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What Is A Supply Chain And Why Is It Important In Investing?

Supply chains are integral to the global trade system and were established over thousands of years to become what we witness in present-day society. In fact, the food you eat, clothes you wear and smartphone you are using are the combined efforts and coordination of an effective supply chain. So, what exactly is a supply chain?

Investopedia defines “supply chain” as follows:

“A supply chain is a network between a company and its suppliers to produce and distribute a specific product, and the supply chain represents the steps it takes to get the product or service to the customer.”

The above tells us that supply chains are, in effect, coordinated systems involving people, activities and resources to help to transport goods and services from one point to another. Sourcing and production would represent the beginning of the chain, while the sale and consumption of the final goods represent the end-point. In essence, supply chains help to transform raw materials and resources into finished products, which can then be used and enjoyed by a wide variety of people.

There are two ways an investor can observe if a company may be an attractive investment – where the company stands within the supply chain, and how many layers there are in the chain itself.

If a company is a distributor, for example, it tends to get squeezed by both its suppliers (to buy at higher prices) and customers (clamouring for lower selling prices). Hence, such companies may find it tough to increase margins, and it would be even more difficult if the companies are selling commodity products (products which are generic and have no pricing power).

If the supply chain is complex with many layers, the company may end up with many layers of costs to get their product to market. This impacts both their profitability as well as their competitiveness. With the Internet being prevalent in the modern era, many companies have been cutting out unnecessary layers in their supply chains to remain lean and to stay competitive.

Reviewing a company’s supply chain is an integral part of the investing process and can provide useful insights as to whether its stock makes an attractive investment.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.