AP® Business with Personal Finance review sheet from Aim for Five (aimforfive.com/business-finance/units/1/1-8)
Unit 1 · Topic 1.8
1.8 Supply Chains
A supply chain is every person and business involved in getting a product from raw materials to the customer. Businesses design their production process and choose their suppliers to fit what customers want and how the business plans to beat its rivals.
Key terms
- supply chain
- raw materials
- artisan production
- mass production
- supplier
- scale
Choosing a production process
Businesses that make goods pick between two broad approaches. Artisan production relies on skilled workers and careful detail, like a custom guitar maker. Mass production uses technology, assembly lines and machines to make large quantities, like a factory turning out thousands of guitars a week.
The choice depends on what customers care about (quality, price, customization), on the business's core competencies, and on what rivals are doing. Customers who want a one-of-a-kind item will pay for artisan work; customers who want the lowest price need mass production.
How supply chains work
A supply chain links everyone involved at each stage, from getting raw materials to delivering the finished product. It can be local, regional or global.
For a good, a typical chain looks like this: raw materials and component parts (like computer chips) → shipped to a factory, where workers and machines turn them into finished goods → stored in a warehouse → sent to a distribution center or store → delivered to customers.
Services have supply chains too. A tutoring company needs tutors (employees), materials and software (resources), and a way to reach students in person or online (a delivery system).
Picking suppliers and managing risk
A supplier is a business that provides materials, parts or services to another business. Businesses compare suppliers on five things: cost, quality, efficiency (how quickly and reliably they deliver), convenience and risk.
Risks include natural disasters, political instability, shortages of resources, production mistakes and a supplier's bad reputation. Any of these can delay deliveries or raise costs, which can wipe out a business's competitive advantage and profits. That's why some businesses use more than one supplier for key parts, even if it costs a bit more.
Strategy shapes the supply chain
- Competing on low price: use mass production and a supply chain built to cut costs, with cheaper resources and more efficient processes. Some businesses scale up, building bigger or more efficient supply chains, aiming for revenue to grow faster than costs.
- Competing on high quality: use high-quality materials and methods, whether the work is artisan or mass-produced.
- Competing through barriers to entry: sign exclusive deals, such as a supplier agreeing not to sell a key part to rivals, or a retailer agreeing not to carry rival products.
Worked examples
Try each one yourself first, then open the solution.
- Example 1Calculator allowed
Does scaling up pay off?
A water-bottle maker can add a second production line. The line adds $50,000 a year in fixed costs. It would let the company make and sell 20,000 more bottles a year at $6.00 each, and each bottle costs $3.20 in materials and labor. Does scaling up raise profit?
Show the solutionHide the solution
- Step 1: Added revenue = 20,000 × $6.00 = $120,000.
- Step 2: Added costs = $50,000 + 20,000 × $3.20 = $50,000 + $64,000 = $114,000.
- Step 3: Change in profit = $120,000 − $114,000 = $6,000.
- Step 4: Scaling makes sense when revenue grows by more than costs. Here it does, but only by $6,000, so the company should also weigh risks, like whether it can really sell 20,000 more bottles.
Answer: Yes. Profit rises by $6,000 a year, because added revenue ($120,000) exceeds added costs ($114,000).
- Example 2Calculator allowed
Choosing between suppliers
A skateboard company competes on high quality. Supplier A sells wheels for $3.10 each but has had two shipments arrive late this year. Supplier B charges $3.60 each, is nearby and has never missed a delivery. For an order of 10,000 wheels, which should it choose, and why?
Show the solutionHide the solution
- Step 1: Cost: A = 10,000 × $3.10 = $31,000; B = 10,000 × $3.60 = $36,000. A saves $5,000.
- Step 2: Risk and efficiency: A's late shipments could leave the company with no boards to sell, and B is close and reliable.
- Step 3: Strategy: the company competes on quality and reliability, not lowest price, so a steady supply from a trusted supplier matters more than a $5,000 saving.
Answer: Supplier B. It costs $5,000 more, but its reliability and lower risk fit a high-quality strategy better than A's lower price.
Common mistakes
- Thinking only goods have supply chains. Services need employees, resources and a delivery system too.
- Choosing a supplier on price alone. Weigh quality, efficiency, convenience and risk, and connect the choice to the business's strategy.
- Assuming artisan means high quality and mass production means low quality. A business can compete on quality with either approach.
On the exam
- Expect cases that ask how a supply chain risk (a storm, a political crisis, a supplier scandal) could affect a business's costs, deliveries or competitive advantage.
- When you recommend a supplier or production process, tie it to the business's competitive strategy: low price, high quality, or barriers to entry.
Connected topics
Videos
Check yourself: 1.8 Supply Chains
4 questions on 1.8 Supply Chains. Pick an answer to see if you got it, and why.
| Supplier | Location | Price per chair frame | Defect rate | Delivery time | Notes |
|---|---|---|---|---|---|
| Northwood Mills | Same state | $48 | 1% | 3 days | Offers an exclusive contract |
| Pacific Timber | Overseas | $31 | 4% | 6 weeks | Its region has had port strikes |
| Ridge Joinery | Neighboring state | $40 | 2% | 10 days | Also supplies two of Oak & Iron's rivals |
Supplier comparison prepared by Oak & Iron, a hypothetical furniture maker
Oak & Iron competes by selling the lowest-priced chairs in its market. Which supplier best fits this strategy, and what risk comes with it?
If Oak & Iron instead wanted to use its supply chain to create a barrier to entry, which choice would fit best?
How much more would 500 chair frames cost from Northwood Mills than from Pacific Timber?
Oak & Iron is planning a premium line of hand-carved chairs made in small batches by skilled woodworkers. This line would use
0 of 4 answered