What is supply chain management?
Supply chain management (SCM) is the process and activitity of sourcing the raw materials or components an enterprise needs to create a product or service and deliver that product or service to customers.
The goal of SCM software is to improve supply chain performance. Timely and accurate supply chain information allows manufacturers to make and ship only as much product as can be sold. Effective supply chain systems help both manufacturers and retailers reduce excess inventory. This decreases the cost of producing, shipping, insuring, and storing product that cannot be sold.
6 components of SCM
Planning—Enterprises need to plan and manage all resources required to meet customer demand for their product or service. They also need to design their supply chain and then determine which metrics to use in order to ensure the supply chain is efficient, effective, delivers value to customers, and meets enterprise goals.
Sourcing—Companies must choose suppliers to provide the goods and services needed to create their product. After suppliers are under contract, supply chain managers use a variety of processes to monitor and manage supplier relationships. Key processes include ordering, receiving, managing inventory, and authorizing supplier payments.
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Making—Supply chain managers coordinate the activities required to accept raw materials, manufacture the product, test for quality, package for shipping, and schedule for delivery. Most enterprises measure quality, production output, and worker productivity to ensure the enterprise creates products that meet quality standards.
Delivering—Often called logistics, this involves coordinating customer orders, scheduling delivery, dispatching loads, invoicing customers, and receiving payments. It relies on a fleet of vehicles to ship product to customers. Many organizations outsource large parts of the delivery process to specialist organizations, particularly if the product requires special handling or is to be delivered to a consumer’s home.
Returning—The supplier needs a responsive and flexible network to take back defective, excess, or unwanted products. If the produce is defective it needs to be reworked or scrapped. If the product is simply unwanted or excess it needs to be returned to the warehouse for sale.
Enabling—To operate efficiently, the supply chain requires a number of support processes to monitor information throughout the supply chain and assure compliance with all regulations. Enabling processes include finance, HR, IT, facilities, portfolio management, product design, sales, and quality assurance.
Supply chain management examples
Walmart and Procter & Gamble began to work together in the late 1980s and are the classic example of supply chain collaboration. Before these two companies began working to connect their supply chains, retailers and manufacturers shared little information. After Walmart and P&G demonstrated that shared information reduced cost, other retailers became more willing to consider the possibility. In the early 1990s Walmart formalized its Retail Link system and cajoled (some would say strong armed) other retailers to connect.
Over time, the Walmart POS system was able to aggregate sales of individual P&G products at each store. When the POS indicated that inventory for a particular product had fallen to a predetermined threshold, the Walmart distribution center was notified to ship additional product to the store. As inventory in the Walmart distribution center fell to its threshold, the P&G distribution center was automatically alerted to ship additional product.
Why is supply chain management important?
Over the last twenty years, the supply chains of manufacturers and retailers have become ever more tightly linked. In many industries, retail sales trigger replenishment orders to manufacturers. Manufacturers with a well-tuned, just-in-time supply chain can automatically restock retail shelves as products are sold. As collaboration has increased, additional data from supply chain partners has allowed companies to use advanced analytic tool to further improve results. Examples include:
- Identifying potential problems before they occur. When a customer orders more product than the manufacturer can deliver, the traditional response has been to short the order. This leaves the buyer feeling unimportant and convinced the manufacturer’s service is poor. Manufacturers who anticipate the shortage before the buyer is disappointed may be able to offer a substitute product or other incentive to keep the buyer happy.
- Optimizing price dynamically. Seasonal products, particularly fashion products, have a limited shelf life. Any that don’t sell by the end of the season are scrapped or sold at deep discounts to empty the warehouse. Airlines, hotels, and other companies with a limited, but perishable product, adjust prices dynamically to meet demand. While this is more difficult with clothing and other products where the supply can vary widely, similar forecasting techniques can improve margins.
- Improving the allocation of available to promise inventory. Today’s tools dynamically allocate resources and schedule work based on the sales forecast, actual orders, and promised delivery of raw materials. Manufacturers are able to confirm a product delivery date when the order is placed, significantly reducing incorrectly filled orders.
What is the extended supply chain?
The extended supply chain includes all companies that contribute to a product. This means that the extended supply chain includes the suppliers to your suppliers as well as the customers of your customers.
When companies encounter supply chain problems, the initial action is to ask the supplier about the situation. However, organizations that monitor the extended supply chain have the option of reaching back through the primary supplier to the company that supplies components to the primary supplier. As an example, if a popular baseball hat is not available from the manufacturer, the normal reaction of the store manager is to contact the manufacturer. However, if the retailer monitors the extended supply chain, the store manager would know the manufacturer was having trouble getting the brim. If it appears that additional brims will not be available to the manufacturer quickly, the retailer would have time to seek a different supplier.
What is the impact of globalization on the supply chain?
Twenty-five years ago, one of the main reasons companies created global supply chains was to take advantage of lower wages in other countries. In general, it was fairly easy to off-set the increased shipping costs resulting from remote manufacturing. However, salary arbitrage advantages are eroding as wages in lower cost countries are rising, improved process and robotics allows plants to be operated with far fewer people, and local firms are becoming strong competitors in virtually every industry.
One of the advantages of the global supply chain has been the ability to scatter patents and manufacturing sites around the globe. This allowed companies to report profits in countries with low corporate taxes. However, many of these arrangements are being challenged. In 2016, the European Commission ordered Apple to pay Ireland €13bn in back taxes, ruling that Apple’s tax agreement with Ireland amounted to illegal state aid. The antitrust chief of the European Union, Margrethe Vestager, recently began investigating Amazon’s European tax practices. Google and other technology firms are also being investigated by the EU.