Supply chain management: From raw materials to retail
Take a look around your home. Almost every product you see—from the simplest grocery item to the most sophisticated device—took hundreds, if not thousands, of steps to get there. It required numerous resources, activities, and people to get from an idea to its end state. From raw materials and creation, to marketing, sales, and transportation—there’s a flow to the chain of actions that gets a product into your hands.
There’s an umbrella term for this all-encompassing process: the supply chain. And in many cases, that chain—even for the simplest pencil—can span the entire globe.
Key Points
- Almost every product goes through a complex journey from idea and raw materials to finished state; it’s called the supply chain.
- Each industry uses different supply chain models to meet consumer demand and market conditions.
- Understanding the supply chain can help investors analyze a company’s operational performance and competitive capacity.
From an investor’s point of view, understanding how an industry’s supply chain works can provide extraordinary insights into the fundamental operations of a company. Almost every company relies on a supply chain to varying degrees. It helps to know which ones manage their supply chains more effectively and whether certain aspects of a supply chain might be helping or hurting a company.
What is a supply chain?
A supply chain is the network of everything involved in the development of a product from conception to its sale or delivery to the consumer. Supply chains can be broken down into three main categories:
- Material resources. This includes everything from raw materials to the technology used in creating a product.
- Activities. The steps from the production of raw materials to the marketing, sale, and delivery of the end product.
- People. The individuals and organizations that played a role in creating the product from its earliest to its final stages.
These categories define the broad universe that’s called the supply chain. The field of managing the supply chain is just as broad, but it’s important to understand how all the parts fit.
Supply chain models among industries
Some supply chains are simple, with materials and labor that are mostly locally sourced—those for a small pottery maker or beekeeper, for example. Other supply chains are highly complex; materials and labor may come from multiple and global sources, such as the supply chain for electric vehicle (EV) production.
There are also different supply chain models designed to meet the needs of different industries.
- Continuous flow model: Adopted by companies that continuously produce the same product (like tomato sauce or pasta).
- Fast chain model: Useful for manufacturers of products with short, trend-driven life cycles that need to be made and sold quickly (like fashionable clothes or trendy gadgets).
- Efficient chain model: Employed by businesses operating in highly competitive markets where retail prices are a key factor (such as steel, cement, or even fast food).
- Agile model: Utilized by companies with products and services that entail unique customer preferences, such as advertising agencies or health care providers.
- Flexible model: For companies that experience seasonal demand or periods of high demand followed by sluggish periods. Examples include office supply stores and food manufacturers featuring seasonal products.
- Custom-configured model: Used by companies that produce customized products, such as made-to-order furniture.
What is supply chain management?
Supply chain management (SCM) is the process of managing the flow of resources, activities, and people involved in the development of a product from the production or sourcing of raw materials to the sales and delivery of the final product.
The supply chain manager’s main goals are centered on maintaining quality, managing costs, and enhancing efficiency across every phase of the supply chain, all while remaining adaptive to the conditions that may affect the demands of the market.
Phases of managing a supply chain
As you can imagine, supply chains can be incredibly huge, especially when they involve international suppliers. In general, they can be broken down into five phases.
- Product and inventory planning: Evaluating market demand evaluation, managing inventory and resources, planning marketing and sales, and other intermediate steps.
- Sourcing and procuring resources: Procuring raw materials and other basic components from various suppliers.
- Production and manufacturing: Transforming raw materials or assembling components into the finished product.
- Sales and distribution: Marketing, distribution to vendors, and sales to consumers of the final product.
- Post-sales support and returns: Providing customer support, managing product returns, and, in some cases, component recycling.
Is the supply chain the same thing as the value chain?
Supply and value chains are related, but the answer is no. Their aims are mutually supportive, but different. The supply chain refers to the total process of creating and delivering a product, while the value chain is about looking for ways to enhance each step of the process to add value and give a product (and the company producing it) a competitive advantage.
Consider, for example, a coffee producer/retailer. The supply chain manager’s responsibility begins with the sourcing process—negotiating favorable contracts with farmers and other suppliers, and ensuring the quality of the beans. The manager also plans and oversees all logistics, distribution, and inventory. To maintain a continuous process from raw material to sale, the manager is also tasked with creating and implementing contingency plans to avoid or counter any disruption that may affect the supply chain.
In contrast, the value chain manager starts from the opposite direction, starting with the consumer. They begin by analyzing the market trends to make sure the beans are being sourced in a way that matches customer preferences (e.g., fair trade and ethically sourced beans). The decision to focus on a type of roast (e.g., light to dark), or to develop a certain type of coffee product, might depend on market research and feedback. All the while, the manager must keep marketing and sales in mind when adding any element of “value” to the product. And finally, the manager must look over the overall cost in every stage of the product life cycle, as price can affect consumers’ perception and experience of the product.
In other words, the supply chain manager tries to optimize value from the starting point of the production process to the consumer. The value chain manager starts with the consumer (customer demand) as the primary point and traces optimization down to the earliest stages of the production process.
Supply chain management concerns the operational aspects of a product’s cycle from the procurement of raw materials to the end product delivered to the consumer, whereas value chain management is about creating a competitive advantage and enhancing value within the supply chain to maximize customer satisfaction.
Example: The electric vehicle (EV) supply chain
Compared to most gas-powered vehicles, which require about 30,000 parts, an electric vehicle (EV) has far fewer parts—about 15,000. The EV supply chain, much of it centered on the battery, is typically divided into four segments.
- Upstream activities: The mining and extraction of raw materials such as lithium, nickel, and cobalt, among others. Depending on the material, these resources are sourced in different places across the globe, particularly Argentina, Australia, Chile, China, Indonesia, South Africa, and the Democratic Republic of the Congo.
- Midstream activities: Once the raw materials are extracted, they have to be refined and processed into battery cells. Most midstream operations take place in China, South Korea, and Japan. Once the batteries have been assembled, they’re shipped to automakers and installed in vehicles, setting the stage for the downstream phase of the supply chain.
- Downstream activities: Once EVs have been assembled, the cars are transported to car dealers worldwide.
- Recycling: EV batteries that have completed their life cycle are collected and broken down into individual components. Some parts are recycled for the production of new batteries. This last phase of the supply chain is critical for promoting environmental sustainability.
The bottom line
Understanding how supply chains work can give you a clearer sense and broader perspective on how companies compete within a given industry. Once you see the sequential chain that brings a product from idea to market, you can approach your analysis from another angle by evaluating the value chain, which is the realm where a company differentiates its products from its competitors.
Beyond gaining industry knowledge, you’ll also come away with useful insights that can make you a better investor.