Companies that want to move into the supply chain space, companies must understand the differences between the upstream vs downstream supply chain. Then they must focus on the factors that separate the different sides of this important part of the economy. These factors can make a difference between your success and failure.
Upstream vs downstream supply chain
Regardless of the business’s industry, upstream and downstream operations play an important role in the supply chain. Upstream refers to the process of gathering raw materials for production, while downstream refers to the production process and the sale of the finished products.
Typically, the supply chain starts with raw materials, moves to manufacturing, and ends with the sale of the product. However, this is not a linear process. Rather, it involves many intermediaries that provide services in between. For instance, a distributor needs to be set up to handle exchanges between upstream and downstream partners.
It is important to identify the differences between upstream and downstream operations in order to effectively manage the supply chain. This will enable companies to improve their supply chains and make their networks more efficient. For instance, businesses that focus on upstream operations can ensure that the finished products meet the needs of their end customers. They can also track the inventory levels of their products.
On the other hand, downstream operations include all activities relating to the flow of materials to clients and customers. This can include services such as retail stores, wholesalers, and distributors. They may also include after-sales services.
For instance, in the personal computer industry, the upstream supply chain focuses on purchasing the parts needed for the production of a computer. The downstream supply chain deals with the delivery of the finished product to the end consumer. In addition, downstream operations also include customer service and fulfillment of orders.
Managing the supply chain requires strict controls and systems of record. This will help ensure that businesses can avoid shortages and excess inventory. It is also important to have accurate information about downstream activities to ensure that upstream processes will not overreact.
Another way to increase supply chain flexibility is to bring separate parts under one company. This will allow companies to have more control over their operations. For example, a retail company would think of its suppliers as upstream, while its warehouse managers would think of the delivery of its products as downstream.
Another way to improve supply chain flexibility is to use data technologies to gather sales figures and transportation statuses. This information can be used to adjust orders and provide more visibility for the supply chain.
Costs of upstream vs downstream supply chain
Whether a company has an upstream or downstream supply chain, understanding the differences between the two can help optimize the operations. Upstream refers to the processes that start with the production of a product. It includes raw materials, supplier relationships, and other aspects of production. On the other hand, downstream refers to the processes that end with the sale of a product.
For example, a retail company’s supply chain would think of their suppliers as being upstream. Typically, companies want to integrate upstream and downstream operations so they can control their supplies and pricing.
Upstream and downstream operations both have their own set of problems that can affect the overall costs of the business. For instance, sudden demand spikes can create shortages. This can cause an inefficiency, such as a part shortage, that wastes a significant amount of operating expenses.
Another issue that affects overall costs is physical occurrences, such as scrap rates and in-transit damage. Keeping track of these factors can help supply chain managers avoid overordering.
In order to reduce costs, supply chain managers need to be able to adapt their processes to downstream factors. By understanding the differences between the two processes, companies can increase the efficiency of their supply chain and decrease their operating costs.
For example, the bullwhip effect, a phenomenon that occurs when a sudden demand spike causes suppliers to oversupply, can waste up to 25% of operating expenses. By reducing the bullwhip effect ratio by one, companies can save up to $26 per product per year.
Having upstream and downstream operations working more closely together will help avoid disruptions. For instance, an automobile manufacturer may decide to vertically integrate its tire manufacturer. This will allow the company to manage quality production, target marketing, and partnerships with wholesalers.
Similarly, companies that specialize in upstream operations can minimize the cost of raw materials. They can also keep track of inventory levels and ensure the quality of their finished products.
Upstream and downstream supply chains work together to ensure the timely delivery of goods to consumers. Having both of these processes working together can ensure that customers receive their products on time and in good condition.
During the past decade, the bullwhip effect has captured headlines, causing confusion and distrust among supply chain players. Despite the fact that many companies have made significant technology investments in trying to combat the bullwhip effect, these efforts have had only a minor impact on the bullwhip.
While the bullwhip effect can be caused by a variety of factors, it is primarily the result of insufficient information and a lack of cooperation. In a complex supply chain, the number of players increases and there is a higher chance of inefficient communication. This leads to inaccurate demand forecasts and a greater amount of waste.
In order to reduce the bullwhip effect, businesses must accurately forecast demand. This will help reduce the amount of resources required to sell a product. Companies need to use point-of-sale data to better understand what real demand looks like for a product. This information can be used to improve inventory positioning.
Another way to reduce the bullwhip effect is to make sure that the products you are selling meet your customer’s needs. Meeting demand can involve direct shipments or the use of replenishment product. The product must arrive in a timely manner and in sufficient quantities. The lag time between a product arriving and selling can affect the accuracy of the demand forecast.
In addition, companies can reduce the bullwhip effect by using a technique called order smoothing. Order smoothing is an efficient way to reduce the ripples in a supply chain. Order smoothing involves ordering larger quantities to buffer the inventory against low stock issues. This strategy can also help improve the visibility of demand changes.
Another strategy to fight the bullwhip effect is to keep prices consistent. Keeping prices stable allows companies to ensure that they meet customer demands.
Another strategy is to reduce the complexity of the product. A large consumer goods manufacturer recently reduced the number of products it offered. This reduced the product portfolio and made it easier to plan for future sales.
The bullwhip effect is a common problem in supply chains. The problem occurs when consumers expect a shortage of certain items. Buying more of these products than they need can result in waste and a poor customer experience.
Impact of supply chain issues
Having greater visibility between upstream and downstream supply chain processes can help to improve operations. This is especially important during times of disruption. It can also help to adapt upstream processes to downstream factors faster.
Upstream and downstream supply chain processes may work better together than individually. This could result in reduced costs and increased profits. The more accurate information from downstream operations can help upstream processes adapt to changing needs.
A bullwhip effect is the combined effect of downstream and upstream uncertainty. It has the potential to reduce inventory savings. This is because downstream uncertainty is expected to produce higher consumption and investment growth. Upstream uncertainty, however, is expected to produce lower sales ratios.
The authors estimate that a decrease of one bullwhip effect ratio translates into $26 in inventory savings per product per year. This can have a substantial impact on profits over the long run.
As an example, the authors estimate that upstream uncertainty was associated with a decrease in firm level investment. This is because a disruption to the supply chain could cause the supplier to overcompensate and produce surpluses.
Disruptions to the supply chain can also produce capacity reductions. This may have contributed to the sharp decline in economic activity during the first half of 2020.
In the first quarter of 2020, the VIX index rose nearly 200%. This masked the full scope of the two opposite effects. The CBOE constructs uncertainty measures by combining granular production network data.
Upstream uncertainty is typically associated with lower sales ratios and lower firm-level investment. This is because the upstream supply chain is crucial to processes. Upstream processes must be able to scale production quickly.
Disruptions to the supply chain result in severe scarcity of inventory. This impacts all economies. During times of uncertainty, companies must re-evaluate their inventory management, sourcing and transportation practices. They may decide to localize production or sourcing, or may decide to increase inventories.
Companies also have to consider the quality of their suppliers. This includes their track record, business continuity plans, and financial resources. The bullwhip effect can also result in waste. It is estimated that companies may waste up to 25% of their operating expenses due to excessive inventory.