Supply Chains Illustrated

The increasing importance of supply chain management is forcing organizations to rethink how their purchasing and sourcing strategies fit with and support broader business and supply chain objectives. Supply chains involve multiple organizations as we move toward the raw material suppliers or downstream toward the ultimate customer. Simple supply chains pull materials directly from their origin, process them, package them, and ship them to consumers.

A good example of a simple supply chain involves cereal producers (see Exhibit 1.3). A cereal company purchases the grain from a farmer and processes it into cereal.

The cereal company also purchases the paperboard from a paper manufacturer, which purchased the trees to make the paper, and labels from a label manufacturer, which purchased semifinished label stock to make the labels. The cereal is then packaged and sent to a distributor, which in turn ships the material to a grocer, who then sells it to an end customer. Even for a simple product such as cereal, the number of transactions and of material and information flows can be considerable.

The supply chain for the cereal manufacturer features an extensive distribution network that is involved in getting the packaged cereal to the final customer. Within the downstream portion of the supply chain, logistics managers are responsible for the actual movement of materials between locations. One major part of logistics is transportation management, involving the selection and management of external carriers (trucking companies, airlines, railroads, shipping companies) or the management of internal private fleets of carriers. Distribution management involves the management of packaging, storing, and handling of materials at receiving docks, warehouses, and retail outlets.

For products such as automobiles, which feature multiple products, technologies, and processes, the supply chain becomes more complicated. The materials, planning, and logistics supply chain for an automotive company is shown in Exhibit 1.4 on p. 16, which illustrates the complexity of the chain, spanning from automotive dealers back through multiple levels or tiers of suppliers. The automotive company’s supplier network includes the thousands of firms that provide items ranging from raw materials, such as steel and plastics, to complex assemblies and subassemblies, such as transmissions, brakes, and engines.

Participants in a supply chain are willing to share such information only when there is trust between members. Thus, the management of relationships with other parties in the chain becomes paramount. Effective supply chain organizations are built on relationships (sometimes called “partnerships” or “alliances”) that require shared resources.

For instance, organizations may provide dedicated capacity, specific information, technological capabilities, or even direct financial support to other members of their supply chain so that the entire chain can benefit.