Upstream and Downstream Logistics in Supply Chain Management.

Supply chains consist of all the steps involved in getting a product from a raw material into the hands of the customer. Typically, the supply chain begins with the vendors or suppliers. These are the businesses that provide raw materials. Next in the supply chain is manufacturing. This is the process of converting the raw materials into products that are ready to sell. The final step is distribution which can involve multiple different intermediaries. Some of these middle-men could be wholesalers, retailers, distributors, and even the internet.

Often, different stages within the supply chain are referred to as upstream or downstream. Upstream operations are those in which the materials flow into the organization. Downstream operations are those in which materials (mostly in the form of finished products) flow away from the organization to the customers. Similarly, the term logistics is used when talking about a business’s supply chain. Inbound logistics are related to the upstream activities and include all of the movement of the product before manufacturing. They involve receiving materials, storing them, and the manufacturing processes required to produce the product. Of course, outbound logistics are related to the downstream operations involving just about all of the movement of the product once it is a finished good.

Flows in the Supply Chain

There are three types of main flows that happen in any supply chains: flow of materials/goods, flow of money/cash, and flow of information. There is a forward flow of materials/goods for the regular flow that happens all the way from higher tier suppliers (upstream) to the end-consumer (downstream). In addition, if there is any returns for any reason, there will be a reverse flow of materials/goods in the opposite direction to the forward flow.

Flow of money (cash flow) happens from downstream to upstream. For example, the retailer needs to pay the distributor for the goods they have received from them.

Flow of information happens both ways in the supply chain since organizations will need to share different type of information with each other so that the whole supply chain can make better decisions to improve overall performance.

Foundational Elements of Supply Chain Management

Each organization in a supply chain needs to manage four key elements. These include supply management, managing the internal operations, distribution management, and managing the integration of all of these so that all parts of the supply chain are working with each other in harmony. The following sections will cover some of the things that are done in relation to each one of these elements. Figure 4.3 depicts the foundational elements.

Supply Management includes purchasing and managing the suppliers and the relationships with them. Internal Operations is consisted of managing whatever the company does to add value. For example, a manufacturer does “Production”, along with managing inventory of raw materials and finished goods, human resources, etc. Distribution Management deals with managing the customers and the relationships with them. In order to do this, the organization needs to have a deep understanding of its customers and their needs to be able to deliver the right product/service to the right customer at the right time. Integration Management uses several technologies such as ERP systems to make the collaboration among the different elements easier and more accurate.

Supply Chain Design

Supply Chain Design is a strategic decision which determines who needs to take on what role or responsibility in the supply chain and where they should be located. Different companies choose different design or structure for their supply chains. For example, Walmart has always used traditional brick and mortar stores to serve its customers, while Amazon has been using an online platform to get customers’ orders and then, ship them directly from their distribution/fulfillment centers.

When designing a supply chain, two main things to consider are Efficiency (cost reductions) and Responsiveness. The balance between these two could be different for different companies. That is, depending on the customers’ preferences, the company decides to have a certain structure for their supply chain. For example, if the customers for a particular company are willing to wait for 5-7 days to get their ordered products online, the company can store its inventory in fewer locations and use the longer time of transportation to serve its customers. However, if the customers want to have their products right away, the company may need to open quite a few stores and keep enough inventory in each one to be able to respond faster to its customers’ needs.

A company may decide to use other companies for parts of their supply chain or to have their own entities. This includes Vertical and/or Horizontal integration. Vertical integration is a term that is used when a firm owns more than one portion of its supply chain. For example, for a manufacturer company, they may have their own distributors or even retail stores to sell their products to the end-consumers (forward integration) or they may choose to own one or more of the suppliers that provide the company with certain materials or components (backwards integration).

Supplier Tiering

Tiering suppliers is a form of supply base management in which suppliers are organised such that only first tier suppliers deal directly with the buying organisation. Second tier suppliers will participate in the same supply chain, but will supply first tier suppliers who will assemble or integrate before supplying the buying organisation. The practice originated in the automotive industry and allowed car assemblers to reduce their first tier supply base to below 1000 suppliers. The practice allows the development of differentiated supply relationships with a smaller community of suppliers. Management contracting is a similar practice in the building and construction sector.