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What Is The Supply Chain?

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What is the supply chain?
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What is the supply chain? A supply chain is a global network used to deliver products and services from raw materials to end customers through engineered information flow, physical distribution, and payment for a product.

A very basic supply chain management consists of three entities, namely producers with one supplier and one customer. The basic flows that link supply chain entities together are as follows:

  • The flow of physical materials and services from suppliers to end customers 
  • Cash flows from customers to suppliers of raw materials 
  • Information flow back and forth along the supply chain and product returns


Basic supply chain management consists of entities, as in the image below:


A seller is a supplier who provides goods and services or the person or organization with whom the buyer does business. Their general term in the marketplace is a supplier that is a person providing energy services, raw materials, or components for products or services such as electricity, fabrics, plastics, cabling, or airplanes. 


Producers are parties who receive components from sellers to produce finished goods or services, such as shirts made of cloth, plastics, electricity cables, or provide transportation by airplane. 


Customers are people who receive the finished product, namely people who wear the shirt, people who use glassware, people who turn on the lights, or those who fly on an airplane.


There are three types of supply chain strategies, including:

  • Stable
  • Reactive Supply Chain 
  • Efficient Reactive Supply Chains

Stable supply chains are suitable for supply chains that focus on efficiency of execution and cost performance. They use simple connectivity technology and have little need for real-time information, for example, table salt producers use scale production and specialized capital assets.

Reactive supply chains work best when the supply chain acts to meet demand from trading partners, for example, a manufacturer of sports team apparel for fans when it seems that they are going to the next round so more product is needed. On the other hand, the request for the losing team will almost certainly disappear. 

An efficient reactive supply chain focuses on efficiency and cost management on the total cost of delivering finished goods. For example, in a supermarket chain distribution center, logistics providers and producers work together to replace goods sold in stores in less than 24 hours. 


There is four flow in the supply chain, namely: 

1. Information Flow

Which includes the flow of information, among others, sales invoices, literature specifications for order acceptance, and regulations. 

2. Main Cash Flows 

Main cash flows include payments for products and inventories.

3. Main Product Flow

Including the main product, the flow includes components, materials, service supplies, and products.

4. Product Return Flow

Including the flow of product returns (reverse product flow) includes returns for repair, replacement recycling, and disposal.


Consider the supply chain model of a bakery selling a wide variety of cakes and this baker is one end of the supply chain.

In this case, the supplier is a wholesale distributor of food that provides ingredients such as cream, flour, and sugar, a bakery is a manufacturer that converts these ingredients into various types of cakes. 

The bakery is operated by an owner who is a retailer and who sells these cakes to customers. 


Considering the complex manufacturing supply chain model that appears in the company's supply chain in this model, you will look at second-tier suppliers and more distribution centers and customers.

These suppliers supply the materials and services that you place as your central manufacturing and parts supplier.

Tier one suppliers have their suppliers. At level two for example Supplier one might be a wholesale food distributor that buys flour from its supplier. The supply chain for this flour starts with wheat field farmers supplied to distributors of factory-processed food sent to wholesalers and distributing it to stores.

No matter how far you go, you will never run out of raw materials from major product suppliers.

Initially, the supply chain model was developed for manufacturing, but the service industry also has a supply chain. Some examples include the legal advisory services industry, electricity supply, housing, software, construction, plantations, and even the government.

In a broad sense, the service industry includes all organizations except mining, agriculture, and manufacturing. Another example is an electric utility supply chain that receives product and supply services and shares its services with commercial and other home customers. 

Utility companies generally pursue one of two types of vertical integration of supply chain management and lateral or horizontal integration of management.

A vertical supply chain is an arrangement in which a company's supply chain is owned by that company, and usually, each member of the supply chain produces a different product or market-specific service and the product combines to meet a common need. 

This structure persists in some companies, vertical integration companies can grow from an entrepreneurial base by adding departments and layers of management or through mergers and acquisitions. For example, to create an adequate company, it would be Ford's iron ore mine, fleet steel plant, shipbuilding plant, and showroom that build and distribute the horizontal integration of Ford automobiles. 

This is a business expansion by acquiring a similar company in the same industry, in contrast to vertical integration where the company produces different goods related to a single product.

Companies can do this through internal expansion acquisitions or mergers, the process can lead to monopoly. If a company captures a large part of the market for that good or service for example a company that produces shampoo can add another brand to benefit from a wider customer base of vertical integration.

The main benefit is no dependency control for components or service operations can be synchronized with other enterprise functions.

The benefits of horizontal lateral integration are that they achieve economies of scale and scope. They focus completely on a particular business so develop more skills and they know their market well.

The difference between vertical and lateral integration is that when a company wants to grow through vertical integration, the company seeks to strengthen its supply chain by reducing its production costs, capturing upstream or downstream profits, or accessing downstream distribution channels.

However when a company wants to grow through horizontal integration that is looking to increase its size, diversify its product or service to achieve economies of scale, reduce competition or gain access to new customers from the same stage of the market.

From this evolution of supply chain management, advances in supply chain management are reflected in each supply chain development which usually consists of four or five stages.

All stages globally and within organizations range from zero to four states, and they are stable across multiple semi-functional dysfunctions. The integrated company and the expanded company every organization is located somewhere in these five stages. 

Some companies take refuge from change so they are less advanced some take advantage of change and Some organizations believe they are in the most advanced stage.

In the first stage, multiple dysfunctions, the core organization has no internal definition of goals. There is no external connection other than a few transactional links. Lack of coordinated information flow or solid relationships among potential partners such organizations have unplanned activity, more threats, reduced demand forecast, and supply problems, as well as the poor flow of payments 

Stage two, Semi-functional enterprises. At this stage, the core organization begins to improve efficiency and quality effectiveness in the functional areas. Information flow has been improved and functional areas have been defined. But departments perform their functions one by one, there is no collaboration between various departments, and no partnerships are formed with customers and suppliers. 

The third stage, the integrated company. The organization is fully integrated between departments, using enterprise resource planning or ERP. This is a preload to end-to-end supply chain management. Individual firms began to focus on business processes rather than compartmentalized functions. Company walls link supply chain partners together.

Stage four, expanding company. The company has integrated its internal network with the internal network of supply chain partners to improve the efficiency of product or service quality or both. The advancement of this structure allows for complete information sharing across integrated networks and team building and planning across company boundaries. 


What is the supply chain? A supply chain is the management of the flow of goods and services which includes the movement and storage of inventories of raw materials in process and finished goods from point of origin to point of consumption.

Each product that reaches the end user represents the cumulative effort of several organizations. Some organizations only pay attention to what goes on within their four walls, while some pay no attention to it. 

However, the entire chain of activities ultimately delivers the product to the end customer even though the results are intermittent and often the supply chain runs ineffectively.

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