A supply chain enables an organization to move products and services from the raw materials stage through the various production stages, storage, distribution channels, and sale to the end-user.
A constraint is any factor that limits or restricts a business’s ability to produce or do something. There are four key constraints in supply chain management: inventory, capacity, transportation, and information, all of which play a vital role in creating optimal results for your company.
These four constraints interact with each other, giving rise to trade-offs that may not be explicitly obvious when examined individually. To optimize these processes means to minimize the cost while maximizing the benefit; this can only be done by understanding how these factors relate to each other and their respective trade-offs (i.e. what’s gained in one area is lost in another.)
Inventory
Inventory refers to the number of raw materials, work-in-process, and finished goods on hand at any given time. This includes the inventory of your clients as well as that which you hold on their behalf. Managing inventory levels while minimizing costs is key to a profitable business; however, there are two major problems that arise when dealing with inventory: First, if an organization does not have enough inventory on hand, it will incur a cost related to expediting (i.e., paying more for someone else’s inventory). Second, if an organization does not have enough space to store its product or service before distributing it, there may be a problem with late deliveries or lost orders which can incur pricey penalty fees.
Capacity
Capacity is the ability for an organization to produce (i.e., manufacture, process, and maintain service levels). Simply put, more capacity means you’ll be able to meet demand over time and during peak periods; however, if you don’t have enough of it then your company will not perform optimally. Translated into supply chain management: if your company does not have enough space, machinery and personnel available to meet demands – there may be a bottleneck in production that will lead to delays and missed deadlines, resulting in costly penalties for your clients as well as yourself.
Transportation
Transportation refers to the movement of goods from one geographical location to another. In order to meet demand, a company must have enough transportation capacity available to move raw materials and finished goods where they need to go. Without the ability to move products from one place to another, then your service levels cannot be guaranteed, lead times will increase and clients may look elsewhere for their supply chain needs. In other words, if you can’t get it there on time, someone else will.
Information
The fourth constraint is information, which can be defined as the data that identifies and describes what’s going on in the supply chain. Information enables you to coordinate between your various different departments, suppliers, and distributors regarding demand forecasts, inventory levels, production schedules, or staffing. Without a well-designed system for collecting and disseminating information to the right people at the right time, it will be impossible to minimize costs while maximizing service levels.