A supply chain is the connected system that turns an idea or raw material into a product delivered to a customer. It includes suppliers, factories, warehouses, transportation, stores, online platforms, and information systems. Entrepreneurs need to understand supply chains because every step affects cost, speed, quality, and customer satisfaction.
A strong supply chain helps a business deliver the right product, at the right time, at the right price.
Key Facts
- Total cost = materials cost + labor cost + transportation cost + storage cost + overhead
- Lead time = order date to delivery date
- Profit = revenue - total cost
- Inventory turnover = cost of goods sold / average inventory
- Reorder point = demand during lead time + safety stock
- A supply chain works best when materials, money, and information flow accurately between every partner.
Vocabulary
- Supplier
- A supplier is a business or person that provides materials, parts, or services needed to make a product.
- Manufacturing
- Manufacturing is the process of turning raw materials or parts into finished goods.
- Inventory
- Inventory is the stock of materials, work in progress, or finished products a business has available.
- Logistics
- Logistics is the planning and movement of goods through transportation, storage, and delivery.
- Lead Time
- Lead time is the amount of time between placing an order and receiving the product.
Common Mistakes to Avoid
- Ignoring hidden costs, such as storage, returns, damage, and delays, is wrong because the lowest purchase price may not create the lowest total cost.
- Ordering too much inventory is wrong because extra stock ties up cash, requires storage space, and can become obsolete.
- Relying on only one supplier is risky because a single disruption can stop production or delay customer orders.
- Tracking only product movement is incomplete because supply chains also depend on accurate information flow, demand forecasts, and payment timing.
Practice Questions
- 1 A business spends 5 per unit on labor, 1 per unit on storage. If it makes 500 units, what is the total cost?
- 2 A company sells 1,200 units per month and its supplier lead time is 10 days. Assuming 30 days per month and safety stock of 100 units, what is the reorder point?
- 3 A startup can choose a cheaper overseas supplier with a 45-day lead time or a local supplier with a 7-day lead time and higher unit cost. Explain which option might be better for a product with unpredictable demand and why.