Upstream

Definition

In the context of finance, the term ‘upstream’ refers to a business strategy where a parent or main company receives goods, products, or even earnings from its subsidiaries or smaller entities. Essentially, the funds or resources are flowing “upstream” from a lower level to a higher one within a corporate structure. This strategy can increase the profitability of the main company.

Phonetic

The phonetic spelling of “Upstream” is /ʌp’stri:m/.

Key Takeaways

1. Upstream refers to the initial stages of a process or project. In the tech realm, “upstream” commonly relates to open-source projects where improvements or changes are proposed for incorporation into the main project.
2. Contributing upstream involves communicating with original maintainers of a project and having them incorporate your modifications into the main project. This approach ensures that your enhancements benefit all users and are maintained as part of the official codebase.
3. Working upstream can be beneficial as it helps mitigate the divergence between the main project and your contributions. It also lessens maintenance effort because once your contributions are incorporated into the main project, you no longer have to reapply them every time the project updates.

Importance

The term “upstream” is important in business and finance as it refers to the initial stages in the production process and describes one of the three stages in the operations of a company. Specifically, in industries such as oil and gas, “upstream” concerns exploration and extraction activities. It is critical in dictating a company’s profitability and sustainability, as limited or unsuccessful upstream activity may adversely affect production output. It can also serve as an indicator to understand and evaluate the costs, risks, and potential returns associated with the early stages of production. Therefore, upstream elements are fundamental to production-focused companies and overall supply chain management.

Explanation

In the context of finance and business, the term “upstream” is mainly used to describe a type of business activity or a segment of a corporation with operations that are farthest from the end consumer in the supply chain. This term is particularly common in the oil and gas industry, where it refers to exploration and production activities. Similarly, in manufacturing, upstream operations could include raw materials acquisition. Upstream activities serve as the initial steps in the value chain, providing the fundamental resources required to initiate the overall production and distribution process.The purpose of upstream processes is to source and extract the basic raw materials that can be processed and transformed into finished goods. Without these upstream operations, downstream processes (those closer to the final consumer – such as manufacturing or retail) cannot take place. Therefore, upstream companies hold a critical role of feeding raw materials for industries and the global economy. Due to their position at the start of the supply chain, upstream businesses may be more subject to volatility and fluctuations in commodity prices. This necessitates detailed planning, analysis, and risk management strategies; effective upstream management can significantly influence a company’s profitability and sustainability.

Examples

1. Petroleum Industry: One key example comes from the oil and gas industry. Here, ‘upstream’ refers to the exploration and production stages. This includes searching for potential underground or underwater crude oil and natural gas fields, drilling exploratory wells, and operating the wells that recover and bring the crude oil or raw natural gas to the surface. Companies involved in the upstream part of the oil and gas industry are often referred to as E&P (exploration and production) firms.2. Supply Chain Management: Within the context of a supply chain, ‘upstream’ refers to the activities related to obtaining raw materials or components that a company needs to create its products. For instance, if you’re a computer manufacturer, your upstream processes would include sourcing and receiving microchips, metals for casing, and software for the operating system.3. Economics and Business Operations: In the economic model of a river system, firms that are ‘upstream’ produce goods and services that are used in the production processes of firms that are ‘downstream’. For instance, a firm that produces dyes for fabric could be considered ‘upstream’ from a firm that makes finished garments, because the dyeing process happens before the clothing manufacturing process.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Raw Material Extraction
• Exploration & Production (E&P)
• Oil and Gas Industry
• Pre-Manufacturing Stage
• Supply Chain Operations

Sources for More Information

• Investopedia
• Corporate Finance Institute
• The Balance
• WallStreetMojo