# Optimizing Supply Chains: From Raw Materials to Consumers

## What Is a Supply Chain?

A supply chain connects the steps needed to transform raw materials into a finished product ready for consumers. It begins with raw material producers and concludes with the final delivery to consumers. Effective [supply chain management](https://www.investopedia.com/terms/s/scm.asp) is pivotal for reducing costs and enhancing production efficiency. Companies continuously strive to optimize their supply chains to maintain competitiveness and profitability.

### Key Takeaways

*   A supply chain is a network that connects various companies and individuals in the process of creating and delivering a product to consumers, starting with raw materials and ending with order fulfillment.
*   Effective supply chain management lowers costs, boosts production efficiency, and helps businesses maintain competitiveness by ensuring an unbroken and timely flow from raw materials to finished products.
*   The COVID-19 pandemic highlighted the vulnerabilities of global supply chains, leading to significant delays and shortages in various sectors as supply chain networks faced restrictions and abrupt changes in demand.
*   Supply chain management differs from logistics, though they are interconnected; logistics focuses specifically on the movement and storage of goods, while supply chain management oversees the entire process from raw material to consumer sale.
*   Reliable suppliers are crucial for efficient supply chain management, as timely and specification-compliant deliveries are essential to prevent costly disruptions.

![Supply Chain](https://www.investopedia.com/thmb/_-di0dpSQixczZhfhVtKBf6fe5A=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Supplychain-5ff2c0cc5d47448ba4bff72d36f386fd.jpg)

*— Investopedia / Michela Buttignol*

## Components and Functionality of a Supply Chain

A supply chain includes every step that's involved in getting a finished product or service to the customer. The steps may include sourcing raw materials, moving them to production, then transporting the finished products to a distribution center or retail store where they can be delivered to consumers.

 A supply chain includes producers, vendors, warehouses, transportation companies, distribution centers, and retailers.

A supply chain starts when a business gets an order. Its key functions are product development, marketing, operations, distribution, finance, and customer service.

Effective supply chain management lowers costs and boosts profits. However, if one part breaks, it can disrupt the whole chain and be costly.

## Exploring Different Supply Chain Models

The supply chain model that a company selects will depend on how the company is structured and its specific needs.

*   **Continuous Flow Model:** This traditional supply chain model works well for companies that produce the same products with little variation. The products should be in high demand and require little to no redesign. This lack of fluctuation means managers can streamline production times and keep tight control over inventory. Managers must regularly replenish raw materials to prevent production [bottlenecks](https://www.investopedia.com/terms/b/bottleneck.asp) in a continuous flow model.
*   **Fast Chain Model:** This model works best for companies that sell products based on the latest trends. Businesses that use this model must get their products to market quickly to take advantage of the prevailing trend. They must rapidly move from idea to prototype to production to consumer. [Fast fashion](https://www.investopedia.com/terms/f/fast-fashion.asp) is an example of an industry that uses this supply chain model.
*   **Flexible Model:** Companies that manufacture seasonal or holiday merchandise often use the flexible model. They experience surges in demand for their products followed by long periods of little to no demand. Using the flexible model ensures that they're able to gear up quickly to begin production and shut down efficiently as soon as demand tapers off. Profit depends on being accurate in forecasting their need for raw materials, inventory, and labor.

## Best Practices in Supply Chain Management

Successful supply chain management systems benefit from several practices:

*   They support continuous improvement.
*   They aim for increased velocity.
*   They encourage collaboration among the individual businesses in the supply chain.
*   They seek new technologies that improve their processes.
*   They have metrics in place that allow employees to measure the success or failure of each step in the supply chain.

## Comparing Supply Chain Management and Business Logistics

The terms [supply chain management](https://www.investopedia.com/terms/s/scm.asp) (SCM) and business logistics management or simply [logistics](https://www.investopedia.com/terms/l/logistics.asp) are often used interchangeably but logistics is one link in the supply chain.

Logistics deals with the planning and control of the movement and storage of goods and services from their point of origin to their final destination.

Good logistics management prevents delivery delays and ensures products arrive in good condition, helping to lower costs.

## What Is the Flow of Manufacturing Costs?

Efficient supply chain systems deliver each product part to its needed location on time, requiring control over manufacturing costs.

The flow of manufacturing costs is most relevant to businesses that produce products that require many parts from several vendors. A clothing manufacturer might need deliveries of fabric, zippers, trim, and thread that must all arrive at the same time. They must be stored at the business' expense if some supplies arrive too early and the machines stand idle while they wait if some arrive late.

## Reliable Suppliers Are Key

Efficient supply chain management needs reliable suppliers who meet specifications and deliver on time.

Assume that XYZ Furniture manufactures high-end furniture and that a supplier provides metal handles and other attachments. The metal components must be durable so they last for many years. They must meet the design and quality specified by the manufacturer and they must work as intended.

A reliable supplier will fill the manufacturer’s order and ship the parts on time.

## Does the Supply Chain Cause Deflation?

The increased efficiencies of supply chains have played a significant role in curbing [inflation](https://www.investopedia.com/terms/i/inflation.asp). Costs decrease as efficiencies in moving products from point A to point B increase. This reduces the final cost to the consumer. [Deflation](https://www.investopedia.com/terms/d/deflation.asp) is often regarded as a negative but supply chain efficiencies are one of the few examples in which it's a good thing.

Supply chain efficiencies become more optimized as globalization increases and this keeps the pressure on input prices.

## The Impact of COVID-19 on Global Supply Chains

One of the most severe economic problems caused by the COVID-19 pandemic was damage to the supply chain. Its effects touched nearly every sector of the economy.

> **Important**
>
> Supplies of products of all kinds were delayed due to ever-changing restrictions at national borders and long backups in ports.

Demand for products changed abruptly. Shortages developed as consumers hoarded essentials like toilet paper and baby formula. Masks, cleaning wipes, and hand sanitizers were suddenly in demand.

Shortages of computer chips delayed the delivery of a wide range of products from electronics to toys and cars.

### Changing Supply Chain Priorities Post-Pandemic

A survey by Ernst & Young of 200 senior-level supply chain executives points to three essential findings:

*   The pandemic had a deep negative effect as cited by 72% of supply chain executives. Automotive and industrial supplies companies were hit the worst.
*   Visibility was the top priority. Executives wanted to focus on adding technology such as sensors that gave them a better view of their orders throughout the process.
*   The pandemic accelerated the transition to digitization. Most of those surveyed said that digital transformation combined with increased automation would accelerate going forward.  
    

## What Is Supply Chain Management?

Supply chain management (SCM) is the oversight and control of all the activities required for a company to convert raw materials into finished products that are then sold to users. It provides centralized control for the planning, design, manufacturing, inventory, and distribution phases required to produce and sell a company's products.

A goal of supply chain management is to improve efficiency by coordinating the efforts of the various entities in the supply chain. This can result in a company achieving a competitive advantage over its rivals and enhancing the quality of the products it produces. Both can lead to increased sales and revenue.

## What Are the Steps in a Supply Chain?

The key steps in a supply chain include:

1.  Planning the inventory and manufacturing processes to ensure that [supply and demand](https://www.investopedia.com/articles/economics/11/intro-supply-demand.asp) are adequately balanced
2.  Manufacturing or sourcing the materials needed to create the final product
3.  Assembling parts and testing the product
4.  Packaging the product for shipment or holding it in inventory until a later date
5.  Transporting and delivering the finished product to the distributor, retailer, or consumer.
6.  Providing customer service support for returned items  
    

## What Is an Example of a Supply Chain?

A supply chain begins with the sourcing of raw materials. The raw materials are then hauled to a wholesaler that sells them in batches to manufacturers. The manufacturer uses the materials to create a product which is then delivered to a retailer. Finally, it's sold to a consumer.

## The Bottom Line

A supply chain is what lets you plug in your new television or bite down on that hamburger you’ve made at home. It’s a network made up of producers and manufacturers, vendors, warehouses, transportation companies, and retailers. The process begins when a product is created and it ends when you purchase it. Many supply chains are global in scale.

Each step in the process is complicated by the need to create, prepare, package, ship, and unpack the product at each of its successive destinations but it can result in lower costs when it's done effectively. This benefit can be passed on to consumers.

> **Article Sources**
>
> 1.  The White House. "[Why the Pandemic Has Disrupted Supply Chains](https://www.whitehouse.gov/cea/written-materials/2021/06/17/why-the-pandemic-has-disrupted-supply-chains/)."
>     
> 2.  International Monetary Fund (IMF). "[Supply Chains and Port Congestion Around the World](https://www.imf.org/-/media/Files/Publications/WP/2022/English/wpiea2022059-print-pdf.ashx)." Pages 9-13.
>     
> 3.  National Library of Medicine. "[Product Availability and Stockpiling in Times of Pandemic: Causes of Supply Chain Disruptions and Preventive Measures in Retailing](https://www.ncbi.nlm.nih.gov/pmc/articles/PMC9709757/)."
>     
> 4.  S&P Global. "[The Semiconductor Shortage Is – Mostly – Over for the Auto Industry](https://www.spglobal.com/mobility/en/research-analysis/the-semiconductor-shortage-is-mostly-over-for-the-auto-industry.html)."
>     
> 5.  Ernst & Young. "[How COVID-19 Impacted Supply Chains and What Comes Next](https://www.ey.com/en_us/supply-chain/how-covid-19-impacted-supply-chains-and-what-comes-next)."