Supply chain management

Supply chain management (SCM) refers to all the activities required to turn raw materials into finished goods or services and the work required to distribute and deliver those products or services to partners and, ultimately, customers.

SCM applies to the planning stage as well as the transfer and management of information and capital that happens across the supply chain. This discipline consists of five main components: planning, sourcing, manufacturing, delivery and returns.

A supply chain is a coordinated network of people, businesses, resources and technologies that play roles in producing, transporting, selling or delivering a good or service. Put another way, a supply chain is a group of organizations that are connected by a shared goal. Their individual roles might involve moving a product or service downstream — toward the retailer/end customer — or upstream — toward the initial supplier.

Why Is Supply Chain Management Important?

Supply chain management has increasingly become a top priority as business leaders realize how critical an efficient, resilient supply chain is to their bottom lines. Supply chains are among a company’s largest expenses, so it makes sense to evaluate and optimize all of the processes involved in getting a product or service to the end customer. Over time, that fosters loyalty and distinguishes a company from its competitors.

Advanced companies understand that a well-executed supply chain reduces waste by keeping supply aligned with demand. When all parties are in sync — from suppliers to manufacturers to retailers to planners — they can avoid overstock or out-of-stock situations that generate unnecessary costs or frustrate customers and lead to lost sales.

How Supply Chain Management Works

SCM requires establishing relationships between all the entities that form a supply chain for a discrete product or service. Most items are not sourced, designed and built by a single company; rather, a number of businesses work together to produce and distribute a finished good or service.

Physical flow

Companies that sell products must figure out the best way to receive materials, parts or finished goods and then move them on to the next stage in the chain. The physical flow of goods begins with a supplier sourcing raw materials, which then move on to a manufacturer, distributor, retailer and finally the end customer; of course, certain supply chains may skip or consolidate some of these steps. At each step, physical items must be transported to the next destination and are often stored for some period of time, which requires planning and coordination.

Information flow

As goods or services progress through the supply chain, all stakeholders need visibility into detailed status information. The supplier relies on purchase orders from manufacturers to plan production runs and allocate inventory. A distributor needs to know the product types and quantities included in upcoming shipments, as well as expected arrival dates.

Keeping a supply chain running smoothly requires a constant flow of data between all organizations involved, including updates about delays, shortages and other changes. Supply chain management software plays a central role in tracking and sharing all of this information.

6 Benefits of SCM

An effective SCM strategy has a host of benefits that make it more than worth the investment in employees, training and technology. Top benefits of SCM include:

1. Cost savings: An overarching goal of SCM is greater efficiency, which translates to cost savings. A company that can accurately predict demand won’t overspend on inventory. That improves cash flow — less money is tied up in products sitting in a warehouse, and companies realize lower production, shipping and inventory carrying costs. By adopting more efficient processes, businesses can also boost productivity and reduce labor costs.
2. Better customer experience: SCM minimizes situations where a company runs out of a popular product. That keeps customers happy and may entice them to buy from you in the future versus a competitor. As they optimize their supply chains, organizations may also find ways to ship products faster and for less money, potentially passing along savings. Finally, greater transparency allows customers to track the status of their orders at any time.
3. Fewer quality issues: Improving the quality of goods and services is one of the primary goals of SCM. A company might come up with a better-quality assurance (QA) procedure or notice that a certain supplier or courier has a much higher rate of damaged shipments, then work with the partner to correct that. Effective SCM minimizes the product recalls and lawsuits that cause lasting damage to your brand’s reputation.
4. A stronger, more resilient supply chain: Companies that nail SCM have visibility into their entire value chains and can share information with all stakeholders. CFOs can quantify the financial impact of a supplier facing a shortage of a key component or a retailer seeing sales for a certain product drop off. The key is that the business has advance notice so it can react quickly and avoid a dip in revenue or uptick in missed orders to customers while keeping partners informed. This ability to quickly shift gears puts those with clear SCM strategies in a much better position should a natural disaster, disease outbreak, economic instability or a similar event affect the supply chain.
5. Greater sustainability: A supply chain that optimizes purchasing and manufacturing will produce less waste. An accurate demand plan helps purchasers buy only what they need, which means less inventory to dispose of.
6. Create a competitive advantage: The ultimate goal of SCM efforts is to give companies a clear competitive advantage. The benefits discussed above can separate an organization from its competitors, whether through lower prices, an exceptional customer experience, a more resilient supply chain — or all the above.

5 Components of SCM

SCM encompasses a wide range of activities that generally fall into one of five buckets: planning, sourcing, manufacturing, delivery and returns.

1. Planning: SCM starts with planning. A company must first determine the quantity of supplies or products it needs, typically by using supply chain and inventory management software that helps build accurate forecasts and provides detailed analytics. As part of this process, SCM must figure out the labor, capital and partners it will need to meet expected demand.
2. Sourcing: This is when a business identifies the suppliers, manufacturers and distributors that can provide the goods or services it needs based on its plan. In an effort to build supply chain resilience, a manufacturer might have multiple suppliers for an important component, in case one supplier shuts down or has reduced capacity. That adds redundancy but may come at the cost of more complexity. Managing redundant relationships falls into this part of SCM, as well.
3. Manufacturing: Even for companies that outsource manufacturing or buy fully or partially finished products, this is a key step. The company must acquire finished goods or all the parts and materials it needs to produce goods based on its demand plan, inspect them for quality, then package items for direct shipment or distribution.
4. Delivery: Delivery is the final step in the forward supply chain and entails getting goods or services to customers, whether another business or consumers. The company must organize and prioritize orders to ensure it can meet promised delivery timelines and avoid downstream issues. This component includes invoicing and collecting payments from customers, as well.
5. Returns: The product lifecycle doesn’t always end when the end user receives an item. Sometimes products are sent back, whether due to customer dissatisfaction, defects, excess inventory or a warranty claim. The item then moves through the reverse supply chain until it reaches the company responsible for issuing a refund or replacement. That company then either scraps the item, repairs it or returns it to available inventory.

8 Key SCM Processes

Because SCM covers everything from raw-material sourcing to final delivery and returns, it includes a number of different processes.

1. Purchasing: Before a business can manufacture or sell anything, it needs to purchase materials or goods. That’s where purchasing, or procurement, comes in. Based on its demand plan, a company sends purchase orders to its suppliers and ensures they can meet quantity and timeliness requirements.
2. Manufacturing: If your organization is in the business of making things, that process is obviously a fundamental piece of SCM. Manufacturers must plan production runs and ensure they have the necessary capacity to meet demand. They must also track goods-in-progress and finished goods.
3. Inventory management: A company must keep a close eye on the status of all components and items as it receives, uses and ships them out. It needs to know the details on and location of every piece of inventory coming into and going out of its facility. Inventory management focuses on optimizing stock levels to increase inventory turns and reduce holding costs.
4. Order management: Companies — in particular, retailers — may receive orders through many channels and need a way to organize them. Order management involves sorting and prioritizing orders and routing them to the appropriate fulfillment locations, like a regional warehouse or retail outlet. An order management system also tracks orders as they’re fulfilled and shipped to customers.
5. Warehouse management: Although similar to inventory management, warehouse management focuses on the movement of goods in the warehouse and related workflows.
6. Customer service: Businesses must keep customers informed as their orders move through the supply chain. Communication starts with letting customers know whether you can fulfill their requests, then giving them a way to track orders in real time. A high-performing supply chain demands frequent and consistent communication with your partners and clients.
7. Reverse logistics: Customers send back, on average, 30% of online purchases, with a return rate as high as 50% for some apparel brands, say experts. Companies must figure out efficient ways to process returned products. A supply chain partner, such as a retailer or distributor, or the end customer could initiate this process. SCM teams should have a clear policy around when returns are allowed and rules detailing when to return goods to inventory, repair them or destroy them.
8. Supply chain performance tracking: Leaders must establish supply chain KPIs and other metrics to understand if their organizations are meeting operational performance standards. These metrics should be monitored in real time and reviewed frequently lest issues fly under the radar. Companies may measure productivity, costs, fill rate, on-time delivery rate and customer satisfaction.