How Does the Supply Chain Work?

Written By: Eric Kimberling
Date: October 29, 2021

Supply chain management in today's day is fascinating and extremely relevant. The concept is an overview of how the economy functions every day.

Since the pandemic started, the supply chain management discipline has captivated consumers and organizations. We've all experienced supply shortages and a lack of basic goods. Labor shortages and supply chain issues affect everything from the items we buy at the store, to construction, to fundamental human needs.

In this blog, we will unpack the disruptions, blockages, and shortages in today's supply chains.

Customer Demand Forecast

To understand how a supply chain works, let’s start at the beginning - the customer. It's not just what the customer buys, it's actually a forecast of anticipating customer behavior.

The way organizations typically will forecast demand is based on historical trends and analyzing what the customers have done over time. It could be looking at things like macroeconomic trends or potentially even other external factors that could influence people's willingness to purchase.

This demand forecast drives everything throughout the supply chain. Therefore, it's critical to have an accurate demand forecast, or at least as close to accurate as possible, because that's going to influence the way the entire supply chain operates.

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Raw Materials

Once overall customer demand is understood, now we've got to figure out what is it that we need to produce and what are raw materials we need to create the final product.

For example, if you're selling or manufacturing iPhones, there are hundreds or maybe even thousands of different components or raw materials needed to create an iPhone.

Whatever your product is, you're going to have different raw materials and a unique recipe for how that product is made. You have to back that into – what is the demand for your product and how does this translate to purchasing or procurement of raw materials. Once this process is understood, production timeline and manufacturing runs that will support that demand forecast can be effectively created.

Now, one thing that's important to note when we talk about raw materials sourcing. This could be raw materials, which are just individual components that go into a finished product. Or it could also relate to subassemblies, which are partially produced already, or components that are going to go into a broader finished end.

For example, a lot of times aerospace and defense companies aren't just buying raw materials, they're buying pieces that have already been partially constructed that then get put together into other finished products, like a rocket ship or an airplane. Whether it's raw materials or subassemblies, the whole concept is the same of tracing it back to your demand forecast to figure out what you need to buy.

Production and Manufacturing

The next major step in the process is your production and manufacturing. At this point you've acquired raw materials, semi-finished goods, or subassemblies, etc. Now you need to get it to your factory so you can actually construct what you need to produce.

Simple as that right? Well, kind of…

In some cases, it could be simple logistics processes in trucking and shipping things via land. More often than not organizations are ordering raw materials or sub-assemblies from overseas, in which case you're dealing with ships or boats. These goods will be on the water for a certain amount of time and are going to have come through ports in whatever country you're located in. From the port, the raw materials will then be transported via ground shipping to your manufacturing facility.

Once you have the raw materials, then it becomes a matter of how we're going to produce the final product and when. During this step in the production process, inventory management becomes very significant.

Inventory levels – do you have the right level of inventory at any certain time? Do you have too much inventory in stock? Or do you have too little that will prevent outages or shortages?

In the current supply chain, climate organizations are finding that it's worthwhile to stockpile inventory, which they may have done previously. The main reason for this inventory hoarding is that companies have experienced extreme supply chain disruptions that have affected their ability to sell products.

However, this culture of sacristy can be managed and predicted by technology. Whether it's enterprise technologies, ERP systems, or supply chain management technologies, there's a whole host of solutions that buck this trend.

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Once the finished goods are produced, you've got to figure out how to get them to your warehouse in most cases. In some cases, you may ship directly to your customer. If it's an urgent order or if it's a late order, or maybe if you're a made-to-order manufacturer, you might ship your product directly from your manufacturing facility to your customer's warehouse.

Regardless, you're going to have the same process of making sure that you have logistics to get the product from your manufacturing facility to either your own warehouse or to your customer's warehouse. Again, as I mentioned before, that whole logistics process of managing the transport of those finished goods to whichever warehouse it's going to is a key part of the supply chain.

The next step in the process for some organizations, not all, but for some, is a distributor. Getting the product from your warehouse to the distributor that's ultimately going to get it to the end consumer. Distribution centers are more common for retailers and direct-to-consumer types of organizations. If you're a B2B organization that's selling primarily to businesses, chances are you don't have a distributor or a middleman wholesaler, but you could.

Either way, products are moving from a warehouse to a distributor, and then the distributor figures out how to get it to the customer.

The final step in the process is getting the product to your end consumer. That could either come through a retailer, or if you're a B2C organization that's selling to consumers..

This sort of completes the entire cycle of a supply chain. The forecasting demand all the way through raw materials, production, distribution, and ultimately to your end customer.

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Using Technology to Track Supply Chains

Tracking supply chains is a complex process. There's a lot of data, manufacturing touchpoints, suppliers, warehouses, distributors, trucking providers, etc. to coordinate and understand. Without a clear strategy, all these moving parts can make a supply vulnerable.

That's where technology comes in.

Supply chain management technologies can automate these processes, provide actionable data, and the visibility to understand the needs of the organization. There are also ERP systems or enterprise resource planning systems that attach the supply chain to your financials, and then back to your sales organization, etc.

Regardless of the type of system, you might use, it's important to recognize opportunities to leverage technology to make your supply chain is more efficient. Quite frankly, that's why operational technologies are so popular today because so many organizations are struggling with their supply chain. Technology can help fix some of those problems.

Why Supply Chains are Broken?

A key question on a lot of people's minds today is: why are supply chains broken? What's the problem? Why are we experiencing outages, shortages, and constraints in our overall purchasing behavior? Why are we fighting for toilet paper at Costco?

This is a very multifaceted process, and you can imagine how individual components in the supply chain breaking down can have a domino effect throughout the entire supply chain.

For example, if your raw material supplier has a labor shortage. Let's just say they're operating in a country that is experiencing labor shortages or perhaps they have lockdowns or quarantines as a result of the pandemic. This lack of workforce is going to slow down the production of raw materials.

In turn, this is going to create delays in getting the raw materials to the manufacturing plant. The manufacturing plant is now going to be delayed getting it to the warehouse, thus affecting the delivery of the product to the customer.

You might also think about every step along the way. Currently, there is a global lack of truck drivers. An organization may have all the raw materials sitting on a manufacturing shop floor or in a warehouse, but there is no way to get them from point A to point B.

If you can't get it from point A to point B, you're going to have a disruption problem which then causes a product shortage. With the hundreds of thousands of touchpoints and moving pieces within a supply chain, any one of those things breaks down and cascade throughout the entire supply chain.

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I hope this has provided some insight into how supply chains function and they are so broken today. I'd encourage you to download our 2021 Digital Transformation Report which features the top 10 supply chain technologies. This is a great resource that outlines how to transform your supply chain to make it more effective.

If you have questions regarding supply chain management, please don’t hesitate to reach out to me directly. I am happy to be an informal sounding board and advisor as you move through your digital transformation journey.

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Eric Kimberling

Eric is known globally as a thought leader in the ERP consulting space. He has helped hundreds of high-profile enterprises worldwide with their technology initiatives, including Nucor Steel, Fisher and Paykel Healthcare, Kodak, Coors, Boeing, and Duke Energy. He has helped manage ERP implementations and reengineer global supply chains across the world.

Eric Kimberling
Eric is known globally as a thought leader in the ERP consulting space. He has helped hundreds of high-profile enterprises worldwide with their technology initiatives, including Nucor Steel, Fisher and Paykel Healthcare, Kodak, Coors, Boeing, and Duke Energy. He has helped manage ERP implementations and reengineer global supply chains across the world.
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