What is Supply Chain Management? Definition, Components, Evolution, Process

  • Post last modified:23 April 2021
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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..

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

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 The Global Supply Chain Forum

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:

  1. Raw Materials Providers
  2. Manufacturers
  3. Distributors
  4. Resellers
  5. Franchisers
  6. Sales Representatives
  7. Logistics Providers
  8. Financiers
  9. Credit Support Providers
  10. End Users
  11. Lessor

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

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

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:

  • Wholesalers
  • 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.

Resellers

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

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

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.

Logistics Providers

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.

Financiers

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

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.

Lessor

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:

  1. Creation Era
  2. Integration Era
  3. Globalization Era
  4. Specialization Era (Phase I)
  5. Specialization Era (Phase 2)
  6. Supply Chain Management 2.0 (SCM 2.0)

Creation Era

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.

Integration Era

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.

Globalization Era

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.


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.
  1. Move Planning Closer to Demand
  2. Total Demand Visibility
  3. Enterprise-wide Planning
  4. 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.

Enterprise-wide Planning

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:

  1. Customer Relationship Management
  2. Customer Service Management
  3. Demand Management
  4. Customer Order Fulfilment
  5. Manufacturing Flow Management
  6. Supplier Relationship Management (Procurement management)
  7. Product Development and Commercialization
  8. 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.

Demand Management

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.

Returns Management

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.


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