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Start Your Business Startup Basics

Supply Chain Management: What Small Businesses Need to Know

Supply Chain Management: What Small Businesses Need to Know
Credit: chombosan/Shutterstock

The products that fill the shelves and barrels of your favorite retail store go through quite a journey to find their way to your shopping cart. Any physical good that can be purchased has to go through a supply chain, from manufacturer to supplier to retailer and finally to the consumer. But how do businesses manage their supply chains?

Supply chain management is a conscious effort to run supply chains in the most efficient and effective way possible. Such strategies include product development, sourcing, production and logistics, each of which assists in creating quality products and coordinating their flow to the consumer. The supply chain exists in many different forms, but the most common structure contains four separate entities:

  1. Suppliers. These entities provide the materials needed to create the product, whether they're raw materials or individual parts to a finished product. For example, Apple's iPad comes from a variety of suppliers: Samsung manufactures its processor chips, LG produces the touchscreen display, and Toshiba creates the flash memory.
  2. Manufacturers. This stage of the supply chain entails bringing together all of the parts provided by suppliers to create the finished product. Apple would take each individual part from the suppliers and put them together to create a finished iPad for distribution.
  3. Distributors. These entities store and sell the finished product, either at a physical storefront or through an online store. Locations like Apple stores and Walmart provide physical locations where consumers can buy an iPad, whereas online distributors ship the iPad directly to a consumer's door.
  4. Customers. Consumers create demand for products and ultimately influence the quantity of products and the overall supply chain structure.

The organizations that ultimately create the supply chain are linked together through both physical and informational means. The physical element involves the creation, shipping and storage of goods – the obvious, visible part of the process. However, critical to the coordination of goods is the informational element that allows supply chain partners to communicate with one another and control the flow of goods.

Andrew Lynch, president and CEO of Zipline Logistics, told Business News Daily that having a strategy in place for an organized supply chain is vital to the success of a business.

"Without a strategy, supply chain and transportation run the risk of becoming cost centers that can negatively impact a brand," Lynch said.

A single business can't do everything by itself when it comes to the supply chain, so it's necessary to pick some supply partners. Lynch suggested asking the following questions to help you choose the best supply partners for your business:

  • Can the partner grow with you and serve a larger customer base as your company expands?
  • Can they provide any additional benefit, like niche expertise, helpful technology or other resources?
  • Does their organization match your company values?
  • What do their current or previous customers or partners say about them? Are they honest? Are they responsive?
  • Are they in a good area that drivers can easily reach?
  • What kind of investment do they require upfront? Is the cost necessary, or can you function without it?

Risk management is a key driving force to creating a supply chain. Reducing the costs of a supply chain carry inherent risks of reduced quality and unreliable shipping times. Common practices like outsourcing, offshoring, lean manufacturing and just-in-time all create increased risk levels. Countless industries seek after the right balance of risk and cost, using more modern approaches such as supply chain redundancies, information tracking, flexible supply contracts and risk assessment measures.

Lynch warned against cutting corners to save money on shipments. Rather than adding more overhead, small businesses are better off finding a partner who can take the work of transportation off their plate, he said.

"Looking for transactional savings on shipments can hurt businesses in the long run," Lynch added. "While $20 to $100 savings will be seen immediately, the long-term costs and impacts are significant."

Lynch also recommends paying careful attention to your transportation provider. He points out that the transportation provider is often the last person to interact with your customer, and so gives the last impression of your brand.

Part of strategically managing your supply chain is being prepared for disruptions. Disruptions can occur for a variety of reason, but it's especially common in the event of natural disasters. In a survey of more than 1,000 businesses, the Travelers Business Risk Index revealed that when it comes to disruptions, the greatest supply chain risk is associated with getting materials from suppliers. This and other supply chain disruptions might become a problem after events like hurricanes, earthquakes, tornadoes, wildfires or other disasters.

Ken Katz, national property director of risk control for Travelers, suggested planning ahead for such disruptions.

"According to the Travelers Business Risk Index, only 28 percent of small businesses have a business continuity plan," Katz told Business News Daily. "We recommend businesses always prepare for the worst and don't assume that employees and suppliers will know what to do. It's best to have a documented plan that includes information on secondary suppliers and other backups."

Katz said that your business should identify threat; conduct a business impact analysis; create and adopt controls for prevention, mitigation and recovery; and test and adjust your backup plan often so that your business can be prepared and experience the least disruption possible.

In the event of an emergency, you can start to recover by first reaching out to secondary suppliers, said Erika Melander, manufacturing industry lead for Travelers. Communicating with customers is also important, she said.

"Regular communication with customers and suppliers is essential until the supply chain has recovered," Melander said. "This level of transparency helps to reinforce that there is a plan in place. It is also important to communicate with employees about next steps and how their day-to-day jobs might be affected."

Melander also recommended that businesses obtain proper insurance as early as possible into their operations, so that in the event of a disaster, they'll be able to get things up and running again quickly. She suggested contingent business interruption coverage as a possible insurance solution, and encouraged businesses to regularly check with insurance agents regarding coverage.

Additional reporting by Ryan Goodrich.

Jill Bowers

Jill Bowers is a technical writer by day and a fantasy author by night. She has more than 10 years of writing experience for both B2C and B2B content, focusing on topics like travel writing, consumer finance, business marketing, social media marketing and other business categories. She spends an inordinate amount of time singing love songs to her dog, composes handbell music and writes YA fantasy novels.