Businesses make money by selling their products or services to customers who want or need those products or services. Simple, right? After all, that basic concept has underlain commerce for thousands of years.
While this is true, it is something of an oversimplification, writing off certain critical questions. Namely: How does the business acquire the products that it eventually sells, and how does the business get those products into the hands of its customers?
The answer to both of these questions lies in the business’s supply chain and the various methods in which it manages this supply chain to streamline its workflows and increase profits.
Whether you started a small business with no desire to expand or you hope to become a multinational business with customers around the globe, understanding how supply chains work is one of the keys to your success. Here, we explore supply chains and supply chain management and offer tips that you can use to optimize your business’s supply chain for the better.
What Is a Supply Chain?
A supply chain is the network that exists between a business and its suppliers and distributors. It typically includes everything from the suppliers of raw materials, to the manufacturers of the end product, to the retailers that sell the product, and any form of transportation that exists between these hubs.
Supply chains involve the flow of money, materials, goods, and people. They are how a company gets what it needs to produce its product, and also how it distributes that product to retailers or consumers.
Today, technological advances and increased globalization have made it so that producing even cheap, everyday items may rely on vast supply chains spanning halfway across the globe. A microchip made in Taiwan, for example, may be made with metals from Australia, and ultimately end up in the cell phone of a customer in New York City.
Supply Chain Examples
Imagine, for example, that you open a brick-and-mortar store. Regardless of what you sell, you likely have a complex supply chain consisting of:
- Truck drivers, who deliver inventory to your store from distributors
- Distributors, who supply and load trucks with inventory from various warehouses
- Warehouses, which store inventory for distributors
- Shippers, who deliver product to the warehouses from manufacturers
- Manufacturers, who physically produce the products that you sell
- Shippers, who deliver raw materials or component parts to the manufacturer to produce products
- Source locations, which produce the raw materials or component pieces that manufacturers ultimately use to create their products
If you only offer in-person shopping at your store, then the supply chain ends with you. But if you offer an ecommerce component to your business, such as delivery, then your supply chain extends further with delivery companies and their warehouses, distribution centers, and delivery people.
Even a seemingly simple local business that produces all of its own goods likely has a supply chain of some kind. A local farmer, for instance, who saves his seeds from last year to grow crops this year, builds his own tools, and only sells produce to local farmers markets, must still find a way of getting his produce to those markets—even if that is simply by means of a tractor or truck that he owns.
Similarly, starting a restaurant requires that a restaurateur piece together a supply chain that will provide the high-quality ingredients that they need to operate.
What Is Supply Chain Management?
Supply chain management is a discipline that involves the creation and management of a supply chain.
When a business is first getting started, supply chain management typically involves building relationships with manufacturers, source locations, distributors, etc. so that the business has a reliable means of producing its product and selling it to consumers. Once that supply chain is established, supply chain management shifts its focus toward the refinement and optimization of each of these relationships, with the end goal of streamlining the supply chain to reduce costs, limit disruption, and maximize profits.
Supply chain management typically involves coordinating and optimizing the logistics behind all of the various links of a supply chain, including:
- Product planning and strategy
- Sourcing of raw materials and component parts
- Manufacturing the product
- Delivery and/or distribution of the product
- The returns system associated with defective/unsold goods
Benefits of Supply Chain Management
Actively managing and optimizing your business’s supply chain comes with a number of powerful benefits that can help you strengthen your bottom line. These include:
- Reduced risk: A weakness, inefficiency, or breakdown of any link in the supply chain will disrupt all of the links that come after it. By taking control over whatever portions of your business’s supply chain you can, it’s possible to reduce this risk of disruption. Manufacturing your own product, for example, reduces the risk that a third-party manufacturer will go bankrupt and leave you without stock.
- Greater control: Taking responsibility of your supply chain affords you greater control over what matters to you. For example, owning the manufacturing process allows you to conduct quality assurance before the product is shipped to consumers; similarly, sourcing your own raw materials allows you to conduct quality assurance of the major components which will ultimately go into your product.
- Lowered costs: Each link in the supply chain adds to your cost of goods sold (COGS) because it involves an additional party that must be paid. By owning your supply chain fully, it’s possible to bring these costs in-house. It is also then possible to make adjustments to your processes in order to streamline efforts and further reduce costs.
- Increased efficiency: Similar to the above, owning the various links in your supply chain allows you to make adjustments to your processes in order to increase efficiency and profitability.
- More data: Supply chain management is reliant on having the right data. Without this data, it will be difficult, if not impossible, to make important business decisions such as knowing how much stock you should have on hand at any specific point in time. Taking an active role in managing your supply chain allows you to collect more data, which you can then use to adjust and optimize your processes.
Supply Chains and COVID-19
The current coronavirus pandemic offers an excellent example into the effects that supply chain disruption can have on businesses, and why it is important for companies to own whatever portions of their supply chain they have—or at least understand the various links that make up these complicated networks.
A trip to your local grocery store can illustrate the effect pretty clearly. Mass panic in the early days of the pandemic led to a rush on grocery stores, where customers bought an excess of goods. This led to retailers being low on stock and placing larger orders with their distributors to replace their exhausted inventories.
At the same time, disruptions at various stops along the supply chain have exacerbated the problem and made it difficult for goods to get to stores in a timely manner. Drivers and warehouse workers who are sick or concerned about catching the virus cannot work, causing a breakdown in delivery. Similarly, manufacturers whose employees are ill or unwilling to work are unable to produce at the same volume, causing a breakdown in procurement.
The end result is that stores don’t receive their orders, or they receive smaller quantities of goods than what they need, and customers are forced to turn elsewhere to fill the gap.
Supply Chain Management Tips for Small Businesses
While supply chain management is often thought of as a concern for larger corporations, the truth is that all businesses should seek to understand and optimize the supply chains that underpin how they operate. Even small businesses can realize real and powerful benefits by finding ways to adjust the portions of the supply chain that are under their control.
Below are some tips you can use to better manage your supply chain.
1. Track Your Inventory
One area of your supply chain that you have the most control over is the level of inventory that you carry on hand at any given time. But in order to understand how much inventory you should carry, you first need to be sure that you are tracking your inventory and managing it in an efficient way. Without doing so, you won’t have the data necessary to make an informed decision.
By understanding how much inventory your business goes through on an average day and how much it goes through during peak seasons, you can ensure that you have enough inventory on hand to cover those daily needs. You might even decide to hold a certain amount of “buffer” stock in order to prevent yourself from falling victim to a disruption in your supply chain.
2. Track Your Costs
If you aren’t tracking the various costs associated with running your business, you need to start doing so immediately. This will help you understand whether or not you’re making a profit (which is key information for a business owner). It’ll also help you identify potential areas for optimization or improvement.
For example, by understanding the costs associated with manufacturing your product, you might be able to streamline the process and shave a few cents off the production of each item, which can add up in scale. By understanding the costs associated with sourcing raw materials, you might be able to find a cheaper supplier. And by understanding the costs associated with shipping your product (either to retailers or customers), you might be able to find less expensive shipping services or partners.
At every step of the supply chain, there are likely opportunities for you to implement optimizations. Your costs are an excellent guide for where you should start and what you should prioritize.
3. Consider Hiring Outside Help
As a small business owner, you are probably already wearing many different hats, with little remaining bandwidth or energy to add “supply chain management” to your list of responsibilities.
If your business owns much of its supply chain or can otherwise exert control over it, and you have the budget and resources to do so, hiring an in-house supply chain manager can be an excellent idea. Similarly, a third-party systems integrator can help you understand the options available to you such as the various strategies or technologies that you can leverage to streamline your operations.
4. Remember the Value of Investment
While investing in warehouse robotics, inventory management, additional employees, or the other components that go into supply chain management may seem costly, it is important to remember the value that comes from such investments: increased control, lowered risk, and peace of mind.
Additionally, it’s important to remember that this investment does not need to come out of pocket: It’s likely possible to finance these and other critical purchases through small business loans, equipment financing, or even lines of credit. Not having cash on hand is no reason not to invest in supply chain management.
Supply chain management is, admittedly, one of the more complicated aspects of running a business. But it can also be one of the most rewarding aspects, providing you with increased control and substantial return on investment. By owning as much of your supply chain as possible, you can optimize your network and reduce the risks of disruption like we are seeing in supply chains across the world. Keep in mind, there are also supply chain management software solutions to help you handle this process.