Forward linkages are relationships in the supply chain that moves products toward end consumers. This includes the production of raw materials and components used in manufacturing as well as the steps along the distribution chain to get finished products to customers. In contrast, backward linkages are the relationships created by demand from end consumers, which can stimulate growth in the supply chain. Analysis of forward and backward linkages can provide important information about relationships.
In addition to being applied directly to economics, this concept can also be used in the analysis of government services like health care and education. Supply chain linkages can play a critical role in the effective provision of services. In health care, for example, forward linkages can promote an increase in the quality of health through measures like making more clinics available and improving nutrition. Healthier citizens may be able to achieve a higher standard of living, creating a backward linkage as they stimulate growth in other areas of the health care sector.
Raw materials move around the world in ships, trucks, and trains. At each step of the supply chain, they pass through the custody of different people involved in an industry, all of whom benefit from the upstream flow of raw materials and capital. Efficient linkages can increase the chances of making materials available when and where they are needed, and being able to adapt supply to meet demand quickly. Inefficiencies may result in high costs or other problems, like delays that lead to spoilage.
Analysis of forward linkages looks at the relationships between suppliers and manufacturers, manufacturers and distributors, and distributors and retailers. Each of these stages can involve a different kind of business relationship to move a product to the end consumers. Modeling supply chains can provide important information about how industries behave and can be expected to grow and shift over time. Establishing clear documentation on forward linkages can also illustrate the impact industries have on unrelated sectors; ports handling raw materials, for instance, may have jobs available because of demands for those materials.
Products and services can both be viewed from within this kind of supply chain framework. Formulas are available to explore backward and forward linkages using quantifiable data. This can be critical for comparisons, where economists want to be able to have hard information to use in discussions about costs, benefits, and risks. Reports may supplement the work of legislators and other policy makers, and can also be useful for companies preparing annual reports and other statements.