What Is "Upstream" and "Downstream" in Supply Chain Management?

Welcome to Thomas Insights — every day, we publish the latest news and analysis to keep our readers up to date on what’s happening in industry. Sign up here to get the day’s top stories delivered straight to your inbox.

Nearly 80% of companies that develop high-performing supply chains are able to achieve greater-than-average revenue growth within their industries. Supply chain management seeks to maximize customer value and help an organization achieve a sustainable, long-term competitive advantage.

Supply chain management is a complex task, but dividing downstream and upstream supply chain tasks can help add clarity to the process. 

By breaking down the supply chain into these two categories, supply chain managers can gain deeper insight into inefficiencies or obstacles, optimize costs, and ultimately maximize customer value. Here’s how these two concepts work in practice as well as different approaches to managing downstream and upstream supply chains. 

What Is the Supply Chain?

Before we dive into the two subcategories, it’s important to understand what a typical supply chain includes. A supply chain is a network of businesses and processes that contribute to the creation, distribution, and ultimately the sale of a product. 

The supply chain starts with vendors and suppliers who provide the raw material inputs for the goods. Manufacturers procure those inputs and convert them into a product. A distributor then takes the product from the manufacturer to the customer. Distributors could include multiple parties: wholesalers, retailers, and e-commerce partners, among others.

Supply chain management oversees this entire complicated process. As explained by Investopedia, supply chain management includes five steps: 

1. Planning, e.g. developing an overall strategy for the supply chain
2. Sourcing raw materials
3. Manufacturing
4. Delivery
5. Returns

Good supply chain management helps ensure customers receive the goods they need on time and at or above their quality expectations. At the same time, supply chain management helps organizations reduce operating costs and procurement costs while optimizing profitability. 

The Downstream vs. Upstream Supply Chain 

Though the supply chain appears to be quite linear, there are many moving parts and complexities that make supply chain management difficult. Some organizations simplify their management by dividing the supply chain in two parts: upstream and downstream supply chain. 

The upstream supply chain includes all activities related to the organization’s suppliers: those parties that source raw material inputs to send to the manufacturer. The downstream supply chain refers to activities post-manufacturing, namely distributing the product to the final customer. 

Downstream supply chain can also be thought of as the “demand” while upstream supply chain is the “supply.” Supply chain managers seek to balance demand and supply to make sure that there are no lost sales, inventory shortages, or over-ordering. Supply chain inefficiencies can waste up to 25% of operating costs, so matching supply and demand is of paramount importance. 

Managing Upstream and Downstream Supply Chains

Delineating upstream vs. downstream portions of the supply chain can help supply chain managers get a handle on three main flows that happen in the creation and distribution of a product:

1. the flow of materials
2. the flow of money
3. the flow of information.

First, the flow of materials doesn’t just involve the linear progression of raw material to finished product. Some downstream partners will need to process returns, and distributor agreements should be set up to process those returns — and customer exchanges — efficiently. 

Next, the flow of money also typically moves from downstream to upstream. The retailer needs to pay the distributor for the goods received, and the distributor must pay the manufacturer. Supply chain managers need to put in place rigorous controls and systems of record to make sure there’s no waste or payment delays and that all partners are staying compliant with their contracted agreements. 

Finally, the flow of information is critical to overall performance. Upstream and downstream partners must communicate regularly to help the entire supply chain optimize productivity and improve their operations. Making sure there’s transparency from upstream to downstream supply chain partners can help build and solidify strong, long-term relationships that benefit everyone. 

Image Credit: Blue Planet Studio / Shutterstock.com