INTERNAL SUPPLY CHAIN

The concept of supply chain is often given attention in the context of one company dealing with another company. And most books will define supply chain as such which is ok. The problem is if one is keen on adding value to what they make then they have to look at internal supply chain as well.

What is it?

When talking about internal supply chain you need to look at it in terms of value chain. This means a combination of systems an organization uses to create its products and services and in the end make money. Looked at from Michael porter’s point of view your value chain consists of five primary activities, that is, inbound logistics, operations, outbound logistics, marketing and sales, services.

The value chain approach helps you to understand your supply chain, which is, the flow of information and resources within – into and through – your organization. What you will have are inbound activities, which means procuring and receiving the inputs you need, this will be followed by conversion of these inputs into output. The next stage of the chain is outbound activities, which is the moving of outputs, resulting from you conversion activities, onwards to your customers. We can sum up the process as: procurement, production, storage, distribution, sales and marketing.

Why is it important?

Given that value addition and how a firm is good at it is one of those factors that contribute to how much profit it will make, it is important therefore in the quest for value creation to look at how the process used in creation of goods and services are linked internally, since this is what gives you the internal supply chain which will explain your value chain.

The other reason why this really matters is because it helps you to start looking at production units in terms of suppliers and customers, basically one unit produces something that the next unit needs to use and so on. This approach means you end up with your own version of upstream and downstream operations. The ‘supplier unit’ will need to anticipate the needs and satisfy the requirements of these internal customers – just as a supplying firm will seek to do for its external customers.

For instance;

If you have a delivery company some of your regular operations could be truck maintenance and servicing, loading and driving etc. Your procurement team will supply things like oil, tools, overalls etc to your mechanics, who will intern supply the repair and maintenance services to you trucks which in turn your drivers will use to deliver finished products. You can imagine what will happen if the internal supply goes wrong.

The thing to take note of here is that procurement department is also part of internal supply chain given that it is served by finance department on matters regarding finance and the technical department on issues regarding specifications of what is to be procured therefore, at any given point a department is both a supplier and a customer.

Why you focus on internal supply chain?

1. It helps with integration of departments through value chain such that each sees how they can contribute to value addition.
2. It encourages procurement staff to be proactive in planning procurement rather than just reacting to procurement needs.
3. Reducing resistance to procurement involvement in strategic issues and processes since most departments assume that procurement is about cost cutting and low price