Supply chain fundamentals

What is a supply chain

A supply chain is a system of connected processes, participants and flows designed to make a product or material available in the right place, at the right time and in the right quantity, at a justified level of cost.

It is not limited to transport. It includes procurement of raw materials, demand planning, production, warehousing, order picking, transport, delivery to the customer, returns handling and the flow of information and documents. Transport is one part of the system, but it cannot work properly without the other stages being prepared.

A well-designed supply chain should provide product availability, predictable execution and control of total process cost.

• supplier → procurement → production or picking → warehouse → transport → consignee → returns or waste management

More extensive models also involve logistics operators, freight forwarders, transhipment terminals, distribution centres, transport subcontractors, IT systems and returns partners. A supplier delay, lack of warehouse space, incomplete cargo data or an incorrect booking can disrupt the stages that follow. A single leg should therefore not be assessed in isolation.

Three core flows

A supply chain rests on three parallel flows: physical, information and financial.

Transport as part of the system

Transport is one of the most visible parts of a supply chain, but its result depends on decisions made earlier. A carrier cannot complete a delivery properly when goods have not been prepared, documents are incorrect, cargo weight is unknown or the consignee cannot unload the vehicle.

The transport method should be selected using cargo and delivery-site data rather than the availability of a particular vehicle alone.

• cargo weight and volume
• number of pallets or transport units
• stackability
• cargo value and susceptibility to damage
• required delivery date
• unloading conditions at the consignee
• need for a tail lift, loader crane, pallet truck or a roller system such as Joloda
• temperature and ADR requirements
• scope for consolidation with other deliveries

Full truckload transport may be justified for larger batches. For smaller quantities, part-load or groupage transport may be preferable. The choice should follow an analysis of the whole process.

Transport cost and total supply-chain cost

Transport cost can be assessed at two levels. The first is the cost of the carriage itself: the freight rate for outsourced services or the cost of using a vehicle in an own fleet.

Own-fleet costs include, among others, fuel, road tolls, driver pay, vehicle depreciation, servicing and repairs, insurance and the capital tied up in purchasing and maintaining a vehicle. Some of these costs arise even while a vehicle waits for loading, stands at a warehouse, waits for unloading or returns empty.

The second level is the total cost of completing a delivery. Freight price or cost per kilometre alone does not provide the full picture.

• cost of loading, unloading, transhipment and preparing goods for dispatch
• vehicle waiting cost at the loading bay
• warehousing and inventory holding cost
• cost of damage and claims
• cost of delays, missed delivery windows and extra work at the warehouse or consignee
• administration, booking, documentation, monitoring and settlement cost
• cost of returns and empty mileage

The cheapest carrier is not always the best option. A higher rate can reduce total process cost when it brings better punctuality, fewer losses, clearer communication and lower risk of disruption.

Inventory and delivery planning

Inventory protects a business against supplier delays, demand fluctuations, breakdowns, production issues and forecasting errors. At the same time, it requires space, handling, control, protection and funding. There is also a risk of damage, expiry, loss of value or limited saleability.

The goal is not to hold the maximum quantity of stock. The goal is to maintain availability at a reasonable cost.

minimum stock

the lowest stock level needed to keep operations running until the next delivery

safety stock

additional inventory held for a supplier delay, higher demand or a forecasting error

reorder point

the stock level at which a new order must be placed so goods arrive before the current stock runs out

delivery size

the quantity delivered at one time; a larger lot can reduce transport cost per unit but usually increases warehousing cost

delivery frequency

the number of deliveries in a period; more frequent deliveries can reduce stock but increase the number of transport, loading, unloading and administrative activities

order lead time

the period from placing an order to goods becoming available in the warehouse; it includes preparation, production, transport, unloading and receipt

Large and infrequent deliveries can reduce unit transport cost, but they usually increase warehousing cost and the capital tied up in stock. Small and frequent deliveries reduce inventory but increase the number of transport movements, loading, unloading and administrative activities. The right model should follow an analysis of demand, stock rotation, available warehouse space, transport capacity and process-handling cost.

The role of the warehouse

The warehouse connects inbound deliveries, production, order picking, distribution and returns. It does more than store goods: it directly affects the flow of the entire supply chain.

A pallet prepared incorrectly, a missing label, the wrong quantity, missing documents or goods that are not ready on time cause vehicle downtime and additional cost.

• inbound control
• product traceability
• appropriate stock placement
• efficient order picking
• document preparation
• loading and unloading appointments
• quality control
• returns handling
• up-to-date inventory information

In larger businesses, WMS systems support location management, stock rotation, picking and inventory control.

Risk and business continuity

Supply chains are exposed to disruption caused, among other things, by supplier delays, vehicle breakdowns, warehouse errors, driver shortages, weather, regulatory changes, roadside inspections, production problems or counterparty insolvency.

Risk cannot be eliminated completely, but its impact can be reduced by preparing alternatives and checking data early.

• working with more than one supplier or carrier
• safety stock for critical materials
• alternative routes and transport modes
• regular delivery schedules
• transport execution monitoring
• checking documents and data before loading
• assessment of carrier quality
• procedures for delays or lack of product availability

The biggest mistake is reacting only after a problem occurs. Supply-chain management requires risks to be identified early and solutions prepared to limit their effects.

Performance indicators

Supply chains should be measured. Without data, it is difficult to establish whether a company is truly improving a process or merely moving cost from one department to another.

• delivery punctuality
• order fulfilment level
• number of claims
• transport cost per pallet, tonne or order
• warehousing cost
• inventory level and inventory turnover
• number of empty runs
• vehicle load-space utilisation
• average order lead time
• number of picking errors
• number of loading and unloading delays

Indicators should be analysed together. High delivery punctuality does not always mean high efficiency when it has been achieved through excess inventory or expensive express transport.

Summary

A supply chain is a complete system covering procurement, warehousing, transport, information, financing and customer service. Its performance depends not on one decision, but on the alignment of every stage.

Transport should be assessed not only through the cost of carriage but also through the cost of warehousing, waiting time, delays, claims, administration, returns and inventory holding. Only this view makes it possible to assess the real efficiency of a logistics solution.