What is Supply Chain Management?
A supply chain is a network that involves the functions of procurement of raw materials, the transformation of these raw materials into intermediate and finished products, and then lastly distribution of the final products to customers.
A supply chain is a combination of various facilities like supply, manufacturing, assembly, distribution, and logistics facilities. Supply chain exists in both manufacturings as well as service sectors.
Table of Contents
- 1 What is Supply Chain Management?
- 2 Meaning of Supply Chain
- 3 Define SCM
- 4 Scope of SCM
- 5 Benefits and Challenges of SCM
Supply Chain Management (SCM) is an information system approach to managing the supply chain procedures like the flow of information, materials, and services from raw materials suppliers through manufacturing units and warehouses to the end customers.
SCM has emerged as the key to increased productivity and competitiveness in manufacturing and service enterprises.
The major decisions taken during SCM are categorized as follows:
- Procurement (supplier selection, optimal procurement policies, etc.)
- Manufacturing (plant location, product line selection, capacity planning, production scheduling, etc.)
- Distribution (warehouse location, customer allocation, demand forecasting, inventory management, etc.)
- Logistics (selection of logistics mode, selection of ports, direct delivery, vehicle scheduling, etc.)
- Global decisions (product and process selection, planning under uncertainty, real-time monitoring and control, integrated scheduling)
As a business idea, the supply chain was developed in the 1990s, when ‘logistics’ as a process came to be recognized. An integrated supply chain was created for the first time ever which enabled the suppliers to coordinate their information systems with those of their customers to be able to serve them better.
Traditionally, organizations had a warehouse mentality, with products being hoarded in the warehouse as security of supplies being the main requirement. As warehouses reorganized, so did the supplies and suppliers.
The pace of change in technology meant that there was no longer security in having supplies in-house and on the shelf. For example, in the 1990s, the price of semiconductors plunged from over $70 each to less than $1 in a single year.
Thus, managing the supply became a prime concern instead of hoarding it and keeping it secure. The supply chain became a threat to competing organizations.
Supply chain management is rapidly emerging as a significant point of differentiation for organizations that have relied on their own brands and their own advertising. The earlier supply chain was working behind the scene, not visible. Nonetheless, now it is moving from behind to the forefront.
The impact of supply chains is rapid and widespread. Large companies are being impacted and benefit from the implementation of the supply chain as an agent of change. Supply chain management is evolving every day.
It is becoming a significant part of producing a branded good or service. With the customers getting more and more selective and demanding, the supply chain shall be forced to evolve again.
This chapter starts by introducing the concept of the supply chain in organizations. Next, it discusses supply chain management, its objectives, and its components. Thereafter the chapter discusses the scope of supply chain management.
Next, it explains the benefits and challenges of supply chain management. Towards the end, some new trends in supply chain management have been discussed.
Meaning of Supply Chain
According to the Council of Logistics Management, the supply chain is
“The process of planning, implementing and controlling the efficient, cost-effective flow of raw materials, in-process inventory, finished goods and related information from the point of origin to the point of consumption for the purpose of conforming to customer requirements.”
A supply chain is a system or network of facilities in which people, activities, information and resources are involved to enable a smooth movement of a product or service from supplier to customer.
Specifically, the supply chain encompasses the steps that include procuring raw materials or natural resources, transforming these materials into intermediate and finished products, and then distributing the finished products to customers.
Supply chains exist in both sectors, be it the manufacturing or service sector. It is a crucial process in any organization as having an efficient and optimized supply chain leads to cost savings for an organization. Very often confusion arises between logistics and supply chain, but they refer to two different scenarios.
Logistics refers to the distribution process within the departments of an organization whereas a supply chain includes multiple organizations such as suppliers, manufacturers, and retailers.
If an organization manufactures a product from raw materials purchased from suppliers, and that product is sold to customers then, simply put, we have a supply chain scenario.
Some supply chains are simple, while others can be rather complex and complicated. The complexity of a supply chain is directly linked to the size of an organization and the intricacy and number of items that are manufactured.
The figure shows an example of a very simple supply chain. The raw material is procured from suppliers, transformed into finished goods in a single step, and then transported to distribution centers, and ultimately, consumers.
A realistic supply chain may have multiple end products with shared components, facilities, and capacities.
A simple supply chain consists of several elements that are linked by the movement of products along it. They are as follows:
The customer is the first in the chain of events when he/ she decides to purchase a product that is being offered for sale by an organization. The customer comes in contact with the sales department of the organization for placing the order for the selected product.
The sales manager enters the sales order for the required quantity to be delivered on a specific date. If the requested product has to be manufactured, the sales department forwards the order and includes a request that needs to be fulfilled by the production facility.
The sales order containing the request for a product is combined with other sales orders. At this stage, all the sales orders are combined by the planning department and a production plan is geared up to produce the requested products and fulfill the customer’s orders. To start the manufacturing process the company then has to purchase the raw materials needed.
At this stage, the list of raw materials and services needed in order to fulfill the customer’s order is sent to the purchasing department. The purchase department in turn creates purchase orders for raw materials and services needed.
These purchase orders are sent to selected suppliers to deliver the necessary raw materials to the manufacturing site for the specified date.
At this stage, the requested raw materials are received from the suppliers, checked for quality and moved into the warehouse. Along with the raw material, an invoice for the supplied raw material is also sent to the organization for the delivered items.
The raw materials are stored in the warehouse until they are required by the production department to initiate the production of the requested product.
At this stage, the production starts in accordance with the production plan. The raw materials are moved from the warehouse to the production floor area. Here the products ordered by the customer are manufactured using the raw materials procured from the suppliers.
After the production is over, the manufactured product is tested again against the quality standards and stored back in the warehouse till the time of delivery to the customer.
This stage comes into the picture after the finished product arrives in the warehouse. The distribution department decides the most efficient method of transportation to deliver the products to the customers so that the goods are delivered on or before the specified date in perfect condition.
After the goods are received by the customer, the organization sends an invoice for the delivered products to the customer for receiving the payment.
Supply Chain Management (SCM) is a specialized process that is implemented in organizations to ensure that their supply chain is efficient and cost-effective. As we saw in the previous section, the supply chain is the collection of steps that an organization adopts to transform raw components into the final product.
SCM is the combination of art and science that go into improving the supply chain of the organization by finding the raw components it needs to make a required product or service and deliver it to customers.
There are two basic ideas behind the core concept of supply chain management. The first idea is that behind every product that reaches an end user is a cumulative effort of multiple organizations. These organizations form part of what is collectively referred as the supply chain.
The second idea is that although supply chains have existed for a long time, most of the organizations involved in it, have been concerned about the processes that went on within their “four walls.”
Very few organizations understood, much less managed, the chain of processes that were required to ultimately deliver the final products to the customer. This resulted in ineffective and disjointed supply chains.
Thus, SCM is the collective management of all supply chain activities to achieve a singular target of optimizing all the links in the supply chain. Organizations that are part of the supply chain must make a conscious effort to develop and run supply chains in the most effective & efficient ways possible.
SCM activities encompass all the fields from product development, sourcing, production, and logistics, to the information system required to coordinate these activities. Thus SCM can also be defined as the synchronization of an organization’s processes and those of its suppliers to correlate the flow of materials, services, and information with customer demand.
The organizations that are part of a supply chain are “linked” together through physical processes and information processes. Physical processes include manufacturing, movement, and storage of goods and materials. These processes are the more visible part of the supply chain.
Then there are information processes that are not as visible but very important. These processes enable the supply chain partners to coordinate their long-term plans, and control the day-to-day flow of goods and materials through the supply chain.
Objectives of SCM
The primary objective of every supply chain is to maximize the overall value generated by the system. The value is defined as the difference between the worth of the final product to the customer and the effort expended in filling the customer’s request.
This value is strongly correlated with supply chain profitability, for commercial supply chains, the difference between the revenue generated by the customer and the overall cost across the supply chain
The supply chain is designed with the ultimate objective of maximizing efficiencies, reducing costs, and increasing profits, by proactively ensuring that the right product is delivered at the right place at right time.
The main objective of SCM is to improve the overall organization performance and customer satisfaction by improving product and service delivery to the customer.
A well-designed supply chain is expected to perform with the following strategic objectives:-
- To maximize the overall value generated
- To look for sources of revenue and cost
- To replenish material and products when required
- To improve cost quality
- To shorten the time between order and delivery
- To meet customer demand for guaranteed delivery of high quality and low cost with a minimal lead time
- To optimize pre and post-production levels
- To reduce transportation costs
- To provide flexible planning and control mechanism
- To reduce working capital
- To be able to take off the balance sheet
- To accelerate cash-to-cash cycles
- To increase inventory turns
- To solve supplier’s problems
- To improve customer service performance
- To reduce pre & post production inventory
- To minimize variance by means of activities like standardization, variety reduction, etc.
- To minimize total cost of operation & procurement
- To ensure and implement product quantity control
- To achieve maximum efficiency in using labor, capital & plant utilization
- To design and implement flexible planning and control procedures
- To achieve synchronization
Components of SCM
By now, we know that supply chain management is the management of the process of converting raw materials into a finished product or service as required by a customer and delivering it to him/her.
There are five basic components of SCM as depicted in Figure:
Now, let us discuss these components in the following section:
It is the first step towards effective management of the supply chain. It is the strategic activity of SCM. An organization must have a perfect plan in place to manage all the resources that are required to meet the customer’s demand for their requested product or service and in turn, satisfy the customer.
SCM planning must be carried out in such a way that it is cost-effective for the organization and deliver high-quality product and value to customers.
The raw materials procured, to manufacture the product for the customers, must adhere to the quality standards followed by the organization. The suppliers or vendors chosen for delivering the goods and services must be reliable and chosen with utmost care.
To ensure the quality and timely delivery of goods, supply chain managers must develop good interpersonal relationships with vendors. They must also prepare a mutually agreed upon set of pricing, delivery margin, and payment processes with suppliers.
SCM managers must ensure that the vendors supply the inventory as per the demand and keep a check on the quality of the material supplied. They should also verify shipments, transfer them to the manufacturing department and authorize their payments.
This step involves the manufacturing of the required product from the procured raw material. During this step, the supply chain managers schedule and manage the activities associated with production, testing the end product, packaging it, and preparing it for delivery to the customer.
Organizations can measure product quality levels, production output, and worker productivity during this step.
This step involves selecting an efficient channel for delivering the finished goods stored in the warehouses to the customers. An efficient distribution system is required for performing this step. The distribution has to be carried out as soon as the product is manufactured and ready in the warehouse.
This step also involves the preparation of an invoice for delivering a good to receive payments from the customers.
This step involves that phase of the supply chain where the organization receives defective and excess products back from customers. This phase of the supply chain has to be implemented carefully and efficiently so as not to affect the relations with the customers.
A responsive and flexible network has to be in place to handle this situation of defective goods as it can sometimes be a problematic part of the supply chain for many organizations.
Difference Between Logistics Management and SCM
Supply chain management and logistics are two functional areas in an organization that often seems to overlap. Different companies have different outlooks towards them and define them differently.
On one hand, logistics deals with strategy and coordination between marketing and production departments, and on the other hand, the focal point of supply chain management is purchase and procurement.
Supply chain management includes factors that are related to inventory, materials and production planning too in its concept, whereas logistics includes factors relating to demand management and forecasting in its concept.
According to experts, logistics management is considered a part of supply chain management that includes planning and implementing the flow and storage of goods, and services in order to meet the demands of the consumers.
In other words, we can say that supply chain management takes care of all the logistics management activities as well.
Supply chain management is a wider concept that encompasses designing, planning, executing, controlling, and monitoring supply chain activities with the primary objective of creating net profit and leveraging worldwide logistics.
Logistics can be considered as managing the flow of goods and services between the point of origin and the point of consumption to meet the requirements and specifications of customers.
Logistics management is also referred to by names such as materials management, channel management, or distribution management.
Figure shows the differences between logistics management and supply chain management
Following tables compile the differences between logistics and supply chain management:
|Logistics Management (LM)||Supply Chain Management (SCM)|
|Logistics management is concerned with providing goods & services when and where they are required||SCM encompasses all the activities associated with the movement of goods from the raw material stage to the end user|
|Logistics is used within a single organization||Supply chain management requires coordination and implementation between various organizations in the supply chain|
|Logistics is considered a subset of supply chain management||Supply chain management is an extension of logistics management|
|Logistics adds value when inventory is correctly positioned to facilitate sales||Effective SCM helps in reducing operating costs, improves asset productivity, and reduces order cycle time|
|The concept of Logistics management is relatively old||The concept of Supply chain management is relatively new|
|Logistics management is a narrower concept||Supply chain management is a broader concept|
Scope of SCM
The contemporary business world is a world of cut-throat competition. Every business tries to be different in its field by distinguishing itself from others. This difference can be successfully achieved by the meticulous implementation of supply chain management in the organization.
Each and every organization, irrespective of its industry, depends upon an effective supply chain to keep business transactions alive.
The four major areas of supply chain management include location, production, inventory, and transportation (or distribution).
The increasing importance of supply chain management in organizations has led to a number of courses being offered. Training in this useful course is very beneficial. It benefits a huge section of the industry of logistics such as planners, working executives, and managers.
It also provides an opportunity to identify the intricacies of supply chain management and its inflexibility. One can even analyze consumer needs, and study the role of communication and IT in the supply chain.
Logistics and supply chain throws career prospects and renders ample amount of jobs. Currently, supply chain software is very popular. Inventory management is also a part of the supply chain network and is used to protect the production system from any kind of disturbance.
It also helps to prevent the organization from running out of stocks, goods, and materials. It basically focuses on managing asset management, visibility of inventory, forecasting inventory, inventory valuation, carrying cost of inventories, replenishing lead time, physical inventory, management of future asset prices, return of damaged goods, and accommodating and demand forecasting of physical inventory.
The primary goal of inventory management is to maintain a balance between the competing requirements to attain the optimum inventory levels. Inventory management is a continuous practice with respect to an organization.
It tries to maintain a comprehensive collection of merchandise and also aids in controlling other issues such as shipping, handling materials, and order.
Benefits and Challenges of SCM
Supply Chain Management (SCM) can offer tremendous benefits to any organization that relies on smooth planning and execution of related functions to attain long-term profitability and maintain a competitive edge.
Here are some of the key benefits that SCM incorporates:
With the help of SCM a defective process, one that increases the cost without increasing the value of the final product, is easy to identify. These processes are wasteful and do not add value to the product.
Once identified they can be easily eliminated whenever possible, thus affecting the overall cost of the product favorably. SCM also improves inventory management.
Wastage of resources contributes heavily to increasing the production cost of an organization. This is often the result of improper planning.
An organization that implements supply chain management is able to considerably reduce wastage and in turn, increase the efficiency of its operations as only value-adding activities are encouraged and included. This ensures the smooth flow of the organization’s processes and output is in sync with the company’s needs.
An organization that implements supply chain management in its operations is able to cultivate good interpersonal relationships with its suppliers and customers, ensuring timely fulfillment of orders.
An organization that is known for its timeliness in payments towards its suppliers and in fulfilling orders towards its customers is popular and shall attract more customers. The organisation will grow as a result of increased output and sales.
Businesses are in existence to make a profit in the market. An organisation’s profit can be increased by ensuring that costs are kept as low as possible. By implementing supply chain management costs can be drastically reduced due to the elimination of wasteful processes.
Since these are a part of operating costs for the company, savings costs in turn reflect on the increased profits by the business.
The key challenges faced by an organization in supply chain management are as follows:
The customer is the key to the supply chain. Supply chain management is called effective if it delivers the right product in the right quantity in the right condition with the right documentation to the right place at the right time and at the right price to the customer.
Thus the major challenge is to overcome these factors and rectify any problem arising at any of these stages and ensure a smooth supply chain in the organization.
Planning and Risk Management
The business world keeps changing every day. There are new product launches, global sourcing, new acquisitions, changing credit availability, the need to protect intellectual property, etc., that supply chains must be planned accordingly and evaluated regularly to incorporate these changes and, if required, redesigned. Supply chain risk must be identified and quantified.
Another challenge that the supply chain faces is the ever-increasing operating costs of businesses. There is a constant rise in freight prices, upgrades in technology, rise in labor rates, increase in healthcare costs, and rise in commodity prices, and so on.
These challenges are to be overcome by supply chain managers by taking correct decisions if the objectives of the organization are not achieved.
Supplier Relationship Management
Different departments in an organization sometimes follow different methods of implementing and measuring performance and its results. Suppliers on the other hand might follow some other method to assess performance. This can lead to a problem if the results do not match.
A few SCM provide a common language for supply chain classification and analysis that makes the assessment easy for participants and on common grounds and parameters to communicate, benchmark efforts, and enhances the evaluation of best practices.
Supply chain managers must have a thorough understanding of the key skills needed for supply chain management roles. Keep abreast with the latest trends and updates in the supply chain requires job qualifications, methods for developing future talent and leaders, and the ability to efficiently source specific skill sets.