1.8 - Supply Chains
Developing a Production Process
Businesses design processes to produce their goods or services and get them to customers. When it comes to goods, there are generally two approaches. Artisan processes rely on skilled labor and close attention to detail, usually producing smaller quantities with an emphasis on craftsmanship and customization. Mass-production processes rely on technology, assembly lines, and machinery to produce large quantities, which typically lowers the cost per unit.
Handmade furniture, custom wedding cakes, and tailored suits are artisan products. Cars, smartphones, and canned soda are mass produced.
Mass production lowers the cost per unit mostly because the big costs of machines and factories get spread over a huge number of units. Say a machine costs $500,000. If it makes 10,000 units, that's $50 of machine cost in every unit. If it makes 1,000,000 units, it's only $0.50 per unit. Artisan production skips the giant machines, but each item takes more skilled labor time, so the cost per unit stays higher.
Feature | Artisan | Mass production |
Relies on | Skilled labor and attention to detail | Technology, assembly lines, and machinery |
Quantity | Small batches | Large quantities |
Cost per unit | Higher | Lower |
Customization | High: items can be made to order | Low: most items are identical |
Example | Handmade leather boots | Sneakers from a large factory |
When deciding on a production process, businesses think about what customers prioritize, whether that's quality, price, or customization, along with the business's own core competencies and what the competitive landscape looks like.
For example, a bakery whose customers want custom wedding cakes (customization and quality), whose bakers are highly skilled (core competency), and whose rivals are mostly grocery stores selling cheap sheet cakes (competition) would choose an artisan process. A frozen pizza brand whose customers mostly care about price would choose mass production.
Supply Chains
A supply chain connects everyone and everything involved in producing and distributing a product, from raw materials all the way to the final customer. Supply chains can be local, regional, or global, and they look different depending on whether the business is producing a good or a service.
For a good, the supply chain typically moves through several stages. First, raw materials and component parts, like metal, plastic, or computer chips, get acquired. Those materials are then transported to manufacturing facilities, where workers and equipment turn them into finished goods. From there, finished goods go to a storage facility like a warehouse, and then move on to either a distribution center or a retail store, before finally reaching the customer.
Here's the supply chain for a cotton hoodie:
- Raw materials and parts: cotton is grown and spun into fabric, and zippers and thread come from other suppliers.
- Transportation: the fabric and parts are shipped to a clothing factory.
- Manufacturing: workers and sewing machines cut and sew the fabric into finished hoodies.
- Storage: the hoodies go to a warehouse until they're needed.
- Distribution: they move to a distribution center or straight to retail stores.
- Customer: a shopper buys one in a store, or one is shipped to their door from an online order.
Each stage can happen in a different country, which is what makes a supply chain global.
For a service, the supply chain looks a bit different since there's no physical product moving through stages. Instead, it's about having what's needed to actually deliver the service: employees with the right skills, the resources required like equipment, tools, or software, and a system for delivering the service, whether that's in person at an office or clinic, or virtually through an app or website.
For example, a tutoring business needs tutors who know the material (employees); laptops, video software, and practice materials (resources); and a way to meet students, either in person at a library or online through video calls (delivery system).
When choosing suppliers, businesses weigh cost, quality, efficiency, convenience, and risk. Common risks include natural disasters, political instability, resource shortages, production errors, and a supplier's poor reputation, any of which could delay delivery, raise costs, or threaten a business's competitive advantage and profits.
For example, a cheaper overseas supplier might save money, but shipping takes weeks, and a storm or a port delay could leave shelves empty. A local supplier might cost more but deliver in days. In 2021, a worldwide shortage of computer chips forced carmakers to cut production, since modern cars need many chips. To lower this kind of risk, many businesses use more than one supplier for key parts.
How Competitive Strategy Shapes Supply Chains
The strategy a business uses to compete shapes how it builds its supply chain.
Businesses competing on low price usually lean on mass production and build supply chains focused on cutting costs, whether through cheaper resources or more efficient production. Some businesses even scale up their operations entirely, investing in bigger, more efficient supply chains with the goal of growing revenue faster than costs.
Here's how scaling can pay off. A bakery makes 1,000 loaves a week and sells them for $5 each, so revenue is $5,000. Its costs are $4,000, so profit is $1,000 (a cost of $4.00 per loaf). It invests in a bigger, faster oven line and now makes and sells 3,000 loaves a week. Revenue rises to $15,000 and costs (including paying off the new ovens) rise to $10,000, so profit jumps to $5,000 and the cost per loaf drops to about $3.33. Revenue went up $10,000 while costs went up only $6,000, which is exactly what scaling is meant to do.
Businesses competing on high quality may use either artisan or mass-production methods, but they build their supply chains around high-quality resources and high-quality production practices.
For example, a premium chocolate maker might buy cacao only from specific farms known for high-quality beans and taste-test every batch. A carmaker known for reliability might mass produce its cars but use top-grade parts and strict quality checks at every step of the assembly line.
Businesses competing through barriers to entry often build supply chains with exclusive or restrictive agreements, like a supplier agreeing not to sell key components to rivals, or a retailer agreeing not to carry competing products. These kinds of agreements make it harder for new or existing competitors to break into the same market.
For example, a soft drink company might pay a university for the right to be the only soda brand sold on campus, so rival brands can't reach those students at all.
Strategy | Production process | Supply chain focus |
Low price | Mass production | Cheaper resources, efficient production, and scaling up |
High quality | Artisan or mass production | High-quality resources and production methods |
Barriers to entry | Either | Exclusive or restrictive deals with suppliers or distributors |