What is Upstream and Downstream in Supply Chain? Key Differences & Examples

Have you ever wondered what goes behind the process for the manufacturing companies to deliver you quality products on time? The supply chain has been divided into two parts: upstream and downstream. Both processes are essential for a smooth and efficient supply chain. Let’s explore upstream and downstream processes to understand why their better management is so crucial for every manufacturing business. 

What is an Upstream Supply Chain? 

An upstream supply chain refers to the primary stage of the supply chain that involves raw materials sourcing, acquisition and transportation from different sources to the manufacturing facilities. So, there are three stages of an upstream supply chain: 

• Supplier management

Supplier management involves creating and maintaining a solid network of reliable suppliers to source high-quality materials at affordable prices. This requires efficient supplier management to meet on-time material supply to meet production demands.

• Procurement 

Procurement refers to the process of raw material acquisition from reliable suppliers while meeting pre-defined quality standards. 

• Transportation 

It involves securely moving raw materials from different suppliers to the manufacturing facility. This is the most critical phase, as any damage or delay during transportation can significantly disrupt production schedules.

Upstream Supply Chain Examples

Here are a few examples to help you understand the upstream supply chain process. 

• An automobile company like Toyota procures raw materials for its cars from different suppliers. In the upstream process, the company focuses on managing the raw material procurement and delivering the materials to the manufacturing facilities on time. 
• A pharma company procures active ingredients and chemicals from different suppliers to manufacture medicines. Its upstream process involves managing supplier relationships and acquiring high-quality ingredients that meet regulatory standards before reaching manufacturing plants. 

However, upstream operations are full of challenges and require efficient management at multiple levels. Let’s examine some of the prominent challenges of managing upstream operations. 

Challenges in Upstream Supply Chain 

• Supplier reliability

If you rely on multiple suppliers for raw materials, there is a chance of production delay for various reasons. For instance, you might not receive essential parts from a supplier due to supplier chain disruption. This might halt production until the issue is resolved, leading to lost revenue. 

• Cost fluctuations 

The cost of raw materials might fluctuate due to market conditions. Various reasons, such as political instability or global shortages, can influence market conditions. These unpredictable price shifts can force the company to buy materials at higher prices, leading to increased product prices and loss of the competitive edge in the market. 

• Inventory Management

Maintaining an adequate amount of stock is also challenging—too much or too little can hamper profitability. For instance, a restaurant ordering too much fresh produce risks spoilages and might lack key ingredients with under-ordering. So, optimal inventory management is essential. 

• Regulatory compliance 

You must follow different regional regulations if you are sourcing raw materials from different geographical regions. This is a different challenge, as you might face sourcing delays due to different global regulations. 

What is a Downstream Supply Chain?

Downstream refers to the final stages of the supply chain operation, where you deliver the finished products to customers. Orders are arranged in the nearest warehouse for delivery and transported to customers for timely delivery. So, like upstream, we can also break the downstream operation into three stages: 

• Order management 

This phase involves managing customer orders from start to finish. You track inventory levels, fast-process orders, and coordinate the fulfilment process–all in a streamlined manner. The aim is to ensure that when your customer orders, the product is available for delivery within a short period without any delays. 

• Warehousing 

Warehousing is the temporary destination of orders before they get shipped to customers. However, the real challenge is organising the inventory to meet promised delivery deadlines without delay. This includes sorting and labelling products inside the warehouse to make them easy to find and ship when needed. Otherwise, you might experience order processing errors and supply chain delays. 

• Transportation 

Transporting orders from the warehouse to customers may seem like a simple step. But it can make or break your business unless you know how to efficiently plan delivery routes and use reliable logistics. For instance, if you ship electronics products, your customers should get them in neat packaging without any damage by the promised deadline. 

Downstream Supply Chain Examples

Here are a few examples to help you understand downstream supply chain management. 

• Retail Clothing 

A fashion brand like Zara manufactures and distributes clothes to retail stores and customers worldwide. Its downstream supply chain typically focuses on the efficient distribution of garments to stores to meet customer demands for off-store purchases and online shopping. 

• Food delivery service

Let’s take the case of Domino’s Pizza. For such food delivery companies, the downstream operation involves:

• Food preparation.
• Coordination with delivery drivers.
• Meeting on-time food delivery to customers without compromising food quality and customer satisfaction.

Challenges in the Downstream Supply Chain 

Downstream operations face two challenges that can affect their ability to effectively meet customer demands. Let’s discuss them below. 

• Ever-increasing customer expectations

Tough competition in e-commerce space has been constantly fueling customer expectations for faster delivery and flexible order fulfilment options. For instance, customers expect an ideal e-commerce platform to offer same-day or next-day delivery, just like Amazon. Customers are also looking for options like curbside pickup and scheduled deliveries to exercise every comfort of online shopping available under the sun. This puts a great amount of stress on small online sellers to evolve their way of downstream operations to avoid losing customers to their competitors. They must invest in advanced technologies like real-time tracking and partnering with efficient delivery services. 

• Reverse Logistics 

No supply chain can avoid product returns—they’re almost inevitable despite all your efforts. Handling these product returns downstream is called reverse logistics. Processing reverse logistics can be costly as it involves shipping, restocking, and possibly repairing or replacing items. In addition, you need to have good return management in practice to avoid customer dissatisfaction. 

Difference between Upstream and Downstream Supply Chain

Let’s briefly understand the difference between upstream and downstream supply chain operations through various aspects.