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.
- Supply chain in a nutshell
- Supply chains vs. Value Chains
- Beyond distribution
- Upstream vs. downstream
- Supply chain vs. customer value chain
- Supply chains in the bits world
- Breaking down the supply chain as a business strategy
- Tesla integrating and disintermediating
- Luxottica integrating and intermediating
- AI, data and flipped digital supply chains
- Connected Business Concepts And Frameworks
Supply chain in a nutshell
The supply chain represents the set of steps it takes to bring a product from raw to finished. And together with it, it also represents the set of steps it takes to bring the product to the final customers.
All the activities needed to fulfil this mission are part of a supply chain.
Imagine a Starbucks espresso. Before it turns into it, it follows a whole supply chain from bean to cup of coffee. All the steps taken from bean to cup of coffee in a Starbucks store will represent the supply chain for that product.
Supply chains vs. Value Chains
Value chains were first described by Michael Porter in his 1985 book Competitive Advantage.
Here’s is how a Porter’s Value Chain looks like.
He believed that the business must first identify its activities and then analyze the value added for each in the context of competitive strength.
Porter split these activities into two primary categories.
- Inbound logistics – the receipt, storage, and distribution of inputs.
- Manufacturing operations – where inputs are transformed into a finished product.
- Outbound logistics – the storage and distribution of products and services to customers.
- Marketing and sales – any activities that create product awareness among the general public.
- Services – those activities that increase the value of the product itself.
As the name suggests, these are any activities that support primary activities such as HR management, technology, procurement, and infrastructure.
Thus, to recap the difference between value chains and supply chains, in the classical sense:
- A value chain comprises the activities a company performs to create value for customers and maximize its competitive advantage. Supply chains describe the network of entities that source raw materials, transform them into products via manufacturing, and distribute and sell them to customers.
- According to Michael Porter, value chains comprise activities that can add to a firm’s competitive strength. These include primary activities such as inbound logistics and manufacturing and any secondary, support activities.
- The notion of value chains arose from business management, but supply chains have their roots in operational management. The latter is more concerned with conveyance
In some cases, supply chain and distribution are used interchangeably. However, distribution’s main focus is to bring the product in the hands of final customers, supply chain represents all the steps to make and also distribute that product.
Yet, depending from the position in the supply chain distribution can take on several forms, all depending to how the customer looks like.
In short, distribution is a marketing activity skewed toward the final customer. If you’re a producer who doesn’t sell its product directly to customers, then distribution will be primarily about dealing with wholesalers, that in turn will distribute the product downstream, until it reaches the final customer.
The supply chain instead comprises all the processes that go from raw materials, sourcing, logistics, and distribution.
Upstream vs. downstream
Why do companies move upstream?
When companies move upstream, they have more control over sourcing and manufacturing of the product. That can give the company more control over the quality of the product. Also, by moving upstream the company can retain more margins, and take advantage of economies of scale.
Why do companies move downstream?
When companies move downstream they get closer to customers, thus gaining more control over customer experience. Any integration, either upstream or downstream can be expensive, yet companies gain more control to ensure the quality of the product (upstream) and the quality of the customer experience (downstream).
Moving both ways
In some cases, companies move in both directions, to enable a fully integrated vertical strategy. The Luxottica case study is a good example of integrating both upstream (toward production) and downstream (toward the sale to final customers it its own retail stores).
Upstream integration case study: Google starts to make its own devices
For years Google had been looking into building its own smartphones. Being the owner of Android, Google now had the chance to take a step upstream the supply chain of data by manufacturing its own phones.
And yet, the first official launch of the Pixel phone only happened in 2016. Google moved upstream by building its own devices, which also led it to be a step closer to customers’ value chain.
The physical phone, part of the Google’s supply chain could be used as the basis also of acquisition of users’ data, in line with the Google business model.
Therefore, when Google got upstream in the supply chain. It also got downstream in the “data supply chain” as it could gather data closer to users.
Downstream integration case study: Apple starts to build its stores
Back in 2001, Apple launched its own stores. As it highlighted at the time:
“The Apple stores offer an amazing new way to buy a computer,” And Steve Jobs, continued, “rather than just hear about megahertz and megabytes, customers can now learn and experience the things they can actually do with a computer, like make movies, burn custom music CDs, and publish their digital photos on a personal website.”
This downstream integration, over the years, also worked as a powerful distribution strategy that enhanced customer experience for Apple’s products.
While Apple’s stores are extremely expensive to build and maintain, and they do not represent the majority of Apple’s sales. They worked as iconic locations where customers could recognize the Apple’s brand at scale.
And also the place where Apple could build a set of ancillary services for its own devices.
Supply chain vs. customer value chain
Where the supply chain comprises the steps and actions needed to bring the product from production to sale.
The customer value chain is about the actions the customers take when acquiring a product, and the values they get at each step of the journey.
Supply chains in the bits world
Vertical integration can also work in the digital/bits world. Where companies get closer to the customer both upstream and downstream.
In the “data supply chain” the hardware is the closest thing to the customer, therefore we can also consider it to be downstream.
Breaking down the supply chain as a business strategy
When companies remove steps in the supply chain, thus making it shorter, this is a process of disintermediation.
In some cases, supply chain might change over time, as those same companies that disintermediated some steps, they might introduce new logics to an existing supply chain.
For instance, in the last-mile problem we saw how Amazon might be disintermediating existing and dominating delivery services, to reintroduce new mechanics of last-mile delivery.
Tesla integrating and disintermediating
A good example of both integration and disintermediation, is how Tesla controlled more steps of the supply chain, from production to distribution. While at the same time, it disintermediated the traditional car dealer, by selling its vehicles directly in its Tesla store, and on its e-commerce.
Luxottica integrating and intermediating
Luxottica is a good example of a company that took control of more steps in the supply chain, while positioning itself as the go-to licensor for luxury brands, from Bulgari, to Prada, Chanel and many more that produce their sunglasses through Luxottica.
AI, data and flipped digital supply chains
Connected Business Concepts And Frameworks