What is Supply Chain Network: Importance, Advantages, Example & How to Optimise it?

From pallet-lifting mechanisation to a dashboard view of sourcing, procurement, warehousing, delivery, and return, supply chain management has come a long way in the last 100 years. Organisations are moving to supply chain networks in a natural progression to this journey of innovations and efficiency. 

This article discusses everything you must know about supply chain networks and supply chain network design. Stay with us.

What is a supply chain network?

A supply chain network (SCN) is a connected combination of multiple essential supply chains covering different partners, including inbound logistics, internal processes of a focal company, and outbound logistics of a specific good or service. 

It's an evolutionary form of a conventional, linear supply chain that tries to track a product's journey across different tiers of the chain, from raw material-level form to last-mile customer-level delivery and return. A conventional supply chain covers only a part of that journey within the focal company's control. 

Conventional Linear Supply Chain

Source: https://commons.wikimedia.org/wiki/File:Supply_chain_network.png

By focal company for a particular good or service, we mean a company:

• Has direct contact with customers.  
• Has a significant stake in designing a product. 
• Has control over the supply chain. 

Coca-Cola is an excellent example of a focal company. It works with multiple partners to supply its diverse products across various geographies, each with specialities, preferences, and market dynamics. Coca-Cola also controls the concentrates used in producing its beverages.

• Different bottling plants across different geographies work as Tier-1 suppliers as they are the closest partners of the focal company and also closest to the final product, i.e., packaged beverage, in the supply chain. Bottling plants get concentrates from the focal company, i.e., Coca-Cola. 
• As Tier-1 suppliers, bottling plants source bottles, cans, and other packaging materials from Tier-2 suppliers, which are essential parts of Coca-Cola's beverage supply chain but do not directly work with the focal company.  
• These Tier-2 companies, further down the line, source materials from Tier-3 suppliers. 
• Once bottled, products are distributed through region-specific logistics companies. 
• Coca-Cola manages marketing, sales and trade activities through another set of Tier-1 agencies.

Conventional linear supply chain management is neither efficient nor effective for Coca-Cola-like companies. So, they adopt a networked approach that tracks and coordinates the supply chains of Tier-1, 2, and 3 suppliers and maintains control over quality, distribution, and customer engagement.  

A supply chain network may fit multiple partners depending on the necessity and the scope of a specific supply chain network design, such as: 

• Manufacturers 
• Distributors 
• Retailers 
• Logistics support 
• Post-sales service providers 
• Tech providers 
• Financiers 
• Regulatory bodies 

However, the focal company can be only one of these stakeholders, such as a retailer or a manufacturer.

A supply chain network ensures the collaborative exchange of data across partner supply chains, enabling the focal company to achieve the highest efficiency and customer satisfaction. 

Supply chain network examples

Suppose ABC Company manufactures sports shoes with cross-border market penetration. A few decades ago, a single company would have done all the work and owned the delivery logistics to ensure last-mile delivery and return. 

However, competition and variances in market dynamics have made the company rely on multiple sourcing partners spreading across countries, and distribution networks are also partner-owned.   

Supply Chain Network

Source: https://www.researchgate.net/figure/Network-structure-of-supply-chain_fig1_360623326

To bring a pair of sports shoes to the market, ABC Company needs to ensure the following steps: 

• Follow the trend in a target market. 
• Create a design according to market dynamics. 
• Finalise sourcing partners for raw materials like rubber, cotton, foam, etc. 
• Decide to manufacture at the company's facility or to partner with manufacturers closer to the target market. 
• Ensured the supply of materials to the manufacturing unit was on time and complied with pre-approved quality standards. 
• Maintain manufacturing processes as per the demand forecast. 
• Assure delivery of shoes at stores within a predefined timeline.  
• Conducting market outreach initiatives to maintain demand and monitoring the trend. 

These steps are not linear, meaning one process does not stop when another begins. Several processes may co-occur at multiple partners' ends, creating a complex network of individual but interdependent chains.

When such interdependent chains are digitised and connected for a seamless flow of information and collaboration, they are called a supply chain network.

Types of supply chain networks

A supply chain network (SCN) is a complex conglomeration of several stakeholder-specific supply chains; however, its design follows the underlying supply chain principles of the focal company. 

So, based on the underlying supply chain models, A SCN can be of several types: 

Continuous flow - SCN catering to this type of supply chain tries to ensure the stability and continuity of supply while meeting demand. Industries suitable for such a supply chain do not experience significant changes or variations in demand; even if changes occur, they are predictable. 

Examples - petrochemicals, paper, oil & gas 

Fast chains are suitable for goods and services with a short or unpredictable life cycle. A supply chain network for similar products tries to keep the time gap between the product design phase and the product's market arrival as short as possible to avoid the risk of losing a trend.    

Example - Fashion industry 

Efficient chain - In this model, a supply chain network focuses on achieving the highest efficiency level to remain fiercely competitive in the industry. The design of such a supply chain network strongly emphasises data-backed forecasting. 

Example - Logistics, e-commerce, FMCG 

Agile supply network—Unlike fast and efficient chains, SCN for the agile model tries to make the supply network responsive and adaptable to changing market dynamics. This model derives maximum benefit from SCN as it improves communications and collaboration between partner chains. 

Example - Software development, Technology 

Flexible—This type of supply chain model is suitable for goods and services with seasonal variations in demand. The SCN design for such a model tries to ensure a smooth transition from seasonal peak demands to seasonal lean periods. 

Example - Agriculture, Food processing 

Custom-configure—This can be a combination of the above supply chain models depending on the product's life cycle phase and other company-specific requirements. Custom-configured SCN is usually suitable for products in the prototyping phase.  

Importance of supply chain network

Supply chain models and management techniques have evolved with changes in market dynamics, sourcing channels and technology availability. Many of today's essential supply chain management tools were only possible after the smartphone era. Similarly, the boom in e-commerce has sky-rocketed the need for hyper-efficiency with a supply chain. 

A supply chain network is essential for several reasons: 

• Collaboration across tiers of the supply chain 
• Strong improvement in efficiency 
• More opportunities for effective cost-saving 
• High customer satisfaction 

Collaboration across tiers of the supply chain 

Conventional supply chain management tools are linear and operate only within a particular company's controlscape, starting with receiving inbound materials from supplying partners. However, a supply chain can go as deep as Tier 3 suppliers, including tech providers, third-party logistics, post-sales service providers, regulators, and many more. 

Even a minor change at the partners' end can inject significant uncertainties if not reported and accounted for promptly. A collaborative connection and communication between partners' supply chains can help the focal company avoid such situations and achieve more control over its supply line. A well-designed SCN helps to build that collaborative system. 

Strong improvement in efficiency 

We can improve a process only when we can measure it with complete data visibility. Earlier, lack of technology availability hindered the secured movement and exchange of data between partner supply networks. However, modern supply chain networks allow implementing tools to extract, load, retrieve, and conduct real-time data analysis over complex supply chain structures. The real-time tracking capability of SCN helps unplug bottlenecks and sort out loopholes quickly, allowing efficient outcomes. 

More opportunities for effective cost-saving

Cost-saving can sometimes impair the agility of a supply process in the absence of a collaborative exchange of information with a single deliverable objective. For example, cost inefficiency in any of the supply chain tiers may only be addressed if it is causing a significant setback in the bottom line. SCN tools improve visibility across an entire supply network, offering preemptive and collaborative corrections to such inefficiencies before they escalate unproportionately. 

High customer satisfaction 

The ultimate aim of any supply chain management is assuring customer satisfaction. All process efficiency, cost-saving, and agility can prove futile if the benefits do not reach end customers in a supply chain. A well-designed SCN helps build a legitimate connection between every process in a multi-tier complex network and customer satisfaction indicators. This allows companies to make data-backed decisions to improve customer satisfaction levels with reliability. 

What is the supply chain network design?

Supply chain network design is a process through which SCM experts, in consultation with the focal company, partner companies and other stakeholders, model and build a viable supply chain to bring products to a target market at minimum cost and time and ensure the highest customer satisfaction. 

Designing a supply chain network may require answering several fundamental questions, such as: 

• Where should the new manufacturing unit be set up? 
• Does that unit need to be a greenfield? Or should the company go for a brownfield infrastructure? 
• How do you choose logistics and sourcing partners?  
• How far does a logistic disruption at tier 1, tier 2, and tier 3 levels impact the delivery timeline? How to minimise such impact?  
• What are the options for cutting costs without affecting product and delivery quality? 

These are regular supply chain management questions. However, a supply chain network designer tries to find answers through modelling and building a network of chains. Within such a network, collaborative data can flow or be extracted for analysis, modelling, and real-time collaborative decision-making.  

Supply chain network optimisation

A supply chain network design process aims to optimise the supply chain network to ensure cost, time, or efficiency for any existing supply chain. This has been one of the major driving forces behind supply chain management practices. 

The availability of reliable and extractable data from partner chains is critical for optimisation, as data is necessary for measuring a yardstick. However, optimisation requires a clear understanding of what the focal company intends to achieve more than data analysis and modelling. 

How can we reduce costs through supply chain network optimisation?

Reducing costs can be challenging to sustain unless we onboard partners collaboratively. 

However, be it costs or optimising any other parameter, the process requires the following specific steps:  

• Defining the right questions. 
• Communication with supply chain stakeholders.  
• Setting a mutually agreeable cost target. 
• Finding cost inefficiency or justifying lower costs across tiers. 
• Checking viabilities of options and validation with partners. 
• Taking partners into confidence. 
• Implementing necessary SCN tools and monitoring.

Advantages of the supply chain network

• Broader and deeper data-backed visibility across supply networks. 
• More vital ability to manage risks and minimise effects of supply chain disruptions. 
• Increased customer satisfaction with improved bottom line. 
• Better quality control across a multi-tier supply network. 
• Better collaborative partnership through mutual growth projection.   

The ultimate aim of any supply chain is to ensure the highest level of customer satisfaction. Modern supply chains are geographically dispersed and segmented into multiple tiers, making managing them complex and challenging. Digitally transformed networks of individual supply chains make it possible to navigate such complex landscapes with the highest efficiency and efficacy.