What a supply chain is

A supply chain is every company and step involved in getting a product to the person who uses it. A jar of peanut butter starts on a farm, goes to a sheller, then a factory that roasts and grinds the nuts, a glass maker and a label printer who supply the factory, a distribution centre, a shop, and finally your kitchen.

Each company sees the chain from where it stands. Upstream is towards the raw materials: your suppliers, and their suppliers. Downstream is towards the customer. The companies that sell to you directly are your tier 1 suppliers; the ones that sell to them are tier 2, and so on. Most companies know their tier 1 suppliers well and their tier 3 suppliers hardly at all.

Three things flow along a supply chain. Goods flow downstream, from raw materials to finished products. Money flows upstream, as each customer pays its supplier. Information flows both ways: orders and sales data go up, while delivery dates, shipping notices and invoices come down. A lot of supply chain trouble starts with information that's late or wrong, not with the goods themselves.

Supply chain management is running all of this so that the right product is in the right place at the right time, at a cost that leaves a profit. That means balancing things that pull against each other: holding more stock makes customers happier but ties up cash; shipping by air is fast but expensive; one cheap supplier is efficient until it has a fire.

It's a bigger job than it sounds. For a typical manufacturer or shop, the things it buys and moves are most of its costs. That's why a small improvement in the supply chain can matter more to profit than a big jump in sales.