Managing the Supply Chain (AQA A Level Business): Revision Note

To produce or to buy in?

• Every business relies on a chain of suppliers, processes and logistics to turn raw materials into products or services that reach the customer

  • A well-managed supply chain helps a business operate efficiently and respond to problems quickly

  • A poorly managed one can lead to delays, higher costs and dissatisfied customers

Producing internally

• A business makes its own products or components using its own resources and staff, rather than buying them from another business

Example

Tesla has invested heavily in producing its own batteries at its Gigafactories rather than buying them in. This gives it more control over cost and supply, and reduces its exposure to disruption from external battery suppliers

Advantages

• Gives a business full control over quality, timing and production methods

• Protects confidential processes or designs from being shared with an external supplier that might also work for competitors

• Can be cheaper in the long run once a business has invested in its own equipment and expertise, especially at high volumes

Disadvantages

• Requires significant investment in equipment, premises and staff before production can even begin

• Limits flexibility, as capacity cannot be increased or reduced as easily as when buying in from external suppliers

• The business carries full responsibility and risk for any production problems, such as faults or delays

Buying in

• A business purchases finished products or components from an external supplier instead of making them in-house

Example

Apple designs its products in-house but buys in manufacturing from Foxconn and other companies in China, which assemble more than 95% of iPhones, AirPods and iPads

This lets Apple avoid the cost of running its own factories, while relying on the large scale and expertise of companies such as Foxconn

Advantages

• Avoids the need for large upfront investment in equipment, premises or specialist staff

• Allows a business to quickly increase or decrease the amount bought, giving greater flexibility to match demand

• Gives access to a supplier's specialist expertise, equipment or economies of scale, which may improve quality or reduce costs

Disadvantages

• Reduces control over quality, production methods and delivery times

• Can create dependency on a supplier, leaving the business vulnerable if that supplier fails or raises prices

• May be more expensive per unit in the long term than producing at scale in-house

Relationships with suppliers

• Supplier relationships are the ongoing connections a business builds with the businesses it buys materials, components or services from

• Well-managed supplier relationships help ensure reliable delivery, consistent quality and fair pricing, all of which support smoother operations

Ways to build strong supplier relationships

Long-term contracts

• Agreeing to work with a supplier over an extended period gives both sides certainty

• It may also encourage the supplier to prioritise the relationship and invest in meeting the business's needs

Regular communication

• Keeping in frequent contact with suppliers helps both sides anticipate problems early, share forecasts and adjust orders before small issues become disruptions

Working collaboratively

• On issues such as quality or delivery problems

• Solving problems together, rather than simply switching suppliers, builds trust and often leads to a strong, reliable relationship over time

Example

Toyota is known for building long-term, closely managed relationships with its suppliers, working with them over many years to maintain quality and support just-in-time production, rather than switching suppliers based on price alone

The purpose and value of managing supplier relationships

• Improves the reliability of supply

  • This reduces the risk of production being disrupted by late or incomplete deliveries

• Can lead to better prices or payment terms

  • Trust builds between a business and its supplier over time

• Encourages suppliers to prioritise a business's orders during periods of high demand or shortages

• Supports quality control

  • Suppliers who understand a business's standards are more likely to consistently meet them

The importance of logistics

• Logistics means managing the movement of goods, both from suppliers and to customers, including transport, warehousing and distribution

  • Effective logistics ensures materials arrive when needed for production, and finished products reach customers on time, in good condition and at a reasonable cost

  • Poor logistics can lead to delays, damaged goods or higher costs, all of which can affect customer satisfaction and profitability

Example

Amazon has a global network of over 175 fulfilment centres, allowing it to store stock close to customers and deliver orders within a day in many locations

The purpose and value of managing logistics

• Ensures materials and stock are available when needed, avoiding delays to production

• Helps deliver finished goods to customers on time, improving customer satisfaction and leading to repeat business

• Can reduce transport and storage costs through efficient route planning and warehouse management

• Helps a business respond quickly to changes in demand, by moving stock to where it's needed

Supply chain issues

• A supply chain issue is any disruption affecting the flow of goods and materials from suppliers through to customers, such as delays, shortages, quality problems or rising costs

Common reasons for supply chain issues

• Supplier failure

  • A supplier going out of business, running short of stock or failing to meet agreed standards can leave a business without the materials or components it needs

• Transport disruption

  • Events such as port congestion, route blockages, strikes or bad weather can delay the delivery of goods, regardless of how well a business plans

• Global events

  • Occurrences such as pandemics, wars or natural disasters can disrupt entire supply chains at once, affecting multiple suppliers and transport routes at the same time

• Supply chain issues can also occur as a result of poor planning or communication within the chain

Example

In 2021, the container ship Ever Given blocked the Suez Canal for six days, delaying an estimated $9 billion of trade a day and contributing to a global shortage of semiconductors

The impact of supply chain issues on a business

• Production delays if materials or components don't arrive on time, potentially leading to lost sales or missed deadlines

• Increased costs, for example if a business must urgently source materials from a more expensive alternative supplier

• Damage to customer satisfaction and reputation if customers experience delivery delays or product shortages

• Reduced ability to compete if rivals with more reliable supply chains can meet customer demand more consistently