Downstream operations refer to the final processes in the production and sale of goods, where finished products are created and sold to consumers. Sales may be at the wholesale level, business-to-business (B2B), or at the retail level, business-to-consumers.
Downstream operations stand in contrast to upstream operations, which are part of the manufacturing process, where the necessary basic materials for producing finished products are obtained.
Upstream and downstream operations are both parts of the supply chain that ultimately delivers finished goods to consumers. While upstream and downstream operations apply to any business engaged in producing and selling goods, the terms are most commonly associated with the oil and gas industry.
Downstream operations are a part of the supply chain process that starts with basic materials and ends with finished goods sold to consumers. The downstream part of the supply chain includes processes used to create finished goods and the distribution and sale of the goods.
Downstream operation sales may be wholesale, business-to-business sales or retail sales to end consumers.
Companies often look to acquire businesses that are in either their upstream supply chain or downstream supply chain in order to gain more control of the whole supply chain process, reduce costs, or increase profits.
Upstream and Downstream Operations – Oil and Gas
In the oil and gas industry, the supply chain from start to finish includes upstream operations, midstream operations, and downstream operations.
The upstream operations basically consist of searching for, finding, and extracting oil from underground deposits. The oil exploration and drilling industry is involved in upstream operations.
Midstream operations are a key part of the oil and gas industry, as transporting the oil extracted from wells to refineries and storing it, where it is processed into the various oil by-products and end products, is typically a complicated and expensive process. The midstream part of the industry includes such things as oil pipelines and oceangoing oil tankers.
The final downstream operations are part of the supply chain process where the oil is refined, processed, and converted into a myriad of products, including gasoline, heating oil, and jet fuel. The downstream operations extend to, first, the wholesalers who purchase such products, and second, to the ultimate end-users or consumers.
For example, an oil refinery sells heating oil to a power company, which, in turn, sells the heating oil to homeowners and other consumers. Thus, the downstream operations include sales of products at both the wholesale and retail levels.
Another Example – Personal Computers
As noted, upstream and downstream operations exist wherever there is a supply chain that begins with basic materials and ends with finished goods for sale. Therefore, another example of upstream to downstream can be the personal computer industry.
The upstream end of the PC industry includes all the basic parts that go into building a personal computer – processor chips, motherboards, monitor screens, keyboards, etc. Other upstream elements include all the software, such as Microsoft Windows and Microsoft Office, that are typically supplied with personal computers.
In the middle of the supply chain process sits the computer manufacturer, a company such as Dell or Hewlett-Packard. The computer manufacturer obtains and assembles all the necessary parts to create personal computers.
Finally, the downstream operations in the personal computer industry include all the retail outlets where the computers are sold. Most computer manufacturers are also engaged in the downstream process of selling directly to end consumers, although they also wholesale their products to retailers LIKE Best Buy or other electronics stores. The last part of any supply chain is customer service, which is provided by the retail seller to the end consumer who purchases a computer.
Vertical Integration of the Supply Chain
Sometimes, companies in the middle of the supply chain process may look to vertically integrate either upstream or downstream operations by acquiring companies involved in those parts of the supply chain. For example, an automobile manufacturer might look to vertically integrate part of its supply chain by acquiring a tire manufacturer from which it purchases tires.
The reasons for a company looking to integrate its upstream operations are usually to exert more effective control of its supplies and/or to reduce the cost of acquiring such supplies.
A company looking to integrate its downstream operations is usually motivated by the desire to gain more control of the distribution and final retail pricing of its products.