How the Supply Chain Affects the U.S. Economy

How Firms Used Supply Chain Financing to Survive the Financial Crisis

Apple controls its supply chain
••• Photo by Cristina Arias/Cover/Getty Images

The supply chain is how a company turns raw materials into finished goods and services for the customer. It starts with the harvesting of the raw material. The commodity could be crops, animals, timber, gold, or other natural resources.

The commodity then goes to the manufacturer. That's when it becomes a finished product. There can be several steps in this process and they can involve locations in several different countries.

The finished product goes to one of three places: a wholesaler, a retailer, or directly to the consumer.

  1. The wholesaler or distributor consolidates the products from around the world. It repackages them for easier marketing and distribution.  
  2. The retailer offers goods and services to the consumer. Retailers provide additional services, such as helping you make a selection. For this service, they charge extra.
  3. Some manufacturers bypass the retailer and offer the products directly to the consumer. Some sell from their own website or catalog. Others use a discount warehouse store. A few can afford their own store that only sells their goods.

    How It Affects the Economy

    Manufacturing managers decide where to locate the company based on costs of production. That's led to a lot of jobs outsourcing in technology to India and China. Many call centers have outsourced to India and the Philippines.

    Natural disasters are becoming an increasing threat that can disrupt any part of the supply chain. The United Nations Refugee Agency reported their frequency has doubled in the last 20 years due to global warming. The impact on local productivity can last decades after an event. 

    If a disaster is bad enough, it can slow global growth. In 2011, Japan's earthquake and resultant tsunami damaged enough ports and airports to halt 20% of the world's supply of semiconductor equipment and materials. The wings, landing gears, and other major airline parts are also made in Japan, so the quake disrupted the production of Boeing's 787 Dreamliner. U.S. gross domestic product slowed in 2011 as 22 Japanese auto part plants suspended production.

    Supply Chain Management

    Businesses manage every step of the supply chain to make sure it is the most efficient. As a result, many companies outsource jobs to countries like China that have a lower cost of living. By 2013, Asia accounted for 26.5% of global manufacturing output of products that are part of the supply chain. China was responsible for half of the global intermediate output. 

    Many companies vertically integrate to get control of the supply chain. This gives them more control over the production process and costs. A great example is Apple, which maintains its high design standards through vertical integration from design through retail. This gives the company enough of a competitive advantage that it is almost a monopoly when it comes to high-end, innovative computers, smartphones, and music players.

    But vertical integration is a disadvantage when it restricts flexibility. For example, newspaper companies invested hundreds of thousands of dollars in expensive printing presses. In 2000, internet companies like Monster.com started stealing help-wanted advertisers from them. Newspapers were stuck with the bill and the need to keep those presses running. They tried to compete by adding other paper-intensive media, like magazines, free press circulars, and community papers. Their investment in printing presses kept them focused on a dying medium.

    How Supply Chain Financing Help Firms Survive

    The global credit crisis forced banks and corporations to find innovative ways to raise cash to keep businesses running. Many turned to supply chain financing, which is like a pay-day loan for businesses. Suppliers use the invoice for a shipment as collateral to get a low-interest loan from a bank. Banks know that they will get paid due to the credit-worthiness of the business receiving the goods.

    Supply chain financing is especially helpful for small companies. It provides an opportunity to earn better financing terms. Banks were reluctant to lend, even to each other. But they were happy to lend against approved purchase orders and invoices with companies with a good shipping record.

    Corporations became more efficient in their operations, which also helped to free up cash. In addition, corporation Treasurers became more focused on making sure the cash they had was invested in "safe havens," such as U.S. Treasuries, municipal bonds, and even their own stocks in "stock buybacks." They became savvier about foreign exchange and interest rate risk. In other words, good companies squeezed cash out of their operations and cash management, since they couldn't rely on banks. 

    The Bottom Line

    Efficient management of the supply chain can reduce costs, maximize customer value, and maximize competitive advantage. It entails effective coordination and control of linked sectors, departments, systems, and organizations. All facilitate the flow of production from conceptualization to point of sale of the product to the consumer.

    Corporations that are adept at supply chain management can be more liquid, flexible, and less reliant on banks and middlemen for their cash flows and profits.