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 is when it becomes a finished product. There can be several steps in this process, including sites in several different countries.

The finished product can go either to a wholesaler, a retailer, or directly to the consumer. The wholesaler or distributor consolidates the products from around the world. It repackages them for easier marketing and distribution.  

Retail is how producers of goods and services get their products to the consumer.  It's the last stop on the supply chain before the products end up in your shopping cart.

Some manufacturers bypass the retailer and offer the products directly to the consumer. They either use online sales, a discount warehouse store, or a small store that only sells their goods.

How It Affects the Economy

Managers decide where to locate the company based on costs of production. That led to a lot of jobs outsourcing in technology to India and China, and call centers to India and the Philippines.

Natural disasters can disrupt any part of the supply chain, thus slowing global growth. In 2011, Japan's earthquake and resultant tsunami damaged enough ports and airports to halt 20 percent 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 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 percent of global manufacturing output of products that are part of the supply chain. China was responsible for half of global intermediate output. 

Many companies vertically integrate to get control of the supply chain. This gives them more control of 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, smart phones, 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 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 Firms Used Supply Chain Financing to Survive the Financial Crisis

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. This helps small suppliers get better financing terms. Even banks that are reluctant to lend to each other are willing to lend against approved purchase orders and invoices with companies that have a good shipping record.

Corporations became more efficient in their operations, which also helps 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.