Supply Chain Overview: How a Supply Chain Works

A supply chain is the network of raw materials, processes, and information systems that a company uses to make and deliver a finished product (like a computer) or a service (like healthcare) to the end user. Organizing this process for any business requires efficient operations management and reliable supply chain partners (like suppliers or vendors) to streamline production lifecycles and reduce costs for businesses.

Other variables in a company’s supply chain can include production facilities (where the manufacturing process takes place), warehousing and inventory management (to store products and track inventory levels), and logistics management (to transport the product from its distribution center to the end user).

While they sound similar, the value chain is different from the supply chain. Value chain activities—like new product development or marketing—add value to a product, while supply chain systems physically produce the good and deliver it to the buyer.

The purpose of a supply chain is to manufacture a final product or service from raw materials, manage product inventory, and distribute it to the consumer. Efficiently running this process allows a business to meet fluctuating customer demand while keeping costs for the business low.

Here are a few advantages of a well-operated supply chain.

• Affords a competitive advantage: Especially for two similar companies, better supply chain planning enables one company to meet customer needs in a superior fashion. This type of planning often involves using the supply chain to enhance the customer experience by reducing shipping costs and offering real-time product tracking and traceability. Supply chain professionals must constantly think about ways to adjust the overall business strategy to reduce lead time and waste.
• Ensures efficient manufacturing and distribution of goods: A well-oiled production system incorporates risk management contingencies to help safeguard against supply chain disruptions and bottlenecks. These systems—like accurate inventory management and favorable supplier relationships—allow a company to manufacture its product and meet consumer demand even in the face of supply chain challenges, like raw material shortages and unstable market conditions. Supply chain managers must constantly remain one step ahead of anything that can disrupt manufacturing, distribution, or logistics.
• Maximizes profits: Effective supply chain management (SCM) can lower costs and maximize profits, allowing a business to produce goods inexpensively while maintaining high customer satisfaction. Effective management keeps prices low and ensures the highest product quality possible. Figuring out whether to contract an outside partner or lean into vertical integration (which involves producing and distributing the product in-house) is an essential part of determining the cost structure for a product.

Here are three examples of different types of supply chains that involve other business processes.

1. 1. Continuous flow model: This supply chain strategy applies to a seller or manufacturer that repeatedly manufactures the same suite of products with slight variation and stable customer demand. This model requires constantly replenishing raw materials to manufacturing sites and maintaining a steady “flow” of resources to the factory, products from factory to warehouse, and products from warehouse to the end customer.
2. 2. Fast chain model: This model’s supply chain activities involve conceptualizing, manufacturing, and distributing different versions of a final product based on constantly evolving trends. In an era of massive digital transformation, e-commerce fast-fashion retailers are prime examples of this model.
3. 3. Flexible model: A flexible supply chain model coordinates its business processes to meet fluctuating levels of customer demand across seasons. It may not be cost-effective to maintain and operate facilities year-round for flexible model businesses. However, they must remain ready to start production and distribution whenever consumer demand spikes.

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