Supply Chains

Artisan or mass production

Businesses set up processes for producing and distributing their goods and services. A business that makes goods chooses between two broad kinds of production process.

An artisan process relies on skilled labor and attention to detail. A guitar maker in Nashville who builds 30 guitars a year by hand, each one to a musician's specifications, uses an artisan process.

A mass-production process typically uses technology, assembly lines and machinery to produce a much larger quantity of goods. A factory that turns out 1,500 guitars a week uses mass production.

Businesses weigh three things when they choose:

• Customer priorities, such as quality, price and customization. Musicians who want a guitar built around their own hands point toward artisan work. Students who want a good first guitar for under $200 point toward mass production.
• The business's core competencies, the strengths you met in the Vision lesson. A shop full of master builders has a reason to use them. A company whose strength is efficiency has a reason to use that.
• The competitive landscape. If a dozen rivals already sell mass-produced guitars at low prices, a newcomer may do better offering custom work than fighting on price.

From raw materials to the customer

A supply chain connects all the individuals and businesses involved at each stage of producing and distributing a product, from acquiring raw materials to delivering it to the final customer. A supply chain can be local, regional or global.

For a good, the stages usually run in this order:

1. Raw materials and component parts, such as computer chips, are acquired and transported to a manufacturing facility.
2. Workers and equipment turn them into finished goods.
3. The finished goods may be transported to a storage facility, such as a warehouse.
4. They go on to a distribution center or a retail store, and from there to customers.

Follow an electric bike from Lakeshore Cycles, which assembles bikes in Ohio. Aluminum tubing arrives from a supplier in one country, and motors from another. Workers at the Ohio plant weld the frames and fit the motors, and every bike is tested before it leaves. Finished bikes go to a warehouse in Indiana and then to bike shops across the Midwest, where customers buy them. The chain is global at the start and regional at the end.

A supply chain for a service looks different, because the service itself is not manufactured ahead of time or kept in a warehouse. The business acquires the employees, resources and delivery systems it needs to provide the service, in person or virtually. A lawn care company needs trained crews, mowers and trucks, plus a schedule that sends each crew to the right yards.

Choosing suppliers

Most links in a supply chain are other businesses that the company chose as suppliers. Businesses weigh five factors when they choose one: cost, quality, efficiency, convenience and risk.

Risk is the factor a low price can hide. Natural disasters, political instability, resource shortages, production errors and a supplier's poor reputation can all delay deliveries or raise costs, and either one threatens a business's competitive advantage and its profits. A supplier that saves you 10% is no bargain if its shipments stop for two months in your busiest season.

Strategy shapes the supply chain

Competitive advantage is a business's ability to outperform rivals in the same market. The way a business seeks it shapes the supply chain it builds.

Through low prices. Businesses that compete on price typically use mass production and build supply chains focused on reducing costs, through cheaper resources and more efficient production processes. Some go further and scale their operations: they build new, higher-capacity or more efficient supply chains, designed so that revenue increases by more than costs do. Suppose Valley Frozen Foods adds a second, faster pizza line.

• Extra revenue: $2.4 million a year
• Extra costs: $1.7 million a year
• Change in profit: $700,000 a year

If the extra costs had come to $2.6 million instead, the bigger operation would have lowered profit, however many more pizzas it made.

Through high quality. Businesses that compete on quality build supply chains that use high-quality resources and production methods. That holds whether they use artisan or mass production. A chocolate maker can temper small batches by hand or run a precise automated line, and buy premium cacao either way.

Through barriers to entry. Barriers to entry are obstacles that make it difficult for new firms to compete. A business can build them into its supply chain with exclusive or restrictive agreements. A supplier might agree not to sell a key component part to rivals. A retailer might agree not to carry rival products. When a sports drink company signs a deal to be the only drink sold at a chain of 300 gyms, every rival drink, including any new one, loses those shelves.