Many of us, in some way, are familiar with the term “Supply Chain”… But just a few know what it means, and even fewer people have a full knowledge of how it works.
Next, this term will be defined in addition to analyzing the factors that come into play, its positive and negative points, the cares that must be taken and its importance within the complex dynamics of companies.
What is a supply chain?
We are all consumers and on a daily basis we buy different products and access all kinds of services, but… How many of us know the process by which that product comes to us or we can get a service? First of all, it will be necessary to clarify that it’s not a single process but a set of processes that complement each other, making what is known as a supply chain.
The supply chain begins with the collection of raw material, continues with its transformation to manufacture the product, the transporting of the merchandise to the point of sale and ends when the consumer purchases the product. It thus comprises the total cycle of a product and interrelates with other supply chains.
In this way, the end of the process for a supplier (the sale of the merchandise) is the beginning of the process for the customer (purchase of the raw material).
In the supply chain also come into play the operations necessary for an optimal distribution of the products, as well as the processes inherent to the sales stage (invoicing) and the post – sale stage (warranty), involving different levels of production. It’s precisely with supply chains that companies compete with each other since it determines the costs and quality of the products and services offered, as well as the speed to attend customer requirements.
Supply chain’s fundamental elements:
Supply
Activities and processes to obtain the raw material for the manufacture of the product.
Manufacturing
Refers to the process of making the product.
Distribution
Comprises the transport network that makes the products reach the points of sale and, from there, to the final consumer.
Musts of a supply chain:
Simplicity
The simpler the system with which a supply chain works, the more agile its operation and the lower its error rate.
Security
This is a key factor since it allows to control the production process.
Synergy
The joint action of different areas that takes part in the supply chain speeds up the process even more.
Flexibility
Implies several factors such as, for instance, having the option of using procedures different from the usual ones or following alternate routes, as well as making changes in the process without affecting the operation.
Coordination
It’s essential to have communication and cooperation among the different areas to obtain results. It’s precisely when there is no coordination that delays and confusion occur.
Focus on the client
The needs of the client must be the priority when carrying out any operation in any area.
Personalization
Basically, consists of modifying and adapting the product according to what the client requires.
Flows
Considers different factors: the raw material, the information, the resources invested, the deadlines and the decisions that must be made throughout the process.
Demand management
Refers to the proper management of resources to give a timely response to the orders. It must consider all kinds of customers, suppliers and means of distribution.
Agility
It’s extremely important to have a correct interrelation among the operations taking part of the process, avoiding interruptions and delays.
Supply chain’s goal is to satisfy the customer and plus:
- Ensure to deliver timely.
- Reduce the margin of losses.
- Speeds up the process of distribution and delivery of products.
- Optimize warehouse administration and inventory management.
- Coordinate the different processes through the appropriate communication channels.
- Serve as support when dealing with unforeseen events related to different factors such as the dynamics of supply and demand.
Supply chain’s features:
The commercial aspects
Which include the staff the company will need to distribute the merchandise, that is, the wholesalers and retailers.
The physical aspects
The activities that ensure the correct supply to the intermediaries, that is, the transport network, inventory management, purchase order management, the storage and the handling of the merchandise.
Types of supply chain
Traditional
Each of its parts works as an independent unit. However, since its parts are not related, more failures occur. That’s why mainly small companies uses it.
Direct
The one with the simplest composition since only three parties are involved: supplier, company that offers the product and consumer. It reduces failure rate due to its simplicity, also reaches greater efficiency and the general process is more agile.
Strategic
It’s based on an action plan that companioes traces taking as base the location of the point of sales. Thus, costs are reduced, although it’s the type of supply chain that most time demands.
Shared
When the different parties involved in the production work are coordinated to advance the supply process. It works with a database through which is possible to share information that is also permanently available for all parties.
Synchronized
When working with very high levels of demand, which implies a constant flow of information among all components. It requires the use of technologies that allow access to the available information and even modify it if necessary.
Complex
Quite frequent in large companies which handle different product lines and also have a large number of suppliers.
Supply chain activities
The structure of supply chains can also vary depending on the product or service provided. That’s how necessary elements of a supply chain at a given moment may not be mandatory for another situation.
In the same way, supply chains can vary depending on the type of company. Thus, the supply chains of service companies tend to be shorter and follow a hierarchy, while those of industrial companies handle a lot of logistics depending on the raw material they handle, their production lines and the target market they have for the product or service. Finally, the trading companies have very little elaborate supply chains because they barely use stock.
Operations that are essential and common to all supply chains
- Planning.
- Stock management.
- Purchase orders processing.
- Transfers and dispatch management.
- Monitoring and control.
- Customer service.
- Warranty management.
- Payment processing.
For these reasons, logistics becomes a key element in the process. Both terms, logistics and supply chain, are usually confused.
Supply Chain Vs. Logistics
Logistics takes care of the inventory management processes such as storage, transportation of merchandise and customer service. In other words, logistics has the goal of satisfying the demand for a product or service as quickly as possible.
Logistics is only one part of the supply chain and these two terms, far from being antagonistic, complement each other. It’s also directed by logistics manager who supervises the product cycle from its arrival at warehouses to the customer’s purchase. For its part, the Supply Chain director contacts the suppliers and is in charge of the manufacturing and distribution processes.
While logistics reduces distribution costs, supply chain reduces raw material costs and controls production times, ensuring accomplishment of logistics’ function.
Advantages and difficulties
Increases efficiency and quality of the service
When it works properly, errors and failures in the production and distribution of the merchandise or the provision of the service are avoided, which is essential, not only for satisfying, but also to reinforce customer loyalty.
Maximum use of the distribution network
Increases the competitiveness of the company, not only at a local level, but also within the international market.
Inventory management is improved
It allows managing the reception and storage of merchandise in a more agile way, also reducing storage periods. It also allows tracking deadlines such as delivery or shipment dates.
Speeding up merchandise delivery
In cases where a customer needs an order urgently, supply chain allows it to arrive even faster regardless of distance.
Communications among the different areas of the company are improved
This allows real – time access to financial and operational information.
A properly functioning supply chain can generate considerable profits as long as the volume and pace of production are regulated. That’s how it’s possible achieving a reduction in expenses which generates up to 60% savings in transportation and distribution costs.
Risks
Coordination risks may arise
This mainly affects companies with clients abroad. These risks include: language barrier, time difference, cultural factors etc.
Access is difficult for SMEs (Small and medium sized enterprises)
The most powerful distribution chains are usually already taken by large corporations, which complicates access for medium and small companies.
The legal aspect can make processes difficult
Tegislation is another aspect to consider and it’s important that the supply chain includes it, since custom laws or policies can delay or hinder the departure and/or entry of the merchandise.
Planning in supply chains
For a supply chain to work properly, it must be part of a planning, execution and control project.
Planning includes analysis of demand and supply; the execution concerns the physical part of the process and the control refers to the estimation of the process based on specific indicators. The three elements of the project respond to the need to check and record the operation to correct failures and optimize the process.
Supply chains must also deal with certain unforeseen events related to the availability of raw materials, points of sale, the distribution process, taxes and fluctuations in the market and in the value of currencies.
It’s precisely from this need to constantly improve its response capacity and maintain a good level of competitiveness that derives the importance of including new technologies and digitizing the operations that come into play in the dynamics of supply chains, mainly to fully satisfy the consumer needs. For this reason, managing inventory and anticipating process requirements become a key factor as well as a challenge for companies.
The goods and the bads
The lack of communication among areas is usually the factor that most affects the supply chain operation. For this reason, using a cloud allows different areas to access the information, guaranteeing correct functioning of the supply chain. It’s also important to verify the data and information that serve as basis for making decisions since, by not doing it, errors and confusion arise.
Having a contingency plan also shields the supply chain from any difficulty or unforeseen event, knowing clearly what the response will be in each of these situations without hindering the company’s operations.
It’s also useful to base the supply chain on a structure that adapts to the particular needs of each company. There are not fixed rules to implement this structure, which makes it so important to know the nature of the company and its specific needs to implement a structure that really optimizes the supply chain operation.
Many companies point out the fact of using manual processes as a determining factor in limiting control over the supply chain. Companies can solve this problem, as well as the lack of coordination, implementing software to manage their supply chain.
Software use would also helps to save time and minimize or even completely eliminate the rate of failures that would occur if these same tasks were performed by humans. It is recommended to use technology only in those processes that require it, to help reducing dependency on it.
It’s important to maintain good relations with suppliers, since it guarantees obtaining quality raw material and in optimal delivery times. It’s also relevant to have constant and effective communication.
Would be advisable to go to suppliers, not only when raw material is needed, but also in search of advice regarding different aspects, since this helps to speed up processes and reduces costs.
Also read: How to manage your pending tasks and not fail
Likewise, it’s advisable to manage contracts because it allows you to control costs. Many of these procedures are occurring at the time of acquisition but, due to a lack of communication, they tend to remain empty spaces which can be avoided with efficient contract management. This management also reduces unnecessary costs and risks.
In relation to the inventory, it’s advisable achieving a balance between the two possible extremes in which an inventory can fall: having too little and having too much. Always remember that storage costs can constitute up to 60% of the cost of a product.
To effectively manage an inventory, it’s important to have a system that allows us to predict fluctuations in demand and also compare this data with previous records. Companies should consider that adequate inventory management, based on demand and on an analysis of the indicators, prevents the lack of stock, which is one of the main difficulties that may arise.
It’s extremely useful to constantly watch the procedures occurring in the supply chain to ensure that it’s working properly and avoid delays and reduce the risk of robbery or fraud. In the same way, it’s essential to know the target client and market in order to direct the supply chain to satisfy the needs within the deadlines.
It’s best to pay attention to the sustainability aspect, trying to reduce CO2 emissions and even conceive transport and distribution systems that are friendly to the environment. The staff in charge of the supply chain can design policies that seek to cushioning the environmental impact of the supply chain.
In the case of very large companies, it’s a booster to hire an external logistics service avoiding failures and reducing costs. it’s also advisable to hire a transport service to keep a better control of the shipped merchandise.
The optimization
In a few words, for the correct optimization of a supply chain, it’s necessary, above all, to find a balance between customer satisfaction and profitability.
On the other hand, it’s essential to define a strategy to manage the supply chain and, in parallel, promote coordination and cooperation between the different areas involved. But the most important thing is to have the necessary technology to automate processes and even offer alternative communication channels, which also implies the use of specialized software.
Optimization phases:
Design of the supply chain
To define the network, the transport and storage of the merchandise and the production guidelines.
Planning of the supply chain
Considers the creation of a strategy that allows the implementation of the supply chain.
Execution of the supply chain
It involves the operations necessary to start the supply chain.
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