Supply Chain Management Basics
Supply Chain Management may seem like a corporate term that would not relate to small business owners. However, any business that is developing products, from coffee to car engines, can benefit from having Supply Chain Management best practices in place.
Effective Supply Chain Management will improve your business’s customer service by meeting customer and client expectations on deliveries and ensuring the right quantities and orders have been shipped.
Internally, Supply Chain Management helps lower purchasing and production costs, which will increase your bottom line. Here, we discuss the basics of Supply Chain Management and how you can implement an effective strategy in your company.
What is Supply Chain Management?
Supply Chain Management (SCM) is the oversight of the process goods and services take from raw materials to final products. This process streamlines a business’s supply activities to maximize customer value and achieve a competitive advantage in the marketplace.
The main goal of SCM is to develop and implement supply chains that are efficient and economical for the company. Supply chains oversee everything from product development to production to the information systems needed to coordinate these efforts.
A supply chain is an interconnecting network of organizations, employees, activities, resources, and technologies working together to manufacture and sell a product or service. A supply chain typically starts with product development and ends with delivering a final product or service to the end customer.
SCM evaluates each step in the supply chain process to determine cost savings and affect the bottom line.
Physical flows are the most visible piece of the supply chain. They involve the movement, transformation, and storage of materials and goods. Physical flows represent the flow of products from suppliers to customers, facilities, and ultimately, the end-users.
Despite being less visible of an operation than physical flows, information flows are just as important. Information flows include the internal practices and coordination to control the everyday flow of materials and goods up and down the supply chain. Effective information flows also determine the long-term plans and establish processes to keep the supply chain moving.
For the past 100 plus years, SCM has evolved from the simple idea of focusing on improving laborious production processes to the present day engineering and management of complex, global networks.
The roots of SCM began in the early 1900s when Frederick Winslow Taylor published The Principles of Scientific Management, which laid the foundation for SCM by providing research on improving manual loading processes and illustrating how you can engineer different tools to help with basic production and increase productivity.
By the 1940s, the importance of operations research became relevant when scientists showed the value of analytics when studying logistics issues in the military, specifically problems arising from World War II. This led to the separate fields of engineering and operations research merging to become Supply Chain Engineering.
Still, until the 1950s, the primary focus was on how to use pallet lifts and other machines to decrease intensive labor in material handling, and by the mid-1950s, this concept expanded to transportation management. Intermodal containers were developed and used to haul large cargoes on trains, trucks, and ships.
Much of these practices continued into the 1960s and 1970s, but by the 1980s, computers were becoming more widely used and began shifting perceptions of SCM. With personal computers came more readily available access to planners, flexible spreadsheets, and map-based interfaces, enabling businesses to start to use technology and automation to improve scheduling and deliveries and handle more complex logistics.
In 1985, the National Council of Physical Distribution Management was updated to become the Council of Logistics Management (CLM), which reflected the shift in integrating the flows of products relating to businesses instead of solely for military use.
A new software called Advanced Planning and Scheduling (APS) that further integrated logistics and supply chain components came about on the coattails of ERP software during the technology boom of the 1990s, which fueled the emergence of Enterprise Resource Planning (ERP) systems as a follow up to the successes of Material Requirements Planning in the 1970s and 1980s.
Today, the term “supply chain” is used across most industries and encompasses a wide range of processes and technologies that further improve logistics and customer relationship management.
Why Supply Chain Management is Important
As mentioned earlier, properly executed supply chain practices can bolster a bottom line and improve customer relationships. However, there are many other benefits to developing supply chain management protocols with your business.
Customers expect their orders to be accurate and delivered on their schedule. Like manufacturing businesses, end customers may also have multiple locations, so it is crucial to ensure logistics management delivers the products to the correct address.
Effective supply chains deliver products on time and prevent avoidable storage of costly items. For example, delays in part deliveries can halt a warehouse’s production, costing them thousands of dollars per day.
Improve Bottom Line
Customers and businesses value supply chain managers because even saving cents on a product can add up to thousands or millions saved in distribution and final sales. Speeding up process flows also allows a business to invoice sooner, ensuring a steady cash flow.
Quality of Life
In extreme situations, managing supply chains to deliver products sooner can help in providing disaster relief. During the current pandemic, supply chains prioritized personal protective equipment to hospitals and care providers as it became available, ensuring that medical professionals and those being exposed every day could have the protection they needed.
Effective SCM can also help solve our global energy crisis by reducing oil consumption and emissions. While there have been strides to decrease energy use, supply chain managers and engineers are still working to develop energy-efficient supply chains that consume fewer resources.
Supply Chain Management Basics
Supply Chain Management can be broken down into four main parts that improve productivity: integration, operations, purchasing, and distribution. Supply chain managers practice these core components through demand management, supply management, sales and operations planning, and product portfolio management.
Demand Management is another umbrella term that encompasses merchandise planning, demand planning, and trade promotion planning.
Merchandise planning is the approach to buying and selling with the intent to maximize your return on investment (ROI).
Demand planning is the process of forecasting demand for different products to meet inventory needs without having a surplus. Statistical forecasting and product portfolio management are processes that help ensure accuracy in demand planning.
Trade promotion planning creates a buzz or short-term demand for a product by offering value-added bonuses, no-obligation gifts, or other promotions, including special pricing and display fixtures.
Supply management controls products and inventory by establishing systems to streamline supply planning, inventory planning, production planning, capacity planning, and distribution planning.
Supply planning draws on information from demand planning to determine how to best balance supply and demand to meet financial goals and service objectives in the organization.
Inventory planning determines inventory quantities and timing that best align with production and sales needs.
Production planning is a complex piece of supply management that addresses a company’s production and manufacturing modules. Production planning looks at:
- Management and collaboration with suppliers
- Balancing supply and demand
- Production scheduling
Capacity planning looks at the staff and equipment needed in production to meet the customer’s product demand.
Distribution planning oversees the shipment of goods from a supplier to the customer or final point of sale. Distribution planning manages everything from warehousing to inventory to packaging to supply chain and logistics.
Sales and Operations Planning (S&OP)
Sales and Operations Planning (S&OP) is an integrated business management process that focuses on key supply chain drivers, like new product introduction, demand management, sales, marketing, inventory management, and production.
S&OP helps business leaders make better-informed strategic decisions by connecting plans and strategies across the company. Many organizations analyze S&OP monthly to ensure effective supply chain management that remains profitable.
Product Portfolio Management
Product portfolio management follows a product from its inception through its entire marketable life. While its introductory marketing may be what most think of, there must also be a plan in place for when a product is no longer profitable. Product portfolio management includes:
- Introducing new products
- Planning for when the product is no longer profitable
- Commercialization and ramp planning
- Brand and platform planning
- Break-even analysis
- Cannibalization planning
Types of Supply Chain Management
SCM modules are broken down into six different categories that vary slightly but rely on the same fundamentals to coordinate the flow of products and services.
Continuous Flow Model
The continuous flow model is best for businesses in high demand situations with little variation. This model is typically adapted by companies in mature industries like paper, steel, cement, or commodities.
A well-designed continuous flow model can deliver consistent products with few variances and more reliable performance.
Fast Chain Model
This model is best for businesses that manufacture and sell trendy products with a short lifecycle. The fast chain model suits you best if you are frequently changing products and you have to get them into the market quickly before the trend becomes irrelevant.
Efficient Chain Model
The efficient chain model is ideal in companies that are in hyper-competitive markets and where end-to-end efficiency is the primary goal.
The custom-configured model looks at correlations between assets and total cost. This model also incorporates parts of the continuous flow model where the product is built before configuration and parts of the agile model for downstream processes.
Businesses that focus on specialty ordered items because it allows for flexibility in ramping up in some situations and remaining solid when there isn’t much movement occurring.
The flexible model gives the business the power to meet demand during high peaks and overcome long periods of low volume and movement. This model can be easily switched on or off.
Supply Chain Process
The supply chain management process flows through five foundational building blocks that move a product from inception all the way to production and eventually to final sales.
- Strategic Planning - identifying core suppliers and define parameters for procurement
- Demand Planning - forecasting, lifecycle planning, promotional planning, and consensus demand planning
- Supply Planning - safety stock planning, outsourcing, supply network planning, supplier collaboration, customer collaboration, and distribution planning
- Procurement - purchase order (PO) processing, invoice verification, and receipt confirmation
- Manufacturing - production planning, detailed scheduling, manufacturing
An Example of Supply Chain Management
It is easiest to look at large businesses and corporations to find innovative and useful examples of the supply chain process. These companies typically have multiple warehouses, offices, and distribution centers to get their product out to customers on a global scale.
Fashion retailer H&M is ranked as number 16 on Gartner’s Top 25 supply chain list for their innovative and effective SCM practices. H&M is known for its effective collaboration with its partners and, without having any factories of its own, works with over 700 partner companies to get its clothing and goods produced.
Because of all of its partnerships, H&M relies heavily on IT integration between its central office and production offices. By establishing an efficient IT communication infrastructure, H&M can conduct most communications electronically.
By implementing effective SCM in their manufacturing, H&M has reduced their lead time by an average of 15-20%, allowing its stores to sell the product at competitive prices.
A Final Thought
As we continue to rely more on technology, online shopping, and frequent deliveries, businesses must continue to grow and adapt to the changing marketplaces. Supply Chain Management focuses on coordination with different components of product management, scheduling, information technology, and logistics to streamline processes and meet customer and market demand.
Even on a small scale, your business can benefit from establishing specific supply chain channels to get the best return on investment and preserve your bottom line. SCM has evolved over the years, and it is sure to integrate itself further into the business hierarchy looking ahead.