A simplistic representation of a supply chain involves a sequence between five stages, from suppliers to the final customer. Each of these stages has its own cycle, which is a sequence of operations and transactions taking place between two stages.
- A customer order cycle takes place when orders are processed, prepared, and shipped. For retail, the customer is often picking his order from the store inventory (shelves), which represents the point of final demand. In a pull logistics system, customer order cycles are particularly important since they are the driver of further cycles upstream of the supply chain.
- The replenishment cycle concerns the steps involved to re-supply outlets from distribution centers and wholesalers. Each outlet places orders to distributors based upon its own fluctuation of the demand.
- The manufacturing cycle concerns the scheduling of production in light of the demand from distributors.
- The procurement cycle involves the scheduling of the components required in the manufacturing of a good.
The frequency of the cycles varies, which is reflected in their respective inventory levels. Usually, retailers have significant fluctuations in their inventory levels since stores only carry a limited amount of inventory (on shelves and in the limited store back area). Once the inventory reaches a critical level, a new inventory is ordered from the distributor, which triggers a replenishment cycle. Since distributors have a higher level of inventory, the replenishment cycle tends to fluctuate less. This is even more so for manufacturers since they tend to have a relatively stable output due to the fixed capabilities of their equipment and tools. Still, flexible manufacturing systems are able to accommodate higher fluctuations.
A common risk in a supply chain is referred to as the “bullwhip effect“, where demand can back-propagate. For instance, a customer may order 10 units of a product from a retailer. The retailer may decide to order 12 units from a distributor to make sure to have additional inventory (and anticipating higher future demand). In turn, a distributor may order 15 units from a manufacturer, which could order components from suppliers to make 20 units. In this case, a 10 unit order has resulted in the procurement of 20 units.