IB L8 - Supply chains and logistics

What is the difference between a supply chain and logistics?

Supply chain

The complete network involved in creating and delivering a product, including:

• Suppliers

• Manufacturers

• Warehouses

• Distributors

• Customers

Logistics

The management of:

• Transportation

• Storage

• Material flow

• Delivery of goods and information through the supply chain

Goals:

• Deliver the correct product

• At the correct time/place

• At minimum cost

👉 Key idea:
The supply chain is the overall system, while logistics manages the movement and storage operations within it

How have supply chains and logistics evolved historically?

• Early military logistics relied on “pillage and plunder”

• As armies grew (16th–18th century), logistics became essential for survival and supply management

• Napoleon emphasised logistics using forage parties

• Frederick Taylor introduced scientific management

Industrial/logistics developments:

• 19th century industrial revolution:

• Railways

• Steam engines

• Refrigeration

Modern developments:

• 1940s: transport management and warehousing

• 1970–80s: computerisation and supply chain integration

• 1990–2010s: enterprise planning systems and CAD

• Today: AI, data-driven tools, and redesign of global supply networks

👉 Key idea:
Modern supply chains evolved from military logistics and industrialisation into highly integrated digital global systems

What is a supply chain?

A supply chain is:

“A set of three or more companies directly linked by upstream and downstream flows of products, services, finances, and information from a source to a customer.”

Different companies manage different stages between:

• Raw material production
  and

• Final customer delivery

Examples of participants:

• Suppliers

• Manufacturers

• Warehouses

• Distributors

• Retailers

Supply chains also exist in:

• Services

• Software development

• Logistics systems

👉 Key idea:
A supply chain is the connected flow of materials, information, and services from source to customer across multiple organisations

What is a supply network?

A supply network is:

“A network of connected and interdependent organisations working together to manage and improve the flow of materials and information from suppliers to end users.”

Unlike a simple supply chain:

• Suppliers may supply multiple customers

• Customers may buy from multiple suppliers

Flows in the network:

• Materials move toward the customer

• Information and money flow back through the network

The structure of the supply network can affect:

• Cost

• Quality

• Flexibility

• Delivery performance

• Final product availability

👉 Key idea:
Real supply systems are interconnected supply networks rather than simple linear supply chains

Why are supply chains critical to product competitiveness?

• A final product is not solely the achievement of the OEM (Original Equipment Manufacturer)

• Customer experience depends heavily on the supply chain:

  • Quality

  • Cost

  • Delivery performance

Much of a product’s value comes from suppliers and external partners.

Supply chains are:

• Interdependent connected systems, not isolated individual systems

Therefore:

• The competitiveness of one company depends on surrounding suppliers and distributors

As stated by Martin Christopher (2002):

“It is the value chains that compete.”

👉 Key idea:
Modern competitiveness depends on the performance of the entire interconnected supply/value chain rather than a single company alone

What is the contemporary definition of supply chain management?

Supply chain management is:

• The management of the flow of goods from raw material source (“earth”) to the end consumer

• The management of internal and external resources to fulfil customer needs

• The coordination of:

  • Logistics

  • Quality

  • New product development

  • Buying and selling activities

This occurs:

• Within organisations
  and

• Across supplier and customer interfaces

👉 Key idea:
Modern supply chain management integrates operations, resources, and commercial activities across the entire interconnected supply network

Why are supply network structures often confidential?

Companies often keep supply network structures confidential to protect:

• Competitive advantage

• Supplier relationships

• Pricing and sourcing strategies

• Manufacturing capabilities and capacity

Confidentiality helps prevent:

• Competitors copying supply arrangements

• Competitors approaching key suppliers

• Exposure of strategic dependencies or weaknesses

Supply networks can therefore be:

• Complex

• Interdependent

• Difficult for outsiders to fully map or analyse

👉 Key idea:
Supply network confidentiality protects strategic relationships and competitive advantage within interconnected supply systems

How are supply networks visualised and analysed?

Supply networks can be visualised by:

• Grouping companies into clusters based on shared characteristics

Clusters may share:

• Common suppliers

• Similar products or technologies

• Geographic location

• Manufacturing capability

• Customer markets

Visualisation helps identify:

• Key suppliers and dependencies

• Bottlenecks and risks

• Highly connected companies

• Opportunities for optimisation

If we zoom out further:

• Multiple supply networks and industrial sectors begin to intersect, forming broader industrial ecosystems.

👉 Key idea:
Supply network visualisation helps understand interconnected company relationships, while larger industrial ecosystems show how entire sectors become linked together

What is the difference between agile and lean supply chains?

Agile supply chain

Designed for:

• Rapid response to demand fluctuations and unexpected changes

Characteristics:

• Flexible

• Responsive

• Adaptable to uncertainty and changing customer needs

Used when:

• Demand is unpredictable

• Product variety changes quickly

• Fast reaction is important

Lean supply chain

Designed for:

• Efficient operation in stable, predictable conditions

Characteristics:

• Low waste

• High efficiency

• Standardised processes

• Cost reduction focus

Used when:

• Demand is steady and predictable

• Products are standardised

• Established supply and production systems already exist

👉 Key idea:
Lean supply chains optimise efficiency for predictable demand, while agile supply chains prioritise flexibility and responsiveness to change

What do coffee, flower, and organ donation supply chains demonstrate?

Coffee supply chain (lean supply chain)

• Long global agricultural supply chain

• Climate uncertainty and high environmental impact (carbon footprint from land use - deforestation, fertiliser use) BUT provides economic value to markets

• Many stages add value from farm to customer

Rose supply chain (agility and leanness)

• Large seasonal demand fluctuations

• There is a steady state (base response - lean) but demand grows quickly on Valentine’s day and Mother’s day therefore multiple shipment options…

• Requires both lean efficiency and agile responsiveness

• Uses refrigerated logistics, AI, and digital twins for quality control

Organ donation supply chain (agile supply chain - temporary logistic)

• Extremely time-critical temporary logistics network

• Requires rapid matching, transport, and coordination

• Uses optimisation algorithms and data science

👉 Key idea:
Different supply chains face different challenges, including sustainability, demand variability, perishability, and extreme timing constraints

What risks arise from poor visibility and information flow in supply chains?

Complex supply chains can become difficult to fully track and manage.

Examples:

• IKEA horsemeat scandal:

  • Organisations lost visibility of suppliers and product origins

  • Raises questions:

    • Who monitors the supply chain?

    • Where should checks occur?

    • Who is responsible?

Poor visibility can lead to:

• Illegal or unsafe products

• Supply chain slavery

• Deforestation

• Quality failures

Information system failures can also disrupt operations:

• Target Canada (“Barbie disaster”):

  • Barcode and IT mismatches caused warehouse overloads and empty shelves

  • Resulted in major financial losses

👉 Key idea:
Modern supply chains depend heavily on visibility, traceability, and reliable information systems to prevent quality, ethical, and operational failures

What challenges characterise modern supply networks?

Modern supply networks are:

• Complex global systems

  • ~80% of trade flows through multinational corporations (MNCs)

Key challenges include:

• Volatility and geopolitics

  • Especially for food, medicine, and energy supply systems

• Systemic ethical/environmental issues

  • Human rights violations

  • Environmental damage

• Security concerns

  • Constantly changing supply chain configurations and dependencies

• New technologies

  • Creating new and evolving supply network structures

👉 Key idea:
Modern supply networks are globally interconnected, technologically evolving, and increasingly influenced by geopolitical, ethical, environmental, and security challenges

What are key objectives and challenges in supply chain management?

Common supply chain objectives:

• Low cost

• Resilience

• Sustainability

• Good delivery/service performance

Challenges:

• Different companies may optimise different costs

• Objectives can conflict across suppliers and buyers

Example:

• Buyers may want small frequent deliveries

• Sellers may prefer large batches to reduce transport cost

Supply chain decisions therefore involve:

• Trade-offs

• Incomplete information

• Information asymmetry

  • (one party has more information than another and may use it advantageously)

KPIs (Key Performance Indicators) are used to measure:

• Cost

• Delivery

• Inventory

• Reliability

• Sustainability performance

👉 Key idea:
Supply chain management balances competing objectives across interconnected organisations operating with imperfect information

What are the different decision levels in supply chain management?

1. Strategic decisions (long-term)

Major organisational decisions such as:

• Product portfolio

• Make-or-buy decisions

• Offshoring

2. Tactical decisions (medium-term)

Planning and resource decisions such as:

• Outsourcing

• Warehousing

• Transport

• Supplier selection

• Service and maintenance planning

3. Operational decisions (short-term/day-to-day)

Daily execution and optimisation such as:

• Forecasting for capacity/resource planning

• Inventory ordering

• Distribution planning

• Supplier order allocation

These decision levels are interconnected:

• Strategic decisions influence tactical and operational decisions below them

👉 Key idea:
Supply chain management involves linked strategic, tactical, and operational decisions across different time horizons

What quantitative tools are used in supply chain management?

Supply chain management uses data-driven tools for:

• Forecasting

• Optimisation

• Simulation

• Prediction and decision-making

Examples:

• Statistical forecasting (regression, ARIMA)

• Optimisation methods (MILP, genetic algorithms)

• Simulation (Monte Carlo, digital twins)

• AI and machine learning:

  • Classification

  • Clustering

  • Reinforcement learning

Applications:

• Demand prediction

• Supplier performance

• Inventory and pricing decisions

👉 Key idea:
Modern supply chains rely heavily on quantitative modelling, simulation, optimisation, and AI for decision-making

What quantitative tools are used in supply chain management?

Supply chain management uses data-driven tools for:

• Forecasting

• Optimisation

• Simulation

• Prediction and decision-making

Examples:

• Statistical forecasting (regression, ARIMA)

• Optimisation methods (MILP, genetic algorithms)

• Simulation (Monte Carlo, digital twins)

• AI and machine learning:

  • Classification

  • Clustering

  • Reinforcement learning

Applications:

• Demand prediction

• Supplier performance

• Inventory and pricing decisions

👉 Key idea:
Modern supply chains rely heavily on quantitative modelling, simulation, optimisation, and AI for decision-making

What is the Centre of Gravity method in logistics?

The Centre of Gravity (CoG) method is used to find a location (e.g. warehouse or factory) that minimises transportation cost.

It calculates a weighted central location based on:

• Destination/source coordinates

• Shipment volumes

Where:

• xi,yix_i, y_ixi​,yi​ = coordinates of locations

• ViV_iVi​ = quantity shipped

Pros

• Simple and quantitative

• Useful for identifying candidate locations

Cons

• Simplified/one-dimensional approach

• Actual feasible sites may not exist exactly at the CoG

👉 Key idea:
The CoG method estimates the best logistics location by balancing transport distances and shipment volumes

What are distribution decisions in supply chain management?

Distribution decisions determine:

• How much product to transport

• From which factories

• To which distribution centres

…while satisfying:

• Supply constraints

• Demand constraints

• Transportation cost limits

These are optimisation problems involving:

• Material flow planning

• Cost minimisation

• Resource allocation

Typically solved using:

• Optimisation algorithms and mathematical models

👉 Key idea:
Distribution planning optimises product flows across the supply network while balancing cost, supply, and demand constraints

What are common distribution strategies in logistics?

Direct shipping

• Point-to-point delivery from supplier to customer

• Good for:

  • Perishable goods

  • Large/bulky items

• Low storage needs but limited risk pooling

Warehousing

• Products stored until demand occurs

• Enables:

  • Risk pooling

  • Shared resources

  • Closer access to customers

• Adds inventory and handling costs (+ obsolescence risk)

Cross-docking (mass-retailers)

• Goods move rapidly through distribution centres with minimal storage

• Requires:

  • Strong IT coordination

  • Fast transport

  • High distribution volumes

• Reduces storage and retailer congestion

Transshipment

• Goods transferred between transport modes or shipment sizes

• Used for:

  • Consolidation/deconsolidation

  • Transport hub operations

• May include temporary storage and product customisation

• May enable risk pooling

👉 Key idea:
Different distribution strategies balance transport cost, storage, responsiveness, handling complexity, and inventory risk differently

What are key conclusions about modern supply networks?

• Supply chains are actually interconnected supply networks

• Different supply networks overlap and interact

• No single organisation owns or controls the entire network

• Organisations have:

  • Different goals

  • Time-dependent priorities

  • Partial/incomplete information

Supply networks function because of:

• Mutual benefits

• Profit and sales incentives

• Influence of dominant players

Logistics is:

• A subset of supply chain management focused on physical goods flow within an organisation’s control span

The overall behaviour of supply networks is:

• Emergent

• Influenced rather than fully controlled

👉 Key idea:
Supply networks are complex interconnected systems whose behaviour emerges from many independent organisations interacting with partial control and shared incentives