the supply chain, and have a direct impact on the quality and availability of the input materials used in the production process.

There are three kinds of suppliers:

Primary suppliers provide essential raw materials directly used in production (e.g., lumber for furniture manufacturing).
Secondary (tier 2) suppliers supply materials to primary suppliers, adding another layer to the chain (e.g., mining companies providing ore to metal refineries).
Service providers offer services that support the supply chain, such as logistics, packaging, or quality control.

Depending on whether you produce goods yourself or outsource production, you might have different relationships with your suppliers. Some manufacturers also integrate vertically and produce their own raw materials.

2. Manufacturers

Manufacturers transform raw materials into finished, market-ready products. They can vary in size and be anything from small workshops to large multinational corporations. They come after suppliers and serve as the bridge between sourcing materials and distribution.

There are a few different types of manufacturers:

Original equipment manufacturers (OEMs) produce parts or products that other companies sell under their own branding (e.g., car part manufacturers).
Contract manufacturers are B2B manufacturers that provide manufacturing services for other companies that do not have their own production facilities (e.g., electronics companies outsourcing phone assembly).
In-house manufacturers produce their own goods for sale without outsourcing production (e.g., furniture companies that build their products from raw materials).

The manufacturer’s business model determines whether they sell their finished products to wholesalers, retailers, or directly to consumers. For instance, a clothing manufacturer might sell products to an ecom brand, while a consumer electronics brand might distribute products to retailers like Best Buy or Target.

3. Warehousing

Moving down the supply chain, you have warehouses. A warehouse stores goods until they are needed for distribution. Warehouses help manufacturers and retailers manage inventory levels and ensure that products are ready for distribution when they’re needed (it would be impossible to store or transport all finished goods at once).

There are different types of warehouses, depending on your supply chain strategy:

Distribution centers are designed for the rapid movement of goods and are more focused on fulfilling orders quickly. They often serve as a hub for shipping goods to retailers or customers.
Private warehouses are owned and operated by businesses for their specific storage needs. These are typically used by large organizations that require control over their warehousing.
Public warehouses are operated by third-party providers and rented by businesses that need storage but don’t want to own or operate their own facility.
Bonded warehouses store imported goods for which duties are unpaid. They allow importers to delay customs payments until the goods are sold.
Smart warehouses use advanced technologies such as automation, robotics, and AI to enhance inventory management and order fulfillment processes.

Warehouses handle the processes of receiving, storing, and shipping inventory. They’re closely intertwined with logistics and transportation and play a crucial role in the order orchestration process.

4. Logistics

Logistics is the process of planning, implementing, and managing the efficient movement and storage of goods, services, and information from the point of origin to the final destination, typically the end consumer.

To distribute products from your warehouses, there are several factors at play:

Inbound logistics deals with the receipt and transportation of raw materials and components to manufacturers or production facilities. It includes sourcing, procurement, and transportation management.
Outbound logistics manages the movement of finished products from manufacturing plants or warehouses to customers or retailers.
Third-party logistics (3PL) is when you outsource their logistics functions to third-party service providers that specialize in transportation, warehousing, and distribution.
Fleet management is an internal process that involves overseeing the vehicles used for transporting goods, including maintenance, fuel management, and routing.
Reverse logistics handle the return and recycling of products and materials, handling customer returns, repairs, and recycling or disposal of items.
Order processing systems automate the process of order receipt, tracking, and fulfillment to improve speed and accuracy.

These processes ultimately work together to streamline order fulfillment and ensure you can meet consumer demands for fast, efficient delivery.

5. Distribution

Distributors are the intermediaries who move products from manufacturers to retailers or end-users. They purchase products in bulk from manufacturers and distribute them in smaller quantities to retailers or directly to customers.

There are a few different kinds of distributors:

Wholesalers purchase products in large quantities and resell them in smaller amounts to retailers. Wholesalers are often associated with bulk transactions and significant product variety.
Retail distributors work directly with manufacturers and sell products to the final consumer through retail channels.
Value-added resellers (VARs) provide additional services or products to complement the goods they sell, such as bundling software with hardware or offering customization.
Exclusive distributors have exclusive rights to sell a particular product or brand within a specific region or market, which can help you penetrate specific markets with focused strategies.

Distributors also sometimes provide customer service, including technical support, product training, and after-sales assistance, adding value to the supply chain. And some handle logistics and warehousing, eliminating the need for a separate entity to handle this.

6. Retailers

Retailers are the businesses that sell products directly to consumers. They can be brick-and-mortar stores, online businesses, or a combination of both (omnichannel). You might be a direct-to-consumer (DTC) brand selling directly to consumers through your own channels, or you might sell through retailers like Amazon or Target.

Examples include department stores, specialty stores, supermarkets, and e-commerce platforms.

As a retailer, you’ll handle everything that comes with selling the product:

Sales, marketing, and promotions
Product selection and display
Customer service
Customer success (in B2B)
Data on consumer preferences, trends, and feedback

To succeed, retailers have to maintain good relationships with the rest of their supply network. That means monitoring stock levels, returns, and customer feedback to ensure the supply chain functions smoothly.

7. Customers

Your customers are the final recipients of your product or service. The end goal of the entire supply chain is to deliver a quality product or service that meets their needs and expectations. They are an essential consideration at the end of the supply chain because they’re the sources of feedback you can use to improve your products and supply chain processes.

To manage your supply chain and improve your product over time, you need to know the…

Preferences
Behaviors
Motivations
Pain points

…of your customers.

You also need to understand market demand and how it relates to your sales and inventory levels. This information can help you forecast, plan production schedules, and avoid stockouts or overstocking.

The Flow of Goods and Services: The Supply Chain Process

Regardless of the industry, company size, or supply chain complexity, the general supply chain process involves five main steps:

Planning
Sourcing
Production
Delivery
Post-purchase

1. Planning

In the planning, phase, you define your supply chain strategy and goals, forecast demand, and determine the resources you’ll need to meet that demand. You’ll also identify potential risks and create contingency plans to mitigate them.

Planning also involves selecting suppliers, distributors, and retailers based on criteria like quality, cost, production capabilities or capacity, location, and delivery times.

If you’re building a unique product, the initial phase also involves product design and development. Prototyping, testing, and finalizing product specifications all happen here.

2. Sourcing

The sourcing step involves securing the raw materials or components needed for production. It’s a critical step as it directly affects production costs, lead times, product quality, and customer satisfaction.

When it comes to sourcing, the first step is finding a reliable supplier who can provide high-quality materials at a reasonable cost. You’ll also need to negotiate contracts, set up payment terms, and establish delivery schedules according to your forecasted demand.

3. Production

In the production phase, the manufacturer produces the final product, either through its own facilities or by outsourcing to a contract manufacturer.

This step involves:

Managing production schedules
Quality control
Optimizing inventory levels to ensure timely delivery while minimizing waste

If you have a complex supply chain, the production process may involve multiple stages and require coordination with various suppliers and distributors.

4. Delivery

Delivery is all about getting the finished product into the hands of your customers. This step includes:

Packaging and labeling
Logistics planning (shipping, transportation, warehousing)
Managing inventory levels to meet demand and avoid stockouts/overstocking
Tracking and monitoring shipments to ensure on-time delivery

Your delivery process might be completely in-house, or you can outsource it to a 3PL.

5. Post-purchase

After the customer receives your product, you have to have the infrastructure in place to handle any post-purchase issues that may arise.

This includes:

Processing returns
Providing customer service and technical support
Collecting feedback and analyzing it for product improvements
Managing warranties or guarantees (if you have any)

A well-managed post-purchase stage can lead to increased customer satisfaction, loyalty, and repeat business.

Orchestrating the Process: Supply Chain Management

Supply chain managers are the ones who oversee the entire supply chain process, from planning to post-purchase. They handle relationships with suppliers, manufacturers, distributors, and retailers to ensure a seamless flow of goods and services.

Key functions of supply chain management include:

Demand forecasting and planning, using data from sales, marketing, and customer feedback
Strategically selecting the right suppliers and negotiating contracts that align with their supply chain goals
Managing and optimizing inventory levels to match consumer demand and minimize the costs of excess inventory or stockouts
Ensuring timely delivery and managing any issues that come up during the process
Continuously monitoring and analyzing the supply chain for potential improvements, cost reductions, and efficiency gains

To handle all of this in one place, businesses use cloud technologies that centralize their supply chain data, automate processes, and facilitate collaboration with suppliers and other partners.

The Hurdles: Common Supply Chain Challenges

Of course, businesses face plenty of challenges when it comes to producing a product and getting it in the hands of your end user.

Disruptions like natural disasters, factory fires, and political instability can lead to production delays or shortages.
Quality control issues force you to send products back to your suppliers or make repairs, when they give you subpar materials or product components.
Supply chain visibility gets more and more complicated as supply chains become more global, complex, and multilayered. You may struggle to get real-time data about your inventory levels, shipment status, and performance metrics.
Demand forecasting and inventory management are inexact sciences that change with the market, customer preferences, and economic conditions. Especially as a new company, you may end up with too much inventory or not enough to meet demand.
Sustainability is a top concern for regulators and your customers — two-thirds of consumers say they prioritize environmentally-friendly options when making purchasing decisions.
Social considerations like workers’ rights and ethical sourcing are important if part of your supply chain is overseas in a country like China or Vietnam.

You also have the issue of risk management. You have to perform risk assessments that account for all kinds of potential supply chain disruptions and develop contingency plans to mitigate them. This requires collaboration with different partners, thorough data analysis, an agile supply chain that can adapt to unforeseen circumstances.

Different Approaches: Supply Chain Models

You can either use the push, pull, agile, or lean model to design your supply chain. Each has its own strengths and weaknesses.

1. Push model

A push supply chain involves producing goods based on demand forecasts and pushing them out to distributors and retailers. Its primary goal is to preemptively stock inventory to meet expected sales, thereby minimizing delays in product availability.

The push model is good for products with stable demand, long lead times, and low levels of product variety. For instance, if you manufacture durable goods like appliances or automobiles that tend to have consistent demand with predictable seasons (e.g., more AC units sold in the summer), this will help you prepare well in advance for the expected demand.

2. Pull model

The pull supply chain is all about responding to actual customer demand. Instead of making products and then trying to sell them, you use data on consumer behavior to create and move products closer to the customer as needed.

The pull model is great for high-variety or customizable products with unpredictable demand. Examples of this include print-on-demand merchandise, food and beverage, fashion apparel, and consumer electronics. Make-to-order products are also typical candidates for pull supply chains.

3. Agile model

The agile model in supply chain management is a flexible, responsive approach that focuses on quickly adapting to changes in customer demand and market conditions. Unlike traditional supply chain models, which are at least somewhat rigid and forecast-driven, the agile model prioritizes speed, adaptability, and responsiveness to ensure that supply chain operations can pivot as needed.

Generally, the agile model works best for companies with large, diversified product portfolios and multiple revenue streams. Walmart, Apple, Amazon, and major fashion retailers like Zara and H&M are good examples of agile supply chain leaders.

4. Lean model

Lean supply chains seek to minimize waste and reduce costs by using lean principles:

Waste reduction (known as “muda” in lean terminology)
Continuous improvement (Kaizen)
Just-in-time (JIT) production
High quality standards
Employee involvement

To implement a lean model, you have to map out the operational value stream, produce using the “pull” system, and use visual management to monitor and optimize your processes.

The lean model originated from manufacturing, particularly with Toyota’s Production System, making it ideal for companies producing standardized products where efficiency is key. Auto, electronics, food and beverage, healthcare, and retail industries are good contenders for the lean methodology.

Best Practices for Optimizing Supply Chain Performance

Your ability to run an efficient supply chain operation ultimately comes down to your ability to collaborate with supply chain partners, leverage technology, mitigate risks, and achieve sustainability.

Here are some best practices to follow:

Go beyond simple forecasting.

Use predictive analytics not just for demand forecasting but for scenario planning.

This involves building multiple “what-if” scenarios to prepare for potential disruptions, like geopolitical events, natural disasters, or sudden market shifts. By integrating machine learning algorithms, you can continuously refine predictions based on new data inputs.

From there, optimize your buffer stock levels dynamically based on the predictive insights, allowing for adjustments in real-time to mitigate risks without overstocking.

Diversify your supplier ecosystem.

Establish relationships with multiple suppliers, including primary and secondary sources, across different geographies to mitigate risk. Include backup suppliers that may be smaller or less conventional but can step in during emergencies.

Work with suppliers on joint process improvements and data sharing to create transparency and reduce lead times. For instance, using CPQ (configure, price, quote) software with vendor integration and ERP (enterprise resource planning) systems streamlines the data and operational flow between you, your suppliers, and your customers.

And, most importantly, make sure to regularly audit suppliers not just for quality but for resilience factors like financial health, capacity constraints, and political stability in their regions.

Adopt circular economy practices.

Integrate processes for product returns, recycling, and refurbishment into your supply chain. This not only enhances sustainability but also reduces the reliance on raw materials.

You should also develop specialized reverse logistics frameworks for efficiently managing the collection, transport, and processing of returned goods. Include analytics to understand return trends and optimize routes.

Use AI for predictive maintenance.

Deploy AI-driven predictive maintenance tools to monitor the health of critical equipment in real-time. This reduces unplanned downtime, which can create bottlenecks in production and distribution.

It’s also a good idea to create digital twins of supply chain assets to simulate operations, predict failures, and optimize maintenance schedules based on real-time data.

Optimize last-mile delivery.

It’s wise to implement smaller, urban-based fulfillment centers in order to minimize the distance to the consumer and reduce delivery times. This can be combined with automated solutions like robotics for faster processing.

You can also use crowdsourced logistics for peak times to scale capacity flexibly. Platforms can tap into independent contractors or local delivery services to expand reach without additional infrastructure investments.

Balance cost efficiency with agility.

Balance just-in-time (JIT) methods with just-in-case (JIC) buffers for critical or high-demand items to ensure continuity during disruptions.

And implement a demand-driven model where inventory replenishment decisions are based on real-time sales data and predictive analytics, ensuring rapid response to changes without excess stock.

Use route optimization tools and techniques.

You can implement route optimization algorithms that adapt in real-time based on current traffic, weather, and road conditions to ensure timely delivery. And you can optimize loads using AI-driven tools that consider weight distribution, delivery times, and vehicle capacities to reduce fuel consumption and costs.

Integrate sustainability beyond compliance standards.

Integrate carbon footprint tracking tools within the supply chain to monitor and report emissions at each stage. Based on this data, optimize your processes to reduce their individual environmental impact.

It also helps to partner with suppliers who have strong sustainability commitments. You can even provide incentives for suppliers to meet specific environmental goals, ensuring alignment with your sustainability objectives.

Implement risk management protocols.

You have to regularly assess risk at each stage of your supply chain, from sourcing to last-mile delivery. Financial risk of suppliers, geopolitical risks, and environmental threats are all considerations deserving of your attention.

We recommend using AI tools that monitor global events and potential disruptions in real time and provide actionable insights to pivot operations before significant impacts occur.

And IoT sensors can help you monitor things like temperature, humidity, and movement of products on their route from factory to customer. Collect and analyze IoT data for predictive actions, like rerouting shipments that are delayed or adjusting warehouse conditions to prevent spoilage.

The Future of Effective Supply Chain Management

The main takeaway from this discussion is that supply chain management is a continuous process of optimization and adaptation. As technology evolves, so will the tools and techniques used to manage the supply chain. And as markets become increasingly globalized, managing risks and disruptions will become even more critical.

As for opportunities, there are plenty.

The deployment of advanced robotics and automated systems is revolutionizing supply chain operations. For instance, Amazon’s extensive use of warehouse robots has significantly enhanced fulfillment efficiency, reducing processing times and operational costs.
AI-driven analytics enable real-time demand forecasting, dynamic inventory management, and predictive maintenance. Companies like McKinsey have highlighted AI’s potential to add substantial value to supply chain operations through enhanced decision-making and operational efficiency.
Implementing blockchain technology ensures transparency and traceability across the supply chain. This is particularly beneficial in industries requiring stringent compliance and ethical product sourcing, as it provides an immutable ledger of transactions.

Innovation is pivotal when it comes to enabling supply chains to adapt to volatile market conditions and evolving consumer preferences. Today’s companies have to embrace digital transformation — those that proactively integrate new tech and best practices will achieve the greatest operational efficiency, customer satisfaction, and competitive advantage in the dynamic global marketplace.