Upstream and Downstream in the Supply Chain Explained

Hi, this is Anita from Endoro. Today we want to talk a little bit about the upstream and the downstream of the supply chain and what each of those mean. Many times when people talk about the supply chain they may talk about the upstream and the downstream of the supply chain. And no, it's not about a fish swimming up and down the supply chain, but it does have to do with how the supply chain itself works. Many companies will divide their supply chain into the upstream and the downstream supply chain. And this will have to do with the two different parts of the supply chain as they see it. When you look at supply chain, many people feel that supply chain is quite linear. And as recent supply chain issues have become, you know, an important part of the supply chain where one part of the supply chain affects another part of the supply chain, this has become even more important. The truth is that the supply chain is very complex. And as the world's getting more complex, so is the supply chain getting more complex. You know, the supply chain really requires a lot of timing. It requires that every part of the supply chain works smoothly together. Or there could be backlogs or other issues, which of course we have recently seen in all the supply chain issues and what has been happening. Because of the complexity of the supply chain, many organizations will divide their supply chain into two significant parts, which is the upstream and the downstream. Upstream of the supply chain, let's talk about that first. You know, what is meant by the upstream of the supply chain? The upstream of the supply chain could refer to all activities in the supply chain that relate to an organization's suppliers. So this would be everything from the manufacturer to, you know, everything to do with the manufacturing of the product. You know, there could be some basic tiers, and the company may not be involved in all these tiers, but they want to kind of keep an eye on them. They want to know about them, because what happens in one of the tiers could affect another part. For example, the raw materials would be one of the tiers. And they, you know, most companies would not be involved in understanding the raw materials or buying the raw materials. But they want to keep an eye on, for example, if raw materials start to significantly increase, this, of course, can affect the other part of the supply chain. And then, of course, between the raw material, there could be another supplier. This would be a subcontractor or a supplier that helps supply to the leading supplier. You know, for example, if you're looking to manufacture something like lamp, this could be the supplier which has the UL parts to assemble the lamp, where they, you know, the company themselves is not manufacturing the UL parts, they're buying the parts from someone else and then assembling them. And of course, the raw material supplier could be the person who's supplying their supplier with all the different parts that they need to be able to assemble their parts. Actually, there could be quite a few tiers, not just three tiers, there could be several different tiers all going to be able to get to the what would be called the contract supplier or the lead supplier, which would be the supplier that the company is purchasing from. The upstream supply chain deals with the production capacity, the inventory levels, the scheduled delivery and payment terms, everything that has to do with purchasing and distributing a product into the warehouse. So you basically think about everything you need to be able to buy the product, get the warehouse is really part of the upstream of the supply chain. You're in the center of all of this would base essentially be your company or if you're the importer, you're looking to import these goods, you would be in the center of the upstream and the downstream. So the upstream would be, you know, you're negotiating with the suppliers and negotiating the prices with them. You know, you're working on the quality, you're working on the shipment, you're working on all of those things at the same time you're keeping an eye on things like are raw material prices significantly increasing, is shipping having issues, are there, you know, other shortages or other things that you need to be aware of throughout the supply chain which could affect your lead supplier and also in turn then affect your own supply chain. So the upstream is vital, you know, for the processes that happen in that part of the supply chain and it's a very important part of the global supply chain. It's been estimated that part shortages, underutilized plant capacities, excessive inventories, and high transportation costs can waste up to 25 percent of operating cost. So because the cost can be so high in these areas, that is one reason why many companies will rightfully decide that they're going to both have one group focused on the upstream and then have another one focused on what would be known as the downstream. You know, and this could be things like late shipments, defective parts, raw material shortages, or other processes. You can break down this entire supply chain and this can cause for the company, they'll lose money. The supply chain issues can also cause what is known as a bullwhip effect and the bullwhip effect is when minor fluctuations in retail sales for a product can create excessive inventory for distributors, manufacturers, and suppliers. In other words, it's usually the upstream that is affected most by this. So, you know, there's really like the whole supply chain is like something that's all attached together, but it's kind of like you could say it's like this big ocean stream and that, you know, you yourself as the main supplier in the middle of it, but you've got one part of the stream which can actually affect the other part of the stream. And so that's why the two are actually really connected together. Now that's why companies need to look at the entire supply chain, including the upstream and the downstream supply chain. So the downstream of the supply chain then would be, it's different than the upstream, it's completely opposite of it in a way that it basically refers to activities that have to do with the distributing and getting the product to the final consumer or to the customer. So there of course would be different parts within this actual supply chain itself. There'd be things like the distributor, which could be the person that's helping you sell your product to a brand and ensuring it gets to the retail store and the consumer. It can be the retailer, the retail store that's actually selling your product to the consumer, to the customers, and then to the end customer itself. So the downstream would deal with things like orders, repairs, service requests, and payments for orders. You know, all aspects to take the product and to get it sold to the end customer. The downstream supply chain involves everything from delivering the product to the warehouse to selling it to the customers. So this is what really, you know, makes it very different from the upstream. You can see how they're really very different processes that's involved in the actual supply chain and why the two are divided. You know, the supply chain because it deals with all of these different things. The supply chain can also be thought of as the demand for the product, while the upstream supply chain is thought of as a supply. So if you wanted to really simplify them, you could say the upstream is about the supply of the product and the downstream is about the sales or the demand of the product. The supply chain manager will need to be able to balance between, you know, these two different supply chains between the up and the downstream in order to make sure things are running smoothly, there's orders, they have products to sell, and they're not losing sales because there is no inventory. That they really need to be able to keep on top of all these different factors. You know, over-ordering can cause an issue and it may mean that the company will lose money by carrying too much stock. They can be forced to discount or dump. But then of course, also inefficiencies in the supply chain itself could mean that the company could, you know, lose up to 25 percent of operating costs or, you know, they may just not have the products to sell. So they're going to lose money and lose in sales. So this is why, you know, many people that are in global trade will divide up the supply chain into two parts, the upstream and the downstream. If you yourselves are looking to, you know, buy products, even if you're a small supplier, it's probably good that you look to start now to divide these two up so you can look at them as two separate but also joined parts of a supply chain. This will help you to make sure that your supply chain is running efficiently and running smoothly. This is Anita from Endoro. We really appreciate you watching our video. 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