What Is Supply Chain? How the Supply Chain Works

A supply chain is a sequence by which goods are transported to your business and final products to your customers. It represents as much as 70% of a company’s operating costs, according to the Association for Supply Chain Management. Effective supply chain management helps companies make the most of this allocation and speed up production time. 

The apparel brand Life Is Good, for example, cut production time from six months to just over two days by moving production and shipping from overseas to the US. “If an artist creates a new graphic on Monday, we can be selling that graphic online on Wednesday afternoon,” Life Is Good president Tom Hassell says on an episode of the Shopify Masters podcast. “We’ve eliminated a lot of waste in the system. There are just so many benefits to bringing the production onshore.”

This guide breaks down the main stages of supply chain management so you can build efficient supply chain operations.

What is a supply chain?

A supply chain is the end-to-end sequence that starts with raw materials that companies source from suppliers, and finishes with products delivered to the customer. In between, you have manufacturers assembling these components and retailers selling finished items.

For example, a supply chain for a skin care product may include the supplying of ingredients, the manufacturing and bottling of the products, and the fulfillment process, which includes shipping from factory to warehouse to customer. 

This process helps products arrive in your shop and to your customers on time. Supply chain disruptions lead to delays in shipping your products, hurting customer satisfaction and potentially damaging the relationship. In a 2026 Bringg survey of 1,040 consumers, 50% said they stopped buying from a retailer after a bad delivery experience. Additionally, 62% of those polled hold the retailer responsible when a shipment goes wrong, even when the carrier is at fault.

By using supply chain management software like Shopify, you see how the links in your chain are performing and spot minor delays before they become disruptions.

Who participates in a supply chain?

For ecommerce companies, a supply chain network usually includes the following supply chain partners:

• Suppliers. Suppliers provide or source raw materials that become finished products later in the chain (for example, fabric for an apparel brand).

• Manufacturers. Manufacturers assemble key components from suppliers, turning them into finished products.

• Wholesalers. Wholesalers purchase goods in bulk from manufacturers and provide products to retailers.

• Retailers. Retailers receive the finished product and sell it to customers.

• Fulfillment providers. Fulfillment providers ship products from retailers and distribution centers to customers.

What is supply chain management?

Supply chain management (SCM) refers to overseeing and optimizing the supply chain. Effective supply chain management involves demand forecasting with predictive analytics, risk management (such as creating contingency plans for delays or disruptions), supply chain planning, and logistics management. The use of artificial intelligence in the supply chain is streamlining these processes, analyzing large swaths of sales data and industry and macro trends to predict demand, ideal fulfillment routes, and warehouse management.

The main stages of a supply chain

• Sourcing raw materials
• Manufacturing and production
• Inventory storage and warehousing
• Distribution, fulfillment, and delivery
• Returns and reverse logistics

According to a 2026 report from the MIT Center for Transportation & Logistics, 81% of supply chain professionals surveyed reported a sharp increase in ecommerce sales in 2025 that placed more pressure throughout the supply chain. They cited inventory management, distribution and logistics, and order fulfillment as the stages of the supply chain most impacted by ecommerce growth.

Here’s a look at the main supply chain roles, in order:

Sourcing raw materials

The supply chain starts with procurement, or sourcing materials that become finished goods to sell. 

Supply chain managers help you find the right suppliers to match your price, output capacity, and quality. Supplier relationship management takes time and due diligence. Sam Naparstek, CEO and cofounder of smart fridge company Rocco, told Shopify that he spoke with 50 factories and 30 designers to find the suppliers who fit his needs.

Sourcing isn’t necessarily about finding the most cost-effective materials. Many retailers, such as athleisure brand Actively Black, use this stage to find supply network partners that reflect the company’s values.

“I’m not buying pre-made blanks that we’re just throwing our logo on,” Actively Black founder Lanny Smith says on Shopify Masters. Describing the brand’s 100% cotton collection, he says, “We’re building a Black-owned supply chain, literally from the cotton coming out of the ground to it being processed into the fabric, to being cut and sewn to us creating the product.”

Manufacturing and production

Companies typically use one of these three manufacturing processes:

• Make-to-stock (MTS). MTS involves a factory producing goods based on predicted customer demand. It’s commonly used by companies manufacturing staples, like toothpaste or detergent.

• Make-to-order (MTO). With an MTO approach, assembly doesn’t start until the order is placed, offering greater product flexibility but also longer production times. This is a common manufacturing process for brands that sell custom items like jewelry.

• Make-to-assemble (MTA). With MTA manufacturing, factories build and stock components ahead of time, then assemble them once an order arrives. This gives you greater flexibility to quickly fill custom orders, but also runs the risk of having unused parts.

The manufacturing and production stage is where quality control happens, as supply management partners check for issues or defects prior to products arriving at a shop or warehouse. 

Manufacturers and partners also test products according to industry standards, ensuring that you’re selling safe products that comply with regulations such as guidelines from the Food and Drug Administration.

Inventory storage and warehousing

The next stage of the supply chain process is storing and organizing items received from manufacturers. This is commonly done in warehouses or, for smaller shops, in the physical store.

At this stage in the supply chain, you monitor your inventory levels, using software to track the current number of items in stock so you can prevent excess inventory or stockouts. 

There are many different inventory management methods you can use, including:

• Economic order quantity (EOQ) calculates the most cost-effective quantity of a product your shop should order to avoid surpluses and shortfalls. The EOQ formula is the square root of: [2(setup costs)(demand rate)] / holding costs. This formula, which inventory software can calculate, helps you understand how much to order and when.

• Just-in-time (JIT) reduces inventory costs by receiving goods only as they’re needed in the production process. This method reduces the risk of overstocking, but requires accurate forecasting and reliable suppliers, so you can predict and meet future customer demand. 

• ABC analysis categorizes your inventory into three classes based on importance: A is for high-value products with low sales frequency, B is for moderate-value products with moderate sales frequency, and C is for low-value products with high sales frequency. Shopify features a built-in ABC analysis tool.

• Perpetual inventory management maintains real-time updates to inventory records as purchases happen. With an accurate, real-time inventory count, you can see where you’re running low and place orders for those items before they run out. To do this, you need inventory management software, such as the supply chain management features built into Shopify or a platform like Prediko.

Distribution, fulfillment, and delivery

You can accomplish fulfillment with the help of in-house teams mailing products or third-party logistics (3PL) providers such as Flexport or DHL Fulfillment Network. 

Smaller businesses, such as those handling fewer than 100 orders per month, might handle fulfillment in-house, packaging and sending out orders to customers themselves. As your shop grows, finding the right 3PL partner is essential, according to Richard Shaw, senior lead of Shopify Fulfillment Network. “When [third-party fulfillment] really helps is at scale, when you’re fulfilling hundreds, if not thousands, of things a month—when you have the volume that warrants going to a 3PL partner,” Richard says.

Returns and reverse logistics

According to a 2025 report by the National Retail Federation, roughly 19.3% of online orders are returned.

Having supply chain strategies in place for returns (or reverse logistics) is just as important as your focus on fulfillment. An efficient return process helps you protect your margins, so you’re not spending more money than necessary to ship items back from the customer and restock those items in your warehouse or shop. Customers expect retailers to fund the return process. As the National Retail Federation’s report points out, 82% rank free returns as a top priority.

Supply chain management software allows you to track returns as they come through the system, autonomously communicate updates with customers, and deliver refunds. Many ecommerce platforms include returns management as a built-in feature. With Shopify, you can manage returns and refunds and see the most common reasons customers send items back. You can make returns easy for customers by featuring a self-serve portal (a feature included in Shopify) where they can start the return process and monitor progress.