What is Supply Chain Management?
Supply chain management is a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores, so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time, in order to minimize system wide costs while satisfying service level requirements.
Table of Content
- 1 What is Supply Chain Management?
- 2 Definition of Supply Chain Management
- 3 Supply Chain Management Components
- 4 Evolution Of Supply Chain Management
- 5 Objectives of SCM
- 6 Importance of SCM
- 7 Functions of SCM
- 8 Supply Chain Planning
- 9 Supply Chain Management Process
- 10 Factors of Supply Chain Management
- 11 Future of Supply Chain Management
The supply chain is the network of organizations that are involved through upstream and downstream linkages in the different process and activities that produce value in the form of products and services in the hands of ultimate customers.
Supply chain management is an external integration of interrelated functions of the firm with its channel members, vendors, and all third-party logistics service providers who contribute in the flow of goods (raw materials, semi-finished and finished products) and related information from the point of inception to the point of consumption with efficiency.
Supply chain management revolves around efficient integration of suppliers, manufacturers, warehouses, and stores, it encompasses the firm’s activities at many levels, from the strategic level through the tactical to the operational level.
Definition of Supply Chain Management
According to Thomas and Griffin (1996), SCM is the management of material and information flows both in and be- tween facilities, such as vendors, manufacturing and assembly plants, and distribution centres. It includes various activities, like inbound and outbound transportation, warehousing, inventory control, etc.
According to the Council of Supply Chain Management Professionals (CSCMP), “Supply Chain Management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers.
Supply chain management is the coordination of all activities involved with the full process of sourcing materials or services, manufacturing products or delivering services, and distributing them to customers,” as defined by Sunil Chopra and Peter Meindl in their book “Supply Chain Management: Strategy, Planning, and Operation.
Supply Chain Management is the integration of key business processes from end-user through original suppliers that provides products, services, and information that add value for customers and other stakeholders.
Supply chain management takes into consideration every facility that has an impact on cost and plays a role in making the product conform to customer requirements: from supplier and manufacturing facilities through warehouses and distribution centers to retailers and stores.
Indeed, in some supply chain analysis, it is necessary to account for the suppliers’ suppliers and the customers’ because they have an impact on supply chain performance.
By the objective of supply chain management is to be efficient and cost-effective across the entire system; total system-wide costs, from transportation and distribution to inventories of raw materials, work in process, and finished goods, are to be minimized.
Thus, the emphasis is not on simply minimizing transportation cost or reducing inventories but, rather, on taking a systems approach to supply chain management.
Supply Chain Management Components
These are supply chain management components which given below:
- Raw Materials Providers
- Sales Representatives
- Logistics Providers
- Credit Support Providers
- End Users
Raw Materials Providers
Raw materials providers sell raw materials like steel, fuel or other commodities to manufacturers who need these to run their operations or incorporate into the goods that they manufacture. Raw materials providers also sell raw materials to others in the supply chain for resale or consumption.
Manufacturers manufacture or produce:
- Their own off-the-shelf products.
- Custom products based on third-party specifications.
The term manufacturer is also used to refer to a product manufacturer or producer that outsources the actual manufacture or production of its products to a third party. Manufacturers sell their goods to others in the supply chain for resale, but also sell goods directly to end users for consumption.
Distributors are typically middlemen that purchase goods from manufacturers or other middlemen for their own account with the intention of reselling them to others in the supply chain, for example:
- End users, for example, consumers or companies that need the goods.
Distributors also include manufacturers that distribute their own products. Distributors typically bear inventory risk and the risk of loss regarding the goods, as well as credit risk related to their customers.
The meaning of “reseller” varies from industry to industry. A reseller may refer to an entity that purchases goods from manufacturers or distributors with the intention of reselling them to end users for consumption or incorporation into another product. A reseller that resells goods to consumers is commonly referred to as a retailer. Resellers typically bear inventory risk and the risk of loss regarding the goods, as well as credit risk related to their customers.
Franchisers are owners of business systems and processes who grant one or more third parties (franchisees) the right to use their business systems or processes, as well as trademarks or trade names to produce and market goods (or services) according to uniform specifications in exchange for a one-time franchise fee plus a percentage of sales revenue (royalty).
Sales representatives market, advertises, promote and solicit the sale of the goods on behalf of the seller (such as a manufacturer or distributor) to the seller’s customers in the specified territory. Sales representatives do not take title to the goods or bear inventory risk or risk of loss regarding the goods. They also do not bear the credit risk of the customers.
These entities provide a variety of services on behalf of other participants in the supply chain to move the goods between the participants. Logistics providers may take temporary custody of the goods, but do not take title to the goods. Logistics providers include:
- Warehousemen, which are entities engaged in the business of storing goods for hire.
- Carriers, which are entities like trucking companies that issue bills of lading.
- Customs brokers, which are entities engaged in the business of clearing goods through customs barriers for importers and exporters.
In addition to sellers who provide seller-financing, such as extended or deferred payment terms, these entities include banks, factoring companies and other entities who provide:
- Purchase-money financing for a buyer to pay the purchase price of goods.
- Commercial letters of credit to buyers to further the payment of goods in the ordinary course of a transaction.
- Factoring to sellers who sell or assign their receivables to accelerate their cash flow.
Credit Support Providers
These entities provide credit support to any party that is insecure about the payment or other obligations of the other party, for example:
- Banks that issue standby letters of credit.
- Sureties like insurance companies that provide surety bonds.
End Users: These include any participant in the supply chain who purchases goods for:
- Their own use or consumption.
- Incorporation as raw materials or components into their own products.
Some users do not own the goods (for example, equipment) that they use in their businesses. Rather, they lease equipment from others in the supply chain who own the equipment. The party that owns the equipment is commonly referred to as the lessor. The party that has the exclusive right to use the equipment is commonly referred to as the lessee.
Lessor and lessees engage in equipment leasing for a variety of reasons including:
- Allocation of the equipment’s life-cycle between the parties.
- Tax advantages.
- Accounting treatment.
Evolution Of Supply Chain Management
Six major movements can be observed in the evolution of supply chain management studies:
- Creation Era
- Integration Era
- Globalization Era
- Specialization Era (Phase I)
- Specialization Era (Phase 2)
- Supply Chain Management 2.0 (SCM 2.0)
The term supply chain management was first coined by a U.S. industry consultant in the early 1980s. However, the concept of a supply chain in management was of great importance long before, in the early 20th century, especially with the creation of the assembly line.
The characteristics of this era of supply chain management include the need for large-scale changes, re-engineering, downsizing driven by cost reduction programs, and widespread attention to the Japanese practice of management.
This era of supply chain management studies was highlighted with the development of Electronic Data Interchange (EDI) systems in the 1960s and developed through the 1990s by the introduction of Enterprise Resource Planning (ERP) systems.
This era has continued to develop into the 21st century with the expansion of internet-based collaborative systems.This era of supply chain evolution is characterized by both increasing value-adding and cost reductions through integration.
The third movement of supply chain management development, the globalization era, can be characterized by the attention given to global systems of supplier relationships and the expansion of supply chains over national boundaries and into other continents.
Specialization Era (Phase I)
In the 1990s, industries began to focus on “core competencies” and adopted a specialization model. Companies abandoned vertical integration, sold off non-core operations, and outsourced those functions to other companies. This changed management requirements by extending the supply chain well beyond company walls and distributing management across specialized supply chain partnerships.
Specialization Era (Phase 2)
Specialization within the supply chain began in the 1980s with the inception of transportation brokerages, warehouse management, and non-asset-based carriers and has matured beyond transportation and logistics into aspects of supply planning, collaboration, execution and performance management.
Supply Chain Management 2.0 (SCM 2.0)
Building on globalization and specialization, the term SCM 2.0 has been coined to describe both the changes within the supply chain itself as well as the evolution of the processes, methods and tools that manage it in this new “era”.
Web 2.0 is defined as a trend in the use of the World Wide Web that is meant to increase creativity, information sharing, and collaboration among users.
Objectives of SCM
To create value for customers
Customer satisfaction is the primary goal of any organisation for its overall success. SCM aims to add customer value by establishing a market-driven customer service strategy based on customer requirements. This results in repeat business for the organisation.
To increase organisational responsiveness towards change
Organisations need to adapt to many changes on a frequent basis with respect to the changes in the business environment, such as the advent of new technologies and changes in government policies. Effective SCM helps the organisation quickly respond to such changes.
To reduce business risks
Quite often, organisations encounter various disruptions in the entire business network, such as natural disasters, cataclysmic weather, labour strikes and supplier failures. These sudden disruptions affect the smooth flow of products and services in the market, which may lead to major consequences for organisations. An effective SCM network enables organisations to reduce such risks by establishing backup plans.
To enhance cost efficiencies
The major objectives of SCM are to reduce inventory-carrying costs, minimise labour expenses and cut expenditures on freight spend, thereby achieving cost efficiencies. For this, the organisations adopt various measures in SCM, such as using contracts or a bid/proposal to obtain economic re- sources at the lowest cost possible.
Importance of SCM
SCM plays a pivotal role in an organisation’s success by enhancing its operational efficiency and maximising customer satisfaction. Moreover, SCM provides a competitive edge to the organisation by ensuring a smooth flow of products and services in the market. The follow- ing points explain the importance of SCM:
- SCM helps an organisation in bringing down inventory costs through inventory management.
- Through SCM, information is disseminated effectively between various partners in the network.
- SCM helps an organisation in enhancing customer satisfaction by making on-time delivery.
- SCM helps in building trust between various partners as they work together.
- SCM also improves profits of the organisation by increasing the efficiency of operations.
Functions of SCM
SCM offers various tools and techniques to identify and diagnose disruptions and solve them in time. Various functions involved in SCM processes in an organisation:
An organisation must plan the allocation of resources to meet the requirements of customers for goods and services. This will require developing a set of standards to monitor the supply chain so that it is efficient and affordable and delivers maximum value to customers.
An organisation must assess the source for pro- curing raw materials to produce goods and offer services to customers. This requires an assessment of cost, invoice and shipment methods of various potential vendors. Once this is done, a vendor is finalised.
This is a critical function as it involves the performance of all aspects, including workers, processes and products. An organisation must manufacture goods that can meet the customers’ requirements and are profitable to the organisation.
It is crucial to an organisation because the manufactured products lying in the inventory increase the cost of production without adding to revenue. To deliver goods and services, an organisation must coordinate various processes, including receiving orders from customers, managing inventories, arranging for the shipment of products to customers and setting up an account system to receive payments. Once an order is placed, the organisation must deliver the product to the right people at the right time and at the right place.
Supply Chain Planning
Supply Chain Planning enables manufacturers to synchronize enterprise-wide production and supply with enterprise-wide demand. The solution allows manufacturers to aggregate total demand and centrally plan for the production capacity and supplies required to satisfy that demand.
Supply Chain Planning consolidates sales, production, inventory and purchasing information to help companies become more demand-driven and actually manufacture items based on real demand.
In today’s demand-driven market, it is critical for manufacturers to optimize and integrate sales and logistics and incorporate such data into the production schedule in a timely manner.
Supply Chain Planning delivers substantial benefits to manufacturers including:
- Increased responsiveness to market changes.
- Improved visibility into aggregated demand as well as enterprise-wide production and supply.
- Reduced inventory levels.
- Improved customer service and on-time delivery performance.
- Optimized supply to meet demand profitably.
- Lowered inventory, distribution, and transportation costs.
- Increased demand forecast accuracy with compressed planning cycle times.
- Move Planning Closer to Demand
- Total Demand Visibility
- Enterprise-wide Planning
- Support for Global PSI Planning
Move Planning Closer to Demand
Supply Chain Planning helps manufacturers increase responsiveness by shifting the planning process closer to actual demand. Manufacturers can then more effectively synchronize production and procurement activities with actual demand and in the process lower costs, decrease inventory levels, and improve customer service.
Total Demand Visibility
Supply Chain Planning increases manufacturers’ visibility into enterprise-wide demand by aggregating forecasts and sales orders created by customers and local sales offices into one, comprehensive demand stream. This demand stream can be organized in a wide variety of ways by corporate entity, customer, customer type, product family or end-item to allow corporate planners to see when, where and what kind of demand is being generated.
Supply Chain Planning provides visibility into demand and also allows manufacturers to determine the optimal way to fulfil that demand based on available enterprise-wide supply and production resources. From the same screen, planners can see the production and inventory required to meet demand in user-defined time-buckets.
Supply Chain Planning allows users to drill into demand details to see how supporting production and supply plans were created as well as to make any changes necessary to meet the demand or achieve business objectives more effectively. This ability to plan production and procurement activities centrally against aggregated demand is essential for manufacturers who wish to realize strategic business objectives such as cost reduction or improved responsiveness.
Support for Global PSI Planning
Supply Chain Planning provides full support for Global PSI (Production, Sales, and Inventory) planning commonly used by leading electronics and high-volume manufacturers. The solution contains a global model of production resources and inventory that can be used to fulfil demand.
The Global PSI model is created from multiple Local PSI models generated from the production planning or materials planning systems in use at each factory.
Supply Chain Management Process
The Global Supply Chain Forum identified eight key processes that make up the core of supply chain management:
- Customer Relationship Management
- Customer Service Management
- Demand Management
- Customer Order Fulfilment
- Manufacturing Flow Management
- Supplier Relationship Management (Procurement management)
- Product Development and Commercialization
- Returns Management
Customer Relationship Management
The customer relationship management process provides the structure for how the relationship with the customer is developed and maintained. Management identifies key customers and customer groups to be targeted as part of the firm’s business mission.
Customer teams tailor Product and Service Agreements (PSA) to meet the needs of key accounts and segments of other customers.
Customer Service Management
The customer service management process is the firm’s face to the customer. It provides the single source of customer information, such as product availability, shipping dates and order status. Real-time information is provided to the customer through interfaces with the firm’s functions, such as manufacturing and logistics. Customer service management is responsible for administering the PSA.
The demand management process needs to balance the customers’ requirements with the firm’s supply capabilities. This includes forecasting demand and synchronizing it with production, procurement, and distribution. “Demand Management coordinates all acts of the business that place demand on manufacturing capacity”.
The process is also concerned with developing and executing contingency plans when operations are interrupted.
Customer Order Fulfilment
A key to effective supply chain management is to meet customer requirements in terms of order fulfillment . Effective order fulfillment requires integration of the firm’s manufacturing, logistics and marketing plans. The firm should develop partnerships with key members of the supply chain to meet customer requirements and reduce total delivered cost to customers.
Manufacturing Flow Management
The manufacturing flow process deals with making the products and establishing the manufacturing flexibility needed to serve the Review Manufacturing, Sourcing, Marketing target markets. The process includes all activities necessary for managing the product flow through the manufacturing facilities and for obtaining, implementing and managing flexibility.
Supplier Relationship Management (Procurement management)
Supplier relationship management is the process that defines how a company interacts with its suppliers. As the name suggests, this is a mirror image of customer relationship management. Just as a company needs to develop relationships with its customers, it needs to foster relationships with its suppliers.
Product Development and Commercialization
Product development is critical to the continuing success of the firm. Developing new products quickly and getting them to the marketplace in an efficient manner is a major component of corporate success. Time to market is a critical objective of this process.
Supply chain management includes integrating customers and suppliers into the product development process in order to reduce time to market. As product life cycles shorten, the right products must be developed and successfully launched in ever-shorter timeframes in order to remain competitive.
Effective returns management is a critical part of supply chain management. While many firms neglect the returns process because management does not believe it is important, this process can assist the firm in achieving a sustainable competitive advantage.
Effective management of the returns process enables the firm to identify productivity improvement opportunities and breakthrough projects.
Factors of Supply Chain Management
These are the factors of supply chain management:
What products does the market want? How much of which products should be produced and by when? This activity includes the creation of master production schedules that take into account plant capacities, workload balancing, quality control, and equipment maintenance.
What inventory should be stocked at each stage in a supply chain? How much inventory should be held as raw materials, semifinished, or finished goods? The primary purpose of inventory is to act as a buffer against uncertainty in the supply chain. However, holding inventory can be expensive, so what are the optimal inventory levels and reorder points?
Where should facilities for production and inventory storage be located? Where are the most cost efficient locations for production and for storage of inventory? Should existing facilities be used or new ones built? Once these decisions are made they determine the possible paths available for product to flow through for delivery to the final consumer.
How should inventory be moved from one supply chain location to another? Air freight and truck delivery are generally fast and reliable but they are expensive. Shipping by sea or rail is much less expensive but usually involves longer transit times and more uncertainty.
This uncertainty must be compensated for by stocking higher levels of inventory. When is it better to use which mode of transportation?
How much data should be collected and how much information should be shared? Timely and accurate information holds the promise of better coordination and better decision making.With good information, people can make effective decisions about what to produce and how much, about where to locate inventory and how best to transport it.
The sum of these decisions will define the capabilities and effectiveness of a company’s supply chain. The things a company can do and the ways that it can compete in its markets are all very much dependent on the effectiveness of its supply chain.
If a company’s strategy is to serve a mass market and compete on the basis of price, it had better have a supply chain that is optimized for low cost. If a company’s strategy is to serve a market segment and compete on the basis of customer service and convenience, it had better have a supply chain optimized for responsiveness. Who a company is and what it can do is shaped by its supply chain and
Future of Supply Chain Management
The future of supply chain management can be imagined by focusing on supply chain features. These features have been explained as follows:
- Information Technology
- Environmental Concerns
- Manufacturing Technology
- Social Aspect
- Customer Relations
- Organization Structure
- Human Resource
International markets and rivalry will guide changes in scope, scale and lead times, adding difficulty in planning and implementation. Market profiles influenced by uncertainty will change supply chain plans.
Production capital including trained labourers will be internationally spread, even more, leading to more lead times and uncertainty. International Democratization will lead to new markets hence increasing complexity and lead times.
Small and Medium companies will become part of the international network, and this will require organizational changes. International companies will be supposed as local within each market of existence but at the same time will be sold by their international situation and flexibility.
The rising size of international corporations will require them to be autonomous and learn like a multifaceted natural organism.
If market instability rises then the time to start a new business and goods of high agility will decrease. Increased competition and environmental requirements will re-choir lean supply chains. The increase of recently developed countries will have consumers demanding highly customized goods hence demanding diverse product collections.
The contest will be based on creativity and modernization in all the sectors of manufacturing, to be offered in a short duration of time Fast product innovation will require new suppliers at new sites, new markets, new delivery modes, new information requirements etc.
B2B dealings will be more synchronized with the assistance of technology and better business processes thus more agility in the system can be realized.
Improvement in information distribution and communications will improve competitive weather. Market visibility and communications will rapidly improve to improve the speed of information flow and product traceability. additional real-time applications and decision support systems will be necessary.
The high connectivity of IT-supported systems will allow completing orders from various sources in real-time using effective supply chains. Encroachment of IT will allow quicker organizational learning and knowledge management.
The constant pressure to refill natural resources by increasing design and technology will necessitate modifications in manufacturing and supplier base. Authoritarian norms on recycling will influence supply chain design (reverse logistics).
Reverse logistics will be crucial in supply chain decisions which will engage issues such as product disassembly for reuse, remanufacturing, and product traceability. Independence on natural resources will make supply chains more constant and sustainable.
The constant rise in pressure on supply chains to use environmentally friendly materials in production, distribution, usage and disposal, will affect production techniques and hence the partners.
Extra flexibility in including new technologies in production systems on daily basis will be required. The growing need for better technology and knowledge of buyers will make products more difficult, leading to composite processes and the need for new materials.
All this will require an active supplier base and logistic complexity will be more. The requirements for high-value addition will require highly processed products pushing organizations to go for outsourcing and watch out for new suppliers.
Wide-ranging customer needs and mass customization will force products towards the concept of “reconfigurability”. This will require a supply chain to support for unlimited life of the product. Flexible, reconfigurable, autonomous FMS and self-learning systems will allow people to work with The system rather than on the system.
Testing, inspecting & manipulating at infinitesimal levels of materials will allow quality, durability and recyclability. Tele-manufacturing and direct deposit methods will permit designing and selling of extremely flexible, economical and locally available products in a supply chain.
Nano and biotechnology based manufacturing will help to produce in an environment-friendly mode.
The rising world population will damage the availability of resources and force organizations towards being more well-organized and inventive. Demanding the need for basic human rights will boost the social liability aspect of businesses and thus it will have to be included in the strategy.
Rising insecurity caused by war and terrorism will affect the configuration of alliances and will have an unfavourable effect on supply chain reliability, performance and costs.
There will be a direct relationship between manufacturer and customer throughout the life of the product. Organizations and supply chains will more and more look toward establishing processes to establish trust.
Customers will buy only trusted brands. Value-based facilities will be more significant than physical products so post-sales facilities will cause amplification in supply chain difficulty.
Asset rights will get dissolved in form of mobile assets. Leasing and outsourcing will be most favourite options. Real and virtual joint partnerships will be rapidly made and dissolved as and when the opportunity comes and dissipate new corporate houses will swap hierarchical structure with better networks and teams, working under rules laid by corporate objectives.
knowledge of ideas and practices will be faster and more efficient. life span employment will move towards lifetime employability as the labour force will be more powerful and will move competitive benefits from one organization to another.
Individuals will move independently of specific companies towards skill certification rather than conventional hiring and retraining.