backward-chaining

Backward Chaining: Moving Upward The Supply Chain

Backward chaining, also called backward integration, describes a process where a company expands to fulfill roles previously held by other businesses further up the supply chain. It is a form of vertical integration where a company owns or controls its suppliers, distributors, or retail locations.

AspectExplanation
DefinitionBackward Chaining in Supply Chain is a logistics and planning approach that starts with the final customer demand and works backward through the supply chain network to determine the necessary steps, processes, and resources required to meet that demand. It helps organizations optimize their supply chain operations by aligning them with customer demand, improving efficiency, and reducing unnecessary inventory and costs.
ProcessCustomer Demand: The process begins with an understanding of customer demand, which can include orders, sales forecasts, or historical data. This represents the ultimate goal or endpoint of the supply chain.
Working Backward: Starting with customer demand, organizations analyze the various stages of their supply chain in reverse order, moving from distribution and transportation back through manufacturing, production, and raw materials or components sourcing.
Resource Allocation: At each stage of the backward chain, decisions are made regarding resource allocation, production schedules, inventory levels, and transportation routes based on the demand and constraints.
Efficiency Improvement: By identifying the critical path and optimizing processes, organizations can streamline their supply chain operations, reduce lead times, minimize inventory holding costs, and ensure on-time delivery to customers.
Applications– Backward Chaining in Supply Chain is widely used in industries such as manufacturing, retail, and distribution. It is especially valuable in industries with complex and global supply chains, where understanding and aligning with customer demand are paramount.
– In e-commerce, for example, companies use backward chaining to efficiently manage inventory, fulfillment, and delivery processes to meet customer expectations for quick and accurate deliveries.
AdvantagesCustomer-Centric: It aligns supply chain operations with customer demand, ensuring that products or services are available when and where customers need them.
Cost Reduction: By optimizing processes and minimizing excess inventory, organizations can reduce carrying costs, warehousing expenses, and transportation expenses.
Efficiency: It improves supply chain efficiency by eliminating bottlenecks, reducing lead times, and enhancing overall operational performance.
LimitationsData and Forecasting Challenges: Accurate customer demand forecasting and data availability are essential for effective backward chaining. Inaccurate data or unreliable forecasts can lead to suboptimal decisions.
Complexity: Managing a complex supply chain network with multiple stages, suppliers, and distribution channels can be challenging and require sophisticated planning and optimization tools.
Response to Dynamic Demand: Adapting the supply chain in real-time to dynamic shifts in customer demand can be difficult and may require agile supply chain strategies.
Real-World ExampleAn example of backward chaining in supply chain management is a company that manufactures consumer electronics. Starting with customer orders and sales forecasts, it works backward through its supply chain, determining production schedules, inventory levels, and sourcing strategies for raw materials and components. This approach ensures that the right products are available in the right quantities at the right time to meet customer demand.

Understanding backward chaining

Supply chains start with the sourcing of raw materials. These materials are then delivered to a warehouse or factory and then into stores for purchase by consumers. 

The supply of raw materials is sometimes unpredictable and in short supply. As a result, these resources are highly prized and there is much competition among organizations in trying to secure them. Businesses use backward chaining to shore up these resources for themselves, eliminating all competition in the process. 

Backward chaining is also a highly effective competitive strategy. With more control over its supply chain, a business decreases costs and eliminates potential supply chain pressures.

Advantages

  • Efficiency. With greater control, businesses can streamline every aspect of the supply chain to suit their needs and preferences. The efficiency of backward chaining might reduce transportation costs and improve profit margins. In a retail context, a business with total control over its supply chain is better able to stand behind the availability of its products.
  • Reduced costs. Traditional supply chains consist of one or more middlemen who charge a mark-up for their services. With the middleman removed, acquiring raw materials becomes cheaper and these savings can be passed to the consumer.
  • Intellectual property acquisition. For example, backward chaining in the technology industry might see a business gain exclusive rights to trademarks, patents, and other proprietary information owned by their former suppliers.

Disadvantages

  • Cost. Backward chaining requires a substantial investment that not all businesses will be able to absorb.
  • Reduced economies of scale. Normally, a supplier who supplies multiple businesses may pass on savings resulting from economies of scale. Since backward chaining reduces the number of individual units being produced, the company acquiring the supplier might face higher production costs.
  • Manageability. Companies that acquire entire supply chains might become large and more troublesome to manage. Spread so widely, there core strengths and values may also become diluted.

Examples of backward chaining

Netflix started out as a DVD rental company with a focus on television and film. Eventually, the company employed backward chaining to acquire the rights to start making content themselves.

Ford Motor Company originally sourced key raw materials such as rubber, glass, and metal from suppliers. In order to protect its supply, Ford created several subsidiaries to control the supply of these materials, guaranteeing availability, and increasing quality.

Apple is also a proponent of backward chaining. Apple software is installed on electronic devices and operating systems that are owned by the company. Hardware and manufacturing facilities are also under-owned by the tech giant.

Key takeaways:

  • Backward chaining is the process of a company acquiring other companies further up the supply chain, ostensibly to secure raw materials.
  • Backward chaining is an effective competitive strategy because it increases efficiency and reduces costs. However, it does require large amounts of capital and has the potential to dilute a company’s brand.
  • Backward chaining is common to many of the world’s largest and most successful companies. 

Key Highlights

  • Definition and Origin: Backward chaining, also known as backward integration, is a form of vertical integration where a company expands its operations to include roles previously held by other businesses up the supply chain. It involves owning or controlling suppliers, distributors, or retail locations.
  • Supply Chain Control: Backward chaining allows a company to gain control over its supply chain, starting from raw material sourcing. This strategy is particularly useful when raw materials are scarce or unpredictable, as it secures resources and eliminates competition for them.
  • Advantages:
    • Efficiency: By streamlining the supply chain to align with the company’s needs, efficiency can improve, reducing transportation costs and ensuring product availability.
    • Reduced Costs: Cutting out middlemen in the supply chain lowers costs, allowing savings to be passed on to consumers.
    • Intellectual Property: Through backward chaining, a company can acquire exclusive rights to trademarks, patents, and other proprietary information owned by suppliers.
  • Disadvantages:
    • Cost: Implementing backward chaining requires a significant investment that might not be feasible for all businesses.
    • Economies of Scale: Reducing the number of units produced due to backward chaining might lead to higher production costs, losing out on economies of scale.
    • Manageability: Expanding across the supply chain can lead to challenges in managing a larger and more diversified business.
  • Examples:
    • Netflix: Started as a DVD rental company and later used backward chaining to produce its own content.
    • Ford Motor Company: Created subsidiaries to control the supply of raw materials like rubber, glass, and metal to ensure quality and availability.
    • Apple: Owns hardware, manufacturing facilities, and software components to maintain control over its products and services.

Case Studies

Industry/Supply Chain ComponentDescriptionApplication of Backward ChainingExamples and Impact
ManufacturingProduction processes and inventory management.Production is initiated in response to customer orders and demand. Manufacturers adjust production schedules based on real-time orders.Just-in-time (JIT) manufacturing reduces excess inventory and improves cost-efficiency.
RetailThe sale of goods to consumers.Retailers maintain minimal stock and replenish inventory as customers make purchases. Inventory levels are influenced by actual sales data.Retailers reduce carrying costs and respond to changing consumer preferences effectively.
Food Supply ChainThe production, processing, and distribution of food.Food producers and suppliers adjust production and shipments based on orders and consumption patterns. Reduces food waste and spoilage.Ensures fresh food products reach consumers and minimizes food loss throughout the supply chain.
E-commerceOnline retail and fulfillment processes.E-commerce companies use demand data to manage stock levels and trigger restocking or manufacturing based on customer orders.Enables efficient order fulfillment and timely delivery of products to online shoppers.
Automotive ManufacturingProduction of vehicles and automotive components.Auto manufacturers build vehicles based on customer orders and manage inventory accordingly. Parts suppliers adjust production schedules based on automakers’ demand.Minimizes the need for large vehicle inventories and optimizes supply chain efficiency.
Electronics ManufacturingProduction of electronic devices and components.Electronics companies produce gadgets and components based on customer orders and demand forecasts. Reduces excess inventory and ensures rapid product launches.Enhances flexibility in introducing new electronics products to the market.
Fashion RetailThe clothing and apparel supply chain.Fashion brands produce clothing in response to customer trends and orders. Minimizes excess inventory and overstock of out-of-season items.Reduces waste in the fashion industry and aligns production with consumer preferences.
Pharmaceutical ManufacturingProduction of drugs and healthcare products.Pharmaceutical companies manufacture drugs based on prescriptions and demand from healthcare providers and pharmacies. Ensures availability of critical medications.Enables timely distribution of medications and reduces the risk of drug shortages.
ConstructionBuilding and construction materials supply chain.Construction projects order materials based on project schedules and actual progress. Suppliers adjust production and deliveries accordingly.Minimizes excess material storage at construction sites and optimizes project timelines.
Agricultural Supply ChainCrop production and distribution.Farmers and distributors adjust planting and harvesting based on market demand. Reduces food waste and maintains price stability.Improves resource allocation and ensures a consistent supply of agricultural products.

Connected Business Concepts And Frameworks

Supply Chain

supply-chain
The supply chain is the set of steps between the sourcing, manufacturing, distribution of a product up to the steps it takes to reach the final customer. It’s the set of step it takes to bring a product from raw material (for physical products) to final customers and how companies manage those processes.

Data Supply Chains

data-supply-chain
A classic supply chain moves from upstream to downstream, where the raw material is transformed into products, moved through logistics and distribution to final customers. A data supply chain moves in the opposite direction. The raw data is “sourced” from the customer/user. As it moves downstream, it gets processed and refined by proprietary algorithms and stored in data centers.

Distribution

whats-distribution
Distribution represents the set of tactics, deals, and strategies that enable a company to make a product and service easily reachable and reached by its potential customers. It also serves as the bridge between product and marketing to create a controlled journey of how potential customers perceive a product before buying it.

Distribution Channels

distribution-channels
A distribution channel is the set of steps it takes for a product to get in the hands of the key customer or consumer. Distribution channels can be direct or indirect. Distribution can also be physical or digital, depending on the kind of business and industry.

Vertical Integration

vertical-integration
In business, vertical integration means a whole supply chain of the company is controlled and owned by the organization. Thus, making it possible to control each step through customers. in the digital world, vertical integration happens when a company can control the primary access points to acquire data from consumers.

Horizontal vs. Vertical Integration

horizontal-vs-vertical-integration
Horizontal integration refers to the process of increasing market shares or expanding by integrating at the same level of the supply chain, and within the same industry. Vertical integration happens when a company takes control of more parts of the supply chain, thus covering more parts of it.

Horizontal Market

horizontal-market
By definition, a horizontal market is a wider market, serving various customer types, needs and bringing to market various product lines. Or a product that indeed can serve various buyers across different verticals. Take the case of Google, as a search engine that can serve various verticals and industries (education, publishing, e-commerce, travel, and much more).

Vertical Market

vertical-market
A vertical or vertical market usually refers to a business that services a specific niche or group of people in a market. In short, a vertical market is smaller by definition, and it serves a group of customers/products that can be identified as part of the same group. A search engine like Google is a horizontal player, while a travel engine like Airbnb is a vertical player.

Entry Strategies

entry-strategies-startups
When entering the market, as a startup you can use different approaches. Some of them can be based on the product, distribution, or value. A product approach takes existing alternatives and it offers only the most valuable part of that product. A distribution approach cuts out intermediaries from the market. A value approach offers only the most valuable part of the experience.

Backward Chaining

backward-chaining
Backward chaining, also called backward integration, describes a process where a company expands to fulfill roles previously held by other businesses further up the supply chain. It is a form of vertical integration where a company owns or controls its suppliers, distributors, or retail locations.

Market Types

market-types
A market type is a way a given group of consumers and producers interact, based on the context determined by the readiness of consumers to understand the product, the complexity of the product; how big is the existing market and how much it can potentially expand in the future.

Market Analysis

market-analysis
Psychosizing is a form of market analysis where the size of the market is guessed based on the targeted segments’ psychographics. In that respect, according to psychosizing analysis, we have five types of markets: microniches, niches, markets, vertical markets, and horizontal markets. Each will be shaped by the characteristics of the underlying main customer type.

Decoupling

decoupling
According to the book, Unlocking The Value Chain, Harvard professor Thales Teixeira identified three waves of disruption (unbundling, disintermediation, and decoupling). Decoupling is the third wave (2006-still ongoing) where companies break apart the customer value chain to deliver part of the value, without bearing the costs to sustain the whole value chain.

Disintermediation

disintermediation
Disintermediation is the process in which intermediaries are removed from the supply chain, so that the middlemen who get cut out, make the market overall more accessible and transparent to the final customers. Therefore, in theory, the supply chain gets more efficient and, all in all, can produce products that customers want.

Reintermediation

reintermediation
Reintermediation consists in the process of introducing again an intermediary that had previously been cut out from the supply chain. Or perhaps by creating a new intermediary that once didn’t exist. Usually, as a market is redefined, old players get cut out, and new players within the supply chain are born as a result.

Coupling

coupling
As startups gain control of new markets. They expand in adjacent areas in disparate and different industries by coupling the new activities to benefits customers. Thus, even though the adjunct activities might see far from the core business model, they are tied to the way customers experience the whole business model.

Bullwhip Effect

bullwhip-effect
The bullwhip effect describes the increasing fluctuations in inventory in response to changing consumer demand as one moves up the supply chain. Observing, analyzing, and understanding how the bullwhip effect influences the whole supply chain can unlock important insights into various parts of it.

Dropshipping

dropshipping-business-model
Dropshipping is a retail business model where the dropshipper externalizes the manufacturing and logistics and focuses only on distribution and customer acquisition. Therefore, the dropshipper collects final customers’ sales orders, sending them over to third-party suppliers, who ship directly to those customers. In this way, through dropshipping, it is possible to run a business without operational costs and logistics management.

Consumer-To-Manufacturer

consumer-to-manufacturer-c2m
Consumer-to-manufacturer (C2M) is a model connecting manufacturers with consumers. The model removes logistics, inventory, sales, distribution, and other intermediaries enabling consumers to buy higher quality products at lower prices. C2M is useful in any scenario where the manufacturer can react to proven, consolidated, consumer-driven niche demand.

Transloading

transloading
Transloading is the process of moving freight from one form of transportation to another as a shipment moves down the supply chain. Transloading facilities are staged areas where freight is swapped from one mode of transportation to another. This may be indoors or outdoors, depending on the transportation modes involved. Deconsolidation and reconsolidation are two key concepts in transloading, where larger freight units are broken down into smaller pieces and vice versa. These processes attract fees that a company pays to maintain the smooth operation of its supply chain and avoid per diem fees.

Break-Bulk

break-bulk
Break bulk is a form of shipping where cargo is bundled into bales, boxes, drums, or crates that must be loaded individually. Common break bulk items include wool, steel, cement, construction equipment, vehicles, and any other item that is oversized. While container shipping became more popular in the 1960s, break bulk shipping remains and offers several benefits. It tends to be more affordable since bulky items do not need to be disassembled. What’s more, break bulk carriers can call in at more ports than container ships.

Cross-Docking

cross-docking
Cross-docking is a procedure where goods are transferred from inbound to outbound transport without a company handling or storing those goods. Cross-docking methods include continuous, consolidation, and de-consolidation. There are also two types of cross-docking according to whether the customer is known or unknown before goods are distributed. Cross-docking has obvious benefits for virtually any industry, but it is especially useful in food and beverage, retail and eCommerce, and chemicals.

Toyota Production System

toyota-production-system
The Toyota Production System (TPS) is an early form of lean manufacturing created by auto-manufacturer Toyota. Created by the Toyota Motor Corporation in the 1940s and 50s, the Toyota Production System seeks to manufacture vehicles ordered by customers most quickly and efficiently possible.

Six Sigma

six-sigma
Six Sigma is a data-driven approach and methodology for eliminating errors or defects in a product, service, or process. Six Sigma was developed by Motorola as a management approach based on quality fundamentals in the early 1980s. A decade later, it was popularized by General Electric who estimated that the methodology saved them $12 billion in the first five years of operation.

Scientific Management

scientific-management
Scientific Management Theory was created by Frederick Winslow Taylor in 1911 as a means of encouraging industrial companies to switch to mass production. With a background in mechanical engineering, he applied engineering principles to workplace productivity on the factory floor. Scientific Management Theory seeks to find the most efficient way of performing a job in the workplace.

Poka-Yoke

poka-yoke
Poka-yoke is a Japanese quality control technique developed by former Toyota engineer Shigeo Shingo. Translated as “mistake-proofing”, poka-yoke aims to prevent defects in the manufacturing process that are the result of human error. Poka-yoke is a lean manufacturing technique that ensures that the right conditions exist before a step in the process is executed. This makes it a preventative form of quality control since errors are detected and then rectified before they occur.

Gemba Walk

gemba-walk
A Gemba Walk is a fundamental component of lean management. It describes the personal observation of work to learn more about it. Gemba is a Japanese word that loosely translates as “the real place”, or in business, “the place where value is created”. The Gemba Walk as a concept was created by Taiichi Ohno, the father of the Toyota Production System of lean manufacturing. Ohno wanted to encourage management executives to leave their offices and see where the real work happened. This, he hoped, would build relationships between employees with vastly different skillsets and build trust.

Jidoka

jidoka
Jidoka was first used in 1896 by Sakichi Toyoda, who invented a textile loom that would stop automatically when it encountered a defective thread. Jidoka is a Japanese term used in lean manufacturing. The term describes a scenario where machines cease operating without human intervention when a problem or defect is discovered.

Andon System

andon-system
The andon system alerts managerial, maintenance, or other staff of a production process problem. The alert itself can be activated manually with a button or pull cord, but it can also be activated automatically by production equipment. Most Andon boards utilize three colored lights similar to a traffic signal: green (no errors), yellow or amber (problem identified, or quality check needed), and red (production stopped due to unidentified issue).

Read Also: Vertical Integration, Horizontal Integration, Supply Chain.

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