Explainer: Upstream vs Downstream in Procurement and Supply Chain

“We all end in the ocean / We all start in the streams / We're all carried along / By the river of dreams” sang Billy Joel in 1993.

Billy was definitely not singing about supply chain management, but that won’t stop us using his lyrics to splash clumsily into an article about upstream and downstream in procurement and supply.

Fair warning: this article is going to be heavy on the river analogies, so let’s start with the basics. A river’s water flows from the source (the upstream area) all the way down to the ocean (the downstream area). The upstream areas are where the river starts, often in the mountains or hills, while the downstream areas are closer to the river's mouth, where it empties into the larger body of water.

Upstream vs downstream

The same concept applies to supply chain management. Upstream refers to the suppliers, raw materials, and other inputs that go into making a product, while downstream refers to the processes, distribution, and customers on the other end. And just like a river, the flow of goods, services, and information goes from upstream to downstream.

But that flow can sometimes get disrupted. Imagine a big boulder or fallen tree blocking the river upstream - that's going to slow down or even completely stop the water from flowing downstream. Similarly, in a supply chain, any kind of disruption on the upstream side, whether it's a supplier going out of business, a key raw material becoming scarce, or a transportation breakdown, is going to have ripple effects all the way down the system.

Example: The Riverside Biscuit Company

Let's use the example of a biscuit factory to illustrate this. The upstream part of the biscuit supply chain would include the farmers growing the wheat, the mills that grind the wheat into flour, the dairy farms providing the butter and milk, the sugar and salt suppliers, and any other raw ingredient providers. These are the sources of the key materials needed to make biscuits.

Downstream, you'd have the biscuit factory itself, where all those ingredients get mixed, baked, and packaged into the final biscuit product. Then there's the distribution network - the trucks, trains, and planes that transport the biscuits to grocery stores, restaurants, and other customers. And finally, the customers themselves, the folks who enjoy eating the biscuits. 

Now, imagine if there was a drought that severely impacted the wheat crop one year. That would be an upstream disruption - the biscuit factory would suddenly have a hard time getting enough flour, a key ingredient. That could force them to cut back production, raise prices, or look for alternative flour sources. Those downstream impacts would then ripple out to the distributors and customers.

Conversely, if there was a breakdown in the factory's ovens or a truckers' strike that prevented the biscuits from getting delivered, that would be a downstream disruption. The factory might have plenty of ingredients coming in, but no way to turn them into finished products or get them to market. 

Effective supply chain management is all about anticipating, preventing, and quickly resolving these kinds of disruptions, whether they occur upstream or downstream. You want to make sure you have a reliable, efficient supply of raw materials coming in (upstream) so the factory can keep producing biscuits. And you want to make sure those biscuits are getting distributed quickly and cost-effectively to meet customer demand (downstream). 

At the risk of flogging the river analogy to death, here are some additional points the biscuit factory needs to consider:

Sustainability and environmental factors

• Ensuring the river water (raw materials) isn't polluted or contaminated through environmentally sustainable sourcing practices.
• Protecting the river banks (local communities and ecosystems) from harm.
• Monitoring the water quality (regulatory compliance, social and environmental impact) of suppliers and partners upstream.

Diversifying sources

• Having multiple tributaries (suppliers) feeding into the river rather than relying on a single source.
• Regularly assessing the health and reliability of each tributary to ensure consistent flow.
• Building redundancy by having backup tributaries ready in case a primary source dries up.

Preparing for disruptions

• Developing contingency plans for droughts (supply shortages) and floods (demand spikes).
• Identifying potential blockages (bottlenecks) in the flow and putting preventative measures in place.
• Investing in dams and reservoirs (safety stock, buffer inventory) to regulate the water level.

Collaborating and sharing information

• Fostering upstream-downstream collaboration to share data, innovation, forecasts, and insights.
• Establishing early warning systems to detect potential storms (disruptions) brewing upstream.
• Optimizing river traffic control (logistics and transportation).

Sustainability, diversification, resilience, and collaboration – these are all key principles for navigating the complex river of modern supply chains, just as they are essential for managing an actual river ecosystem. By taking a holistic, systems-level view, businesses can ensure their "water" (materials, goods, information) flows smoothly, cleanly, and reliably from source to sea.

Your upstream and downstream partner: GPOs

A group purchasing organization (GPO) can help manage various parts of your upstream and downstream "flow." A GPO is an entity that helps businesses pool their purchasing power to negotiate better deals with suppliers. For our biscuit factory, a GPO could potentially get lower prices and better terms on all those upstream raw materials – the flour, butter, sugar, etc. The GPO has relationships with lots of suppliers, so they can leverage that volume to secure better contracts.

That takes a big burden off the biscuit factory. Instead of each individual factory having to negotiate separately with dozens of suppliers, the GPO handles all that on their behalf. The factory can focus more on the downstream side - perfecting their recipes, running an efficient production line, and getting those fresh biscuits into the hands of hungry customers.

Additionally, a GPO can help the biscuit factory source products and services that keep their locations up and running. Technology to help keep up with inventory, JanSan or MRO providers to keep their facilities clean, and discounted rates on shipping when it comes time to stock stores.

In summary, upstream refers to the suppliers and raw materials that go into making a product, while downstream refers to the processes, distribution, and end customers. Effective supply chain management requires carefully orchestrating that entire upstream-downstream flow, and anticipating and resolving any disruptions that might occur. A GPO can be a valuable partner, helping businesses on both sides of the equation secure better deals and free up resources to focus on other strategic initiatives.

It's all about keeping that river of goods, services, and information flowing smoothly from source to sea. With the right strategies and partners in place, any business can navigate those supply chain waters with ease, no matter what rapids or obstacles come their way.

Discover other ways working with a group purchasing organization can boost business growth by downloading a free copy of our playbook here.