The Basic of Supply Chain

The most basic of supply chain process is where a company purchased raw materials from vendors and transformed it into a finished product in a single step. The company then sells it to the end users or customers. Let’s take a basic example, a boy who wants to sell lemonades. He gets all his materials from his parents. He makes the raw material into lemonades and sells it directly to customers. But, in a realistic business world, supply chains have multiple end products with many vendors supplying different parts of items, components and services that end up with a complete product that is ready to be shipped out or distribute. The flow of materials is also not usually in a linear network but sometimes along multiple networks. Here are a video showing a cartoon example of a very basic supply chain.

Supply Chain Rationalisation

Rationalising the supply chain is the activity of selecting the right number of suppliers and the most suitable suppliers within that numbers. Therefore the strategic consideration in rationalising the supply chain is that, the company has to look and evaluate the supply chain in a tier level perspective. The suppliers can be broken into several different tiers, with the first tier providing the major component to the company. By rationalizing the supply base, the company only needs to handle a few suppliers in delivering a complex product. This can be seen in the automotive industry and also aerospace industry. 

However minimizing the number of suppliers does not necessarily translate the action into an effective supply chain. The effectiveness is highly dependent on which suppliers the company chooses and the commitment it have for long term growth and contracts. Rationalisation of the supply base is closely related to the strategy of the company for long term growth. By limiting the company’s network, it can affect the flexibility of the company to move forward. This action can only be mitigated by the means of stringent selection criteria and choosing the best suppliers to become a part of the company.

As an example, Lotus Cars Ltd has taken the approach of rationalizing their supply chain in 2004. Working with 200 suppliers and producing 2800 products, Lotus Group produced value stream mapping to understand, simplify and restructure the value stream of their supply chain. These resulted in a closer alignment of the supply to demand and therefore reduce the inventory of Lotus with accurate scheduling and improved information. The activity has resulted in 50% improvement in delivery performance.