What Is Supply Chain Management And Why It’s So Important

Supply chain management (SCM) is the broad range of activities required to plan, control and execute a product’s flow from materials to production to distribution in the most economical way possible.

SCM focuses on integrated planning and execution of processes needed to optimize the flow of materials, information and capital in functions that broadly include demand sourcing, planning, production, inventory management and logistics (storage and transportation). Companies use both business strategy and specialized software in supply chain management to create a competitive edge against the competition.

Supply chain management is expansive and complex.  Each role relies on your partners, suppliers, manufacturers and others to operate efficiently. Due to this, supply chain efficiency also requires change management, collaboration and risk management to create alignment and communication between all the participants.

In addition, supply chain sustainability — which covers environmental, social and legal issues, in addition to sustainable procurement — and the closely related concept of corporate social responsibility — which evaluates a company’s effect on the environment and social well-being — are areas of major concern for today’s companies.

Supply Chain Benefits

There’s a number of positive benefits that supply chain management produces, such as;

  • Lower Costs
  • Higher Profits
  • Better Efficiency
  • Ability To Manage Demand
  • Accurate Inventory
  • Increased Collaboration
  • Higher Production

SCM enables companies to keep costs low, help manage demand efficiently, carry the right amount of inventory, deal with disruptions and meet customer demand in the most effective way possible. These supply chain management benefits are possible through effective strategies and appropriate software to help you manage the growing complexity of today’s supply chains.

Why Supply Chain Management Is Important

SCM has many significant impacts on both sides, the enterprise and the consumer.

  • Customer Service – Supply chain management can help you improve customer service, something every company wants to improve on. When done right, they have the ability to ensure customer satisfaction by making certain the necessary products are available at the correct location at the right time. By increasing customer satisfaction levels, enterprises are able to build and improve customer loyalty.
  • Lower Operating Costs – SCM also provides a major advantage for companies by decreasing operating costs. When done right, efficient supply chain management can help you reduce the cost of purchasing, production and the total supply chain. Lowering costs is going to help your company be in a better financial position, allowing you to increase profit and cash flow. Following supply chain management best practices, you’ll have the opportunity to minimize over using your large fixed assets, such as warehouse.  Supply chain experts can help you redesign parts of your supply chain or your entire supply chain. For example, you may find you only need 3 warehouses versus 4 warehouses, saving you the added costs of a full warehouse.
  • Quality Of Life – You won’t hear this a lot, but SCM plays a vital role in our society. We owe our survival to supply chains. People rely on supply chains to deliver necessities like food and water as well as medicines and healthcare. The supply chain is also vital to the delivery of electricity to homes and businesses, providing the energy needed for light, heat, air conditioning and refrigeration.
  • Job Creation – SCM can also improve quality of life by fostering job creation, providing a foundation for economic growth and improving standards of living. It provides a multitude of job opportunities, since supply chain professionals design and control all of the supply chains in a society as well as manage inventory control, warehousing, packaging and logistics. Furthermore, a common feature of most poor nations is their lack of developed supply chains. Societies with strong, developed supply chain infrastructures — such as large railroad networks, interstate highway systems and an array of airports and seaports — can efficiently exchange goods at lower costs, allowing consumers to buy more products, thus providing economic growth and increasing the standard of living.

Supply Chain Processes

Each major phase of a product’s movement through the supply chain, from materials to production and distribution, has its own distinct business processes and disciplines. Most of them began decades ago as paper-based methods but now are usually handled in specialized software.

The SCM process starts with figuring out what products customers want — the early stages of supply chain planning, traditionally considered one of the two overarching categories of SCM, along with supply chain execution.

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Supply chain planning starts with demand planning, this is a process for gathering historical data, such as past sales, and applying analytics and statistical modeling to create a forecast or demand plan that the sales department and operational departments, which is what you see a lot in manufacturing and marketing. The forecast determines the types and quantities of products you’ll have manufactured.

Now, some companies perform demand planning as part of a formalized process, this is called sales and operations planning (S&OP). This focuses on an iterative process for gathering data, discussion, reconciling of demand plans with production plans and management approval. Some companies include S&OP in a broader process called integrated business planning (IBP) that incorporates other departments’ to plan a single global company plan.

The next step would lead us to production planning, this is when a company drills down the specifics of where and how the products based on the demand plan are going to be manufactured.  You can also take it a step further, which often involves specialized software (advanced planning and scheduling), allowing you to optimize your resources for production and make them more adaptive to changes you see in demand. Production planning is also used in other industries, such as agriculture and oil and gas.

Material requirements planning (MRP) is a process that’s been used for the past 80 where manufacturers ensure sufficient materials and components (like subassemblies) are available for use in the manufacturing process by taking inventory of what’s on hand. This allows you to identify gaps so you can buy or produce the remaining items you need. The central document in both MRP and production planning is called a bill of materials (BOM), which is a complete list of the items you’re going to need to make any given product.

MRP is sometimes done as part of manufacturing resource planning (MRP II), which builds the MRP concept to other departments such as HR and finance. MRP and MRP II were the predecessors of enterprise resource planning (ERP) software, which is designed to integrate the major business processes of companies within any type of industry.

Two complex processes play important roles in most of the major steps of SCM:

  • Inventory Management
  • Logistics

Inventory management consists of various techniques and formulas for ensuring adequate supply, from raw materials in a manufacturing plant, perhaps managed in an MRP system, to packaged goods in a retail store, for the least expenditure of time and resources. Manufacturers are faced with a variety of inventory management issues, many of which involve coordinating demand planning with inventory at both ends of the production process. For example, sometimes material requirements planning leads to more inventory, especially when the system is first implemented and the manufacturer must work to synchronize MRP parameters with the inventory already on hand.

Logistics focuses on everything you do with transporting and storing goods, from the start of the supply chain with delivery and materials to manufacturers, to delivery of finished products to stores or directly to your consumers. It goes beyond to product servicing, return and recycling too, a process we refer to as reverse logistics. It’s inventory management that’s built into all of your logistical processes.

Procurement, which is called sourcing by some, is the process of finding suppliers for goods, managing those relationships, and acquiring the goods at the best economical price. Procurement has a lot of working elements too,  including communication, requests for bids and paperwork, such as purchase orders and invoices. It is a major component of supply chain management, given how much is bought and sold at all points along the chain. Most companies that operate in the supply chain, which include suppliers, manufacturers, distributors and retailers, they have dedicated procurement personnel to handle your supply chain points.

Strategic sourcing would refer to an elevated and more sophisticated type of procurement that aims to optimize a company’s sourcing process by taking advantage of its consolidated purchasing power and align it with the business goals of the company.

Supplier relationship management (SRM), in contrast, addresses sourcing issues by focusing on the suppliers the company deems most critical to success and systematically strengthening relationships with them while fostering a high level of performance.