What Is Meant By Upstream And Downstream Supply Chain?

When many companies look at the supply chain, they will look at the upstream and downstream supply chains. Though these are the same supply chain, there are some differences.

Many companies divide their supply chain into upstream and downstream supply chains. The upstream supply chain has to do with the contract supplier and their subsuppliers, including things to get the product into the warehouse to be distributed. The downstream supply chain manages the distribution, retail, and sales.

Upstream And Downstream In The Supply Chain

When they look at the supply chain, many people may feel that the supply chain is quite linear. As recent supply chain issues have shown, one part of the supply chain will affect the other moving parts.

The truth is the supply chain is very complex. It requires that all the timing in one part of the supply chain stays on projects for the other part of the supply chain.

Because of the complexity of the supply chain, some organizations will divide their supply chain into two significant parts called upstream and downstream.

What Is Meant By Upstream Supply Chain?

The upstream of the supply chain refers to all activities in the supply chain that relate to an organization’s suppliers. This would include all the parties that have to do with things such as raw materials to send to the manufacturers, the manufacturing, and everything to do with the suppliers.

The upstream would also include managing the suppliers and the company’s relationship with them. 

Here are some basic things the upstream supply chain would include:

  • Raw Material Suppliers or Tier 3 – Tier 3 is usually the raw material suppliers or supplies needed to help produce and manufacture the product or commodity.
  • Supplier or Tier 2 – The supplier or Tier 2 supplier is usually the subcontractor or the supplier that helps supply to the leading supplier. In manufacturing lamps or other items, it could be the supplier that suppliers the UL parts to assemble the lights.
  • Contract Supplier or Tier 1 – The contract supplier is the supplier you have the contract with making the product for you.
Definition of Upstream

The upstream deals with the production capacity, inventory levels, scheduled delivery, and payment terms. Everything has to do with purchasing and distributing a product into the warehouse.

In the center of all this is your company. Looking at the attached chart, you can see the essential supply chain for a company like Reebok. Reebok is contracting with suppliers who have other suppliers. They are essentially in the middle between the different suppliers, distribution, and consumers.

Upstream and Downstream Work Flow

The upstream of the supply chain is vital for processes that happen in that part of the supply chain; things that happen in the upstream supply chain will affect your entire supply chain.

It has been estimated that parts shortages, underutilized plant capacities, excessive inventory, and high transportation costs can waste 25% of the operating expenses.

Also included in this could be late shipments, defective parts or raw materials, and other process parts breakdowns that can also cause a company to lose money. The supply chain issues can also cause what is known as the bullwhip effect.

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 is usually the upstream that is affected most by this.

That is why companies need to look at the entire supply chain, including the upstream of the supply chain.

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What Is Meant By Downstream Supply Chain?

The downstream of the supply chain is at the opposite end of the supply chain from the upstream. The downstream of the supply chain refers to activities that have to do with distributing and getting the product to the final consumer or customer.

Here are some parts of the downstream supply chain:

  • Distributor – The person helping you sell your product or brand and ensuring it gets to the retail store and consumer.
  • Retailer – The retail store helping you sell your product to consumers or customers.
  • Customer – The person who purchases your product to use, also known as the end-user or consumer.
Definition of Downstream

The downstream will deal with orders, repairs and service requests, and payment for orders. All aspects to take the product and 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.

The downstream supply chain can also be thought of as the demand for the product, while the upstream supply chain is thought of as the supply.

The supply chain manager needs to balance the demand with the supply to ensure that the supply chain continues to run smoothly while not over-ordering or losing sales due to no inventory.

Over ordering can be an issue as it may mean that the company will lose money by carrying too much stock they may be forced to discount or dump.

Because supply chain inefficiencies can cause up to 25% loss of operating costs, both the upstream and downstream of the supply chain must be managed correctly.

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An Efficient Supply Chain And How To Improve It

An efficient supply chain is a supply chain that functions and operates and does so at the most optimal level possible. An efficient supply chain can excel at getting products or services ordered, shipped, and to the end purchaser in the most efficient way possible.

You can discover more by reading An Efficient Supply Chain And How To Improve It by clicking here.

How Do Information Systems Support The Supply Chain?

Information systems and the information we can obtain are critical in any supply chain; we must have and use accurate information to make correct decisions.

You can discover more by reading How Do Information Systems Support The Supply Chain? by clicking here.

What Is The Difference Between Supply Chain Management and Logistics?

Supply chain management is about the collaboration and partnerships to get the goods from raw material to the end consumer; it is about the partnerships and alliances within this process. Logistics is one part of supply chain management; logistics involves moving goods from one place to another.

To learn more about loading a dry shipping container, you can read our blog on What Is The Difference Between Supply Chain Management and Logistics? by clicking here.

Anita Hummel

Hi, I am Anita Hummel. I am the President of Mondoro. I am passionate about helping you CREATE, DEVELOP, and MANUFACTURE home decor and home furnishing products. I am also an avid blogger with a love of travel and riding my motorcycle around the streets of Hanoi, Vietnam.

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What Is Meant By Upstream And Downstream Supply Chain?