4 FAQs About Supply Chains

October 08, 2019

Any business that takes raw materials or components and uses them to manufacture a finished product or a service has a supply chain. While there are many different industries that utilize supply chains in their everyday operations, a few common examples include:

  • A plant that uses chemicals to produce soap
  • A factory that uses circuit boards, batteries, computer chips, and touchscreens to produce mobile phones
  • A power plant that uses coal to produce electricity

Here are four FAQs about supply chains:

What is a supply chain?

A supply chain consists of the inputs for the creation of your products or services, as well as the vendors, suppliers, and transportation carriers that provide them. These inputs might be raw materials, such as chemicals, metals, or fuel, or finished products, such as electronic components, plastic parts, or even packaging.

Supply chain is often described as "farm to fork." However, this is not quite accurate, unless you are in the restaurant business. Technically, a supply chain ends with your consumption of the inputs to make your products. Delivery of your finished products via local trucking or other freight services to your customers is usually not considered part of a supply chain.

What is supply chain management?

Supply chain management is the process of coordinating the various parts of your supply chain. Supply chain management is the management of resources, including time and money, to put the inputs where they are needed, when they are needed, within a budget. There are three aspects to supply chain management:

  • Procurement: Finding and purchasing the production inputs is the first step in a supply chain. Aside from finding a vendor or supplier that has exactly the inputs needed, you need to negotiate and execute an agreement with the vendor or supplier. For ongoing relationships, it may be possible to negotiate bulk discounts, requirements contracts (contracts where the vendor or supplier agrees to sell you all the inputs you need at an agreed-upon price), or output contracts (contracts where you agree to buy everything the vendor or supplier has on hand). For example, potato chip factories enter into output contracts with potato suppliers because they expect to be able to sell as many potato chips as they can produce.
  • Logistics: This will be discussed fully below, but logistics is the step of moving inputs from the vendor or supplier to your business for your use in production.
  • Operations: Once you receive the inputs, you must process or otherwise convert them into a finished product. Operations includes demand management, which ensures inputs are available when needed, and inventory control for inputs that can be stored. For example, a potato chip factory needs salt, potatoes, cooking oil, and potato chip bags. However, a pound of potatoes does not require a pound of salt. Moreover, salt can be stored forever, while potatoes cannot. Potatoes, therefore, must be received much closer to the time they are needed, while salt can be stored and brought in by local trucking as needed.

What is supply chain logistics?

Supply chain logistics is the process of planning and managing the movement of inputs from the vendor or supplier to the production facility. There are many elements to supply chain logistics:

  • Cost: The cost of transportation depends heavily on other elements of transportation, namely the mode of transportation and the time. However, there are also other costs associated with transportation. For example, fuel costs, taxes, duties, and tariffs are fixed costs that may have to be added to the cost of transportation, depending on the situation.
  • Time: As part of demand management and inventory control, the time to transport inputs must be included in any forecasts. For example, local trucking can deliver inputs within a day while bringing in a container from an overseas supplier and having that container delivered by a container pick up service can take several weeks.
  • Mode: Rail, air, and trucking are all options, although trucking is the most common with over 70% of domestic freight (approximately 11 billion tons) transported by trucks in 2017 whether it be over the road, regional, or local trucking.

Why is it important?

Simply put, cost. Mismanaging a supply chain can increase the cost of your goods by increasing the cost of your inputs, increasing the cost of your transportation, and wasting money by delaying production while you wait for inputs.

Supply chain management is an important concept to understand for running your business. Perfect your supply chain logistics by contacting Daybreak Express today.

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