What is a supply chain
A supply chain is the network of suppliers, plants, distribution centers, carriers, retailers and customers that together turn raw material into a delivered product. Supply chain management (SCM) is planning and coordinating those links to serve the customer at the lowest total cost and with the least capital tied up.
It goes beyond buying and shipping. It covers demand forecasting, planning, sourcing, production, inventory, distribution and returns, all tied together by shared information. Each company is one link: what it does improves or worsens the results of its neighbors.
Supply chain visual map
The map shows the three flows, the links of the chain, the five SCOR processes and the numbers of the example in this article.
The three flows of the chain
A chain works when three flows move in sync. Most problems start when one of them drifts away from the others.
| Flow | Direction | What moves | Typical failure |
|---|---|---|---|
| Material | Supplier to customer | Raw material, components, finished goods | Stockouts or excess inventory |
| Information | Both ways | Orders, forecasts, schedules, inventory levels | Distorted orders, delayed information |
| Cash | Customer to supplier | Payments, terms, financing | Cash tied up in stock and misaligned terms |
The links are usually: tier 2 suppliers, tier 1 suppliers, the plant, the distribution center, retail and the end customer. The farther from the customer, the less visibility of real demand.
The SCOR model: five processes
The SCOR model, maintained by ASCM (formerly APICS), describes the chain as processes that serve as a common language for diagnosis and metrics.
| Process | What it covers | Go deeper |
|---|---|---|
| Plan | Demand, capacity, supply, sales and operations plan | S&OP, demand forecasting |
| Source | Purchasing, supplier selection, receiving | MRP, milk run |
| Make | Scheduling, manufacturing, assembly | production planning and control, master production schedule |
| Deliver | Orders, warehousing, transportation | inventory management |
| Return | Returns of materials and products, warranty | Reverse logistics |
Metrics: perfect order and cash-to-cash cycle
Two metrics summarize end-to-end performance: the perfect order rate (customer service) and the cash-to-cash cycle (capital).
Perfect order = % on time × % in full × % damage-free × % with correct documentation
Fictional example: 95% on time, 98% in full, 99% damage-free and 97% with correct documentation. Perfect order = 0.95 × 0.98 × 0.99 × 0.97 = 89.4%. Four individually good results still give a perfect order rate below 90%.
Cash-to-cash cycle = DIO + DSO − DPO
DIO is days inventory outstanding, DSO days sales outstanding and DPO days payables outstanding. For Alpha Plant (example): sales of $36,500,000, cost of goods sold (COGS) of $29,200,000, inventory of $3,600,000, receivables of $3,800,000 and payables of $2,400,000.
| Metric | Calculation | Days |
|---|---|---|
| DIO | 3,600,000 ÷ 29,200,000 × 365 | 45 |
| DSO | 3,800,000 ÷ 36,500,000 × 365 | 38 |
| DPO | 2,400,000 ÷ 29,200,000 × 365 | 30 |
| Cash-to-cash | 45 + 38 − 30 | 53 |
Daily COGS is 29,200,000 ÷ 365 = $80,000. Cutting inventory by 10 days (DIO from 45 to 35) frees 10 × 80,000 = $800,000 of cash and brings the cycle to 43 days. See how to compute inventory turnover and how to prioritize with ABC analysis.
The bullwhip effect
The bullwhip effect is the amplification of order variability as you move up the chain. It was described by Jay Forrester and analyzed by Lee, Padmanabhan and Whang. Classic causes: forecasting from orders instead of real sales, order batching, price fluctuations, and rationing with inflated orders.
Hypothetical example: consumer demand rises from 100 to 110 units per week (+10%).
| Link | Weekly order (before → after) | Increase |
|---|---|---|
| Consumer | 100 → 110 | +10% |
| Retailer | 100 → 115 | +15% |
| Distributor | 100 → 135 | +35% |
| Plant | 100 → 180 | +80% |
| Supplier | 100 → 260 | +160% |
Remedies: share real sales across the links, cut batch sizes and lead times, stabilize prices and replenish in short cycles, as in Just in Time.
Planning across three horizons
- Strategic: network of plants and distribution centers, make or buy, partner selection.
- Tactical: S&OP balances demand and capacity over months.
- Operational: master scheduling, MRP and weekly and daily scheduling.
Common mistakes
- Optimizing only your own link (low purchase cost, high inventory and freight).
- Measuring only cost and ignoring service and tied-up capital.
- Treating suppliers as adversaries and not sharing forecasts.
- Planning with one sales forecast on one side and another production forecast on the other.
- Having no visibility beyond the direct supplier.
- Cutting inventory without reducing variability and lead time, causing stockouts.
Frequently asked questions
What is a supply chain?
It is the network of suppliers, plants, distribution and customers that moves a product from raw material to the consumer.
What is supply chain management?
It is planning and coordinating the flows of material, information and cash between the links, serving the customer at the lowest total cost.
What is the difference between supply chain and logistics?
Logistics handles movement and storage. Supply chain management is broader: it includes planning, sourcing, production and partner relationships.
What is the SCOR model?
It is a reference model with five processes: plan, source, make, deliver and return.
What is the bullwhip effect?
It is the amplification of order variability as you move up the chain, from retailer to supplier.
How do you calculate the cash-to-cash cycle?
Cash-to-cash = days inventory + days sales outstanding − days payables, such as 45 + 38 − 30 = 53 days in the example.
Sources
- CHOPRA, S.; MEINDL, P. Supply Chain Management: Strategy, Planning, and Operation. Pearson.
- SLACK, N.; BRANDON-JONES, A.; JOHNSTON, R. Operations Management. Pearson.
- BALLOU, R. H. Business Logistics/Supply Chain Management. Pearson.
- LEE, H. L.; PADMANABHAN, V.; WHANG, S. The Bullwhip Effect in Supply Chains. Sloan Management Review, 1997.
- FORRESTER, J. W. Industrial Dynamics. Cambridge: MIT Press, 1961.
- ASCM. Supply Chain Operations Reference (SCOR) Model.
Keep studying: trusted sources and links
- CSCMP: Supply Chain Management Definitions and Glossary
- ILOS: Instituto de Logística e Supply Chain (in Portuguese)
- Wikipedia: Supply chain management
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About the author
Lean Manufacturing & Behavioral Management Specialist
Over 20 years in the automotive and metalworking industries (GM and Dana), Lean Manufacturing practitioner since 2006. SENAI instructor and mentor in Brazil’s Brasil Mais Produtivo program, delivering consulting, training and audits for 50+ companies, combining quality, productivity and people development.
