Supply Chain - The Basics

 

Supply Chain - The Basics

With the world suffering from COVID-19 for the past 9 – 10 months, everyone is talking about the global supply chain being disrupted, how the products are not able to reach the customers and how there is a supply shortage across the world.

To understand these demand shortages, we should first understand what is a supply chain. This article deals with the basics of a supply chain.

“A Supply Chain is a well-connected network between the supplier, manufacturer and the end consumers. The basic function of a Supply Chain is to ensure a smooth flow product, finances and information through these channels.”

                                   

                                                                         

Now, we will explode the supply chain into its components as shown in figure 1, to understand each component better and also how to make the supply chain more agile.

(Please note, we will be discussing the SC with respect to a manufacturing firm)

Vendor: In any manufacturing unit, there are numerous suppliers that basically provide the firm with the raw materials (or even finished product) that it requires for producing the finished goods which have some value to the customer and the end consumer. The people or firms that supply the raw materials to the manufacturing unit, are called Vendors. Any firm will have more than one vendor, this is done in order to:

• 1.     Mitigate the quality defects that may arise due to poor raw materials.
• 2.     Remove the monopoly of one vendor (*thereby reducing the bargaining power of the vendor)
• 3.     To manage the variations in lead time.
• 4.     To have sufficient inventory.
• 5.     Provide a buffer (back up) in case of any emergencies.

There are generally two types of products that a manufacturing firm requires:

1.    Main Materials: That are required for the production of the Finished products. Eg: Plastic Pellets for a plastic manufacturing plant, Bamboo & wood for Paper manufacturing, Aluminum ingots for Aluminum extrusion company.

2.     Auxiliary Materials: These materials are not used in production directly, but without them, the production is not possible. These are materials that are required for almost all the manufacturing firms but varies in sizes & quantities. For eg: Bearings, Welding Rods, Tools kit, Stationery Items, Other machinery spare parts.

Sourcing: As the name suggests, it is the activity that takes care of the sourcing of raw materials, this department deals with calculating the lead time, the available inventory of raw materials and the orders in pipeline that have to be fulfilled by the firm and how much raw material is required to complete the process. It is also the duty of Sourcing department to select the vendor and authorize the vendor to supply to the firm. While a vendor is external to the firm, sourcing department is internal to the firm. The decision to select or reject a particular vendor is taken based on

• 1.     The past history of the vendor.
• 2.     The lead time required to supply the raw materials.
• 3.     The cost at which the raw material as compared to the price in the market.
• 4.     The quality of the raw materials being supplied.
• 5.     The capacity of the vendor to supply the required quantity.

Inbound Storage/ Transportation: Once the order has been placed to the vendor, it becomes the responsibility of the vendor to ensure that the raw material is made available to the firm at the promised date. The vendor first produces or sources the raw materials from its suppliers and then moves it forward to the firm that is his customer. Once the material is received, a GRN (Good received Note) is prepared and sent to the production department or maintenance department (depending whether the material received is a RM or auxiliary material). A supervisor or engineer from the respective department inspects the received products and acknowledges that the received products are as per the requirement. Once this is done, two things happen almost parallely:

1.     The payment procedures for the vendor starts.

2.     The products are stored in the warehouse.

Operations: This is the part of the Supply Chain where the VALUE addition is done to the Raw Material with the help of the 5Ms of the manufacturing, i.e. Man, Material, Machine, Method & Money. Various operations are performed by using various machines and technical skills of manpower and Standard Operating Procedures and the Value (that the end consumer pays for) is created in this step.

Outbound: Once the Value is added to the RM, it becomes a finished product that has to be carried with utmost care till it reaches the end consumer that it is intended for. The finished goods are stored in the finished good warehouse, till the transportation is arranged and the FGs are shipped to their future owners. During the industrialization era, the thinking of the firms was “I will produce what I am able to produce, if you want it you buy it”, quoting Mr. Henry Ford “The customers can have any color they want as long as it is black” and a filled finished good warehouse was considered very good and the firm was said to be good in production, but as of date, the thinking has completely changed, only if the firm is able to sell all of its finished good inventory, will it be able to make some money to pay its vendors, employees & also make some profits. So, as of date many companies produce as per the market demand and their primary objective is to keep the FG warehouse empty.

Customer: A customer is someone who buys your finished goods and gives it to the end consumer. A Customer maybe a distributor, wholesaler or retailer. They basically bridge the gap between the consumer and the manufacturer. However, in some cases, customer may itself be the consumer (for eg: Factory outlets, in Mysore, a Reid & Taylor manufacturing unit has their own shops, just outside the manufacturing unit), in this case they have eliminated the distributor and hence the amount that the consumer pays for the product includes the commission amount that is paid to the distributor, wholesaler & retailer and also the transporter that moves the material from one customer to other, whereas if the consumer goes to the factory outlet and buys the product, all these costs are removed, and hence the consumer gets the product for a much cheaper cost as compared to when bought at a retail outlet.

Consumer: Consumer in the most economic terms can be termed as the paying point for the product that the company has manufactured. The company produces a product for its end consumers and it is the supply chain that basically connects that product with the person for whom it was produced.

 Now, a question might be asked: How does a company know what does the customer want?

That is the job of the marketing department personnel, they go out to the market and talk to customers & the consumers and find out their requirements and that information flows back to the manufacturing firm. Based on this information, the firm decides what is to be produced and in what quantities, and what are the other resources required to produce the required products. Based on this information, suppliers are informed and the raw materials are procured.

Once the consumer requirements are met, the consumer pays for the product to the retailer, who then removes his costs & profits and pays the remaining amount to the wholesaler, and then the finances flow to the manufacturer via distributor.