11.3: The Relationship between Supply Chain, Value Chain and the Circular Economy

Supply Chain

Components and Activities of the Supply Chain

A supply chain refers to the network of individuals, organizations, resources, activities, and technologies involved in the production and distribution of a product or service. It encompasses every stage from sourcing raw materials to delivering the final product or service to the consumer.

Key components of a supply chain include the following:

• Suppliers: Provide the raw materials or components needed for production.
• Manufacturers: Transform raw materials into finished goods.
• Distributors and wholesalers: Facilitate the movement of goods from manufacturers to retailers.
• Retailers: Sell the final products to consumers.
• Consumers: The end-users of the product or service.

Activities in the supply chain include the following:

• Procurement: Sourcing raw materials or goods.
• Production: Converting inputs into finished products.
• Logistics: Transporting and storing goods.
• Demand planning: Forecasting customer demand to optimize inventory and production.

Characteristics of an Effective Supply Chain

An effective supply chain aims to deliver products efficiently and cost-effectively while maintaining high levels of quality and customer satisfaction. Supply chain management (SCM) is the monitoring and optimization of the production and distribution of a company’s products and services. It seeks to improve and make more efficient all processes involved in turning raw materials and components into final products and getting them to the ultimate customer. Effective SCM can help streamline a company’s activities to eliminate waste, maximize customer value, and gain a competitive advantage in the marketplace.^[1]

The Distinction between Supply Chain and Value Chain

Although supply chain and value chain are closely related concepts, they focus on different aspects of a product’s lifecycle. The key difference lies in their focus:

• The supply chain emphasizes the logistics and operational flow of goods and services from raw materials to the final consumer and the ways in which the process will convert raw materials into goods and services as efficiently as possible. (Refer to Figure 11.2: The Lifecycle of a Cotton T-Shirt.)
• The value chain focuses on value creation at each step, analyzing how each activity adds value to the product or service and how the costs of operational activities represent a portion of the final sale price of the good or service. (Refer to Figure 11.2: The Lifecycle of a Cotton T-Shirt.)

Supply Chain Perspectives

The supply chain can be understood in two main ways:

Functional Stages Perspective

This perspective focuses on the processes involved in moving a product from concept to customer and includes the following stages:

• Planning: Forecasting demand and strategizing operations.
• Sourcing: Procuring raw materials or components.
• Manufacturing (or production): Converting inputs into finished goods.
• Distribution: Delivering products to customers or retailers.
• Returns (reverse logistics): Handling product returns, recycling, or disposal.

These stages often overlap and involve coordination among multiple actors.

Actor-Based Stages Perspective

This perspective focuses on the participants in the supply chain and their roles and emphasizes responsibility and interaction among the different entities. It includes stages involving the following participants:

• Supplier: Provides raw materials or components.
• Manufacturer: Produces finished goods.
• Distributor: Moves goods from manufacturers to retailers.
• Retailer: Sells products to end consumers.
• Consumer: The final user of the product.

Both frameworks are complementary and can be used together to gain a comprehensive understanding of supply chains.  The supply chain functions as a continuous loop, with data and insights from one stage influencing decisions in others. This integration ensures efficiency, cost-effectiveness, and customer satisfaction. In essence, the supply chain ensures delivery, while the value chain ensures desirability and worth.

Some global companies that are known for their supply chain excellence include Amazon, Apple, Proctor & Gamble and Unilever. You will learn more about supply chain and value chain when you complete an operations management course.  This chapter is meant to be an introduction to these concepts.

Circular Economy in Manufacturing

The circular economy represents a paradigm shift from the traditional linear model of “take-make-dispose” to a regenerative approach that emphasizes the restoration and regeneration of products, materials and energy. It challenges conventional metrics of value creation and encourages manufacturers to design products and business models with durability, repairability and recyclability in mind. Through recycling, part harvesting and remanufacturing, repair, refurbishment, and recommerce, circular economy principles can reduce dependency on scarce resources and component suppliers, building adaptable and resilient supply chains.^[2]

For manufacturers, this means ensuring parts and materials within their control never unintentionally exit their sphere of influence. By retaining control over the lifecycle of products, materials and components, manufacturers can prevent resource loss, ensure efficient reuse, enable capitalization of circular practices and reduce their environmental impact.^[3] Companies like IKEA focus on product design and production processes that can be easily disassembled or recycled at the end of their life cycle. IKEA’s operations focus on sourcing sustainable materials and creating products that contribute to a circular supply chain. Patagonia has implemented circular supply chain practices by offering repair services for products and encouraging customers to return old items for recycling or resale, contributing to a circular flow of materials.^[4]

Over the years fashion consumption habits have been generating alarming amounts of waste. The global clothing and textile industry is responsible for nearly 100 million metric tons (110,231,131 short tons or 220,462,262,185 pounds) of waste every year — a figure that could jump by at least 50% by 2030.^[5]

Despite the lessons from the digital revolution, many companies continue to focus primarily on refining their existing products and services for their current customer base. But this approach overlooks the transformative potential of the circular economy, which, like the internet in the late 1990s, stands poised to redefine how businesses create, capture and deliver value. As we approach 2030, companies that embrace this shift will lead in innovation and market share, much as early adopters of digital technologies outpaced their peers. The rest of this decade will be crucial for businesses to adapt to this new paradigm, where sustainability is no longer a choice but an essential component of success.^[6]

Media Attributions

“Figure 11.2: The lifecycle of a cotton T-shirt ” is adapted from Chapter 10: Operations Management in Fundamentals of Business: Canadian Edition, © Pamplin College of Business and Virginia Tech Libraries, licensed under CC BY-NC-SA.

Image descriptions

Figure 11.2

The image illustrates the life cycle of a cotton t-shirt, depicted in a circular flowchart format, with an inner circle for the micro stages and an outer circle for the macro stages. At the center, a green t-shirt labelled “LIFE CYCLE of a cotton t-shirt” is prominent. Surrounding it are various micro stages of the lifecycle in a clockwise direction:

Micro Cycle:

• Harvesting Cotton/Polyester
• Spinning and Weaving
• Usage of Machine for making the different parts
• Use of Dye
• Washing
• Labelling
• Transportation
• Packaging
• Retail Stores
• Marketing Campaigns
• Reaches Consumers
• Recycling OR After Usage – Trashed – leads to landfills

Macro cycle:

• RAW MATERIALS EXTRACTION $2.75 / Shirt
• MANUFACTURING $3.45 / Shirt
• DISTRIBUTION $.50 / Shirt
• Retail (Markup) Final Sale Price = $50.00

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