What is a supply chain?
A supply chain is the whole line of businesses and steps that turn raw materials into a finished product in the customer's hands. Example for a T-shirt: cotton farm → spinning mill → garment factory → warehouse → shop → customer.
Three things flow along the chain:
- Goods move forward, from supplier to customer.
- Money moves backward, from customer to supplier.
- Information (orders, demand, delivery dates) moves both ways.
Logistics is the part that gets goods to the right place at the right time: transport, warehousing, packing and tracking. Good logistics means lower costs and happy customers. If one link is slow or breaks, every link after it suffers.
Procurement and choosing suppliers
Procurement means finding and buying the inputs a business needs: raw materials, parts and services. The aim is the right goods, at the right price, quality and time.
Factors when choosing a supplier:
- Price: a lower price means lower costs and more profit, but very cheap may mean poor quality.
- Quality: poor parts lead to faulty products, returns and a bad reputation.
- Reliability: does the supplier deliver on time, every time? Late deliveries stop production.
- Flexibility: can they deliver more, less or faster when demand changes?
- Also: payment terms (credit), location (closer = faster, less transport), and ethics (fair wages, environment).
Good relations with suppliers (clear communication, paying on time, long-term deals) often bring better prices, priority in shortages and help with new products.
Stock control: buffer stock and just-in-time
Stock (inventory) is raw materials, parts and finished goods a business holds. Too much costs money (storage, insurance, waste, cash tied up). Too little causes a stock-out: lost sales and stopped production.
Buffer stock
A buffer stock is a safety amount kept in case of late deliveries or a sudden rise in demand. A stock control graph shows stock falling as it is used, then jumping up when a delivery arrives. Key terms:
- Lead time: days between ordering and receiving stock.
- Re-order level: the stock level at which a new order is placed. Re-order level = daily usage × lead time + buffer stock.
- Re-order quantity: how much is ordered each time.
Just-in-time (JIT)
With JIT, stock arrives just when it is needed and almost no buffer is kept.
- Advantages: less storage space and cost, less waste, cash is free for other uses.
- Disadvantages: needs very reliable suppliers; one late delivery stops production; fewer bulk-buying discounts; more orders and deliveries.
Outsourcing
Outsourcing means paying another firm to do a task instead of doing it yourself, for example a phone brand having its phones built by a contract factory, or a shop using a delivery company.
- Advantages: lower costs, access to specialist skills, focus on what the business does best, easy to scale up or down.
- Disadvantages: less control over quality and timing, risk to reputation if the partner behaves badly, sharing secrets, and depending on another firm.
Before outsourcing, a business compares cost, quality, reliability and the risk to its brand, just as when choosing any supplier.
Key formulas and definitions
- Supply chain: raw materials → producer → distributor/warehouse → retailer → customer
- Goods flow forward; money flows back; information flows both ways
- Re-order level = daily usage × lead time + buffer stock
- Maximum stock ≈ buffer stock + re-order quantity
- Supplier choice: price, quality, reliability, flexibility (+ credit, location, ethics)
- JIT: low stock costs, high risk of stock-out; buffer: safe, higher stock costs
Worked examples
1. A bakery uses 40 kg of flour a day. Delivery takes 3 days. It keeps a buffer stock of 60 kg. What is the re-order level?
Re-order level = daily usage × lead time + buffer = 40 × 3 + 60 = 120 + 60 = 180 kg. When flour falls to 180 kg, the bakery orders more. In 3 days it uses 120 kg, so 60 kg (the buffer) is left when the delivery arrives.
2. Supplier A sells a part for ₹90 but is late 1 delivery in 4. Supplier B charges ₹100 and is always on time. A car factory uses JIT. Which should it choose?
B. With JIT there is no buffer stock, so one late delivery stops the whole line, costing far more than ₹10 per part. Reliability matters more than a small price difference for a JIT firm.
3. A small online seller outsources delivery to a courier company. Give one benefit and one risk.
Benefit: no need to buy vans or hire drivers, so lower fixed costs and wide coverage. Risk: if the courier is late or loses parcels, customers blame the seller, harming its reputation.
Common mistakes
- Thinking the cheapest supplier is always best. Quality and reliability problems can cost much more.
- Forgetting the buffer when working out the re-order level. Re-order level = usage × lead time + buffer.
- Saying JIT means no stock at all. JIT keeps very little stock, timed to arrive when needed.
- Mixing up lead time and re-order quantity. Lead time is days waiting; re-order quantity is how much you order.