Are you looking forward to taking a basic or professional course on supply chain management or stuck in the complexities of SCM?
Furthermore, don’t even have any idea about what is the supply chain management and what role it plays in the success of a business?
In this article, the vital knowledge of the supply chain management will be delivered. Also, the importance, components, benefits, flows, processes, and complexities of supply chain management will be briefly explained.
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Table of Contents,
What is a Supply Chain?
A supply chain is a network of organizations involved in the process of production and distribution of product to the end-user. However, this network isn’t just limited to material. Also, it involves the flow of people, information, goods, and money.
Therefore, the complete steps of converting the raw material into product and distributing it to the customer. Moreover, the companies work on SCM to reduce costs and stay competitive in the market place.
The company aims to use supply chain management to optimize the SC process. So, the company can achieve lower product costs and faster the production cycle.
What is Supply Chain Management?
Supply chain management is a process of managing the flow of goods, and services of all the processes involved in the transformation of raw material into finished goods.
Also, it helps to streamline the product supply in the market to give competition to the competitor’s product and enhance customer satisfaction.
Moreover, the supply chain management works in close coordination with all the suppliers. So, the company can develop an efficient and economical network. Therefore, the SCM focuses on managing everything thing from product development to product production to product delivery.
The supply chain isn’t a single function and involves a broad range of activities. Therefore, the business needs to plan, control, and execute a process of product and service flow from raw material to delivery of the finished product.
There are several business functions involve in the supply chain network. So, the supply chain management plan and execute the flow of goods, information, and money for all business functions. Moreover, key business functions involve demand planning, sourcing, production, stock management, and distribution.
Although, the business isn’t the only stakeholder to implement the supply chain management strategy. It relies on the partner with each supplier, manufacturer and beyond.
Therefore, the implementation of an effective supply chain management process also depends on several other functions. Like stakeholders’ management, planning, and engagement plan. Moreover, the business also requires creating a good risk management plan and change management policy.
Besides, the companies involved in the supply chain network also focus on supply chain sustainability and CSR concepts. So, the supply chain sustainability also focuses on the environmental, social and legal aspects of sustainable procurement. Whereas the business corporate social responsibility concept is also merging among the companies. As, the company evaluates the social and environmental impact of its strategies, product, and services.
Advantage of Supply Chain Management
Supply chain management develops an immensely positive impact on business functions. Notable advantages of effective supply chain management include Improved efficiencies, higher profits, lower product costs, and effective coordination but not limited to.
Moreover, the SCM helps the companies to better manage the customer demand, effectively control the inventory, lower the costs, and meet customer expectations. However, the company can only achieve these advantages on the execution of the best SCM strategy.
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Importance of Supply Chain Management
Supply chain management has a significant impact on the manufacturer, supplier, and end-user. SCM works to deliver a quality product at the right time at the correct location. So, it helps businesses to increase customer satisfaction and loyalty.
Moreover, the business achieves lower operating costs due to the implementation of a good SCM process. The business can analyze the major impact on the costs of purchasing, producing, and delivering the goods and information.
Furthermore, the lower operating and administrative costs result in higher profit and improve the financial position of a company.
Similarly, an effective SCM helps the business to eliminate the repetition and redundancy of assets consumption such as inventory warehouses, and vehicles. Although, the best SC management practices also help to improve the human lifestyle. As the concept of sustainability and CSR improves healthcare services and environmental changes.
The good SCM system also maintains a balance in the supply and demand of every daily life product. Further, it includes the production and distribution network of food, medicines, and electricity for our daily use.
The SCM also provides job opportunities to the professionals to design and control the chain of stakeholders connected on different points of a network. Similarly, the supply chain management produces positive impacts on the overall economy of the country.
As a country with good supply chain management practices will have multiple sources of goods distribution that will result in lower logistics costs. Thus, the product cost will reduce and generate higher demand for the product. Finally, the improved buying power of the customer will provide economic growth to the country.
Components of Supply Chain Management
Business supply chain management has several components. There is a further classification of these seven components. However, let’s just discuss the seven basic components of SCM.
- Demand Forecasting
- Production Planning
- Procurement or Sourcing
- Manufacturing or Making
- Delivering or Distribution
- Aftersales Servicing or Returning
Demand forecasting is the first component of the supply chain. It the beginning point to focus on the streamlining of the whole SC process. The business use data collection and analysis strategies in demand forecasting component to estimate the demand of each product for certain product season.
The businesses plan to fulfill the requirement of customer demand. The SCM production planning stage involves the creation of a complete plan of how the required quantity of products will be produced. Also, planning includes the creation of a list of materials required for the manufacturing of products and known as a bill of materials or BOM.
So, the businesses design their supply chain network and define the metrics or KPIs to check the efficiency and effectiveness of the SC process.
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Procurement or Sourcing
Procurement in some cases is equivalent to sourcing. However, there is a difference in these terms. We will discuss the difference of these terms in the section of processes of SCM section.
The procurement stage uses the BOM to see the overall quantity and types of materials required for the production of the customer demanded quantities of the products. Thus, the procurement team verifies the list with the available quantity of materials in the inventory.
So, the remaining quantity of materials can be procured from the suppliers. These components also deal the communication and relation management with the suppliers.
Manufacturing or Making
The supply chain making components integrate the production planning and sourcing components to produce the required quantity of products using the procured materials. So, to deliver the customer order on a timely basis.
The manufacturing section of SCM also includes the steps for quality control and assurance of the product. Thus, overall equipment effectiveness, productivity, labor productivity, and quality are key focus points of the manufacturing component.
The delivery stage of the supply chain comes after the manufacturing of the required quantity of products for the customers according to defined quality standards. The business prefers to dispatch the products as soon as possible to avoid stock keeping.
Moreover, supply chain managers use logistics as an alternative term for delivering. It usually linked with all three flows of the SC: goods, information, and money.
Also, the delivery component deals with the documentation for the flow of materials and payments.
Aftersales Servicing or Returning
The aftersales servicing or returning is a very important component of the business SCM. Thus, the organization requires a very responsive and flexible network to provide quality aftersales services to its customers.
So, If any product found damaged or out of order, the companies arrange to return or get it to repair to gain customer loyalty.
The enabling component of the supply chain connects the supportive function of businesses with the SCM process.
As the efficient application of SCM requires the efforts of all the business functions to monitor and analyze the information. Therefore, the enabling process includes finance, MIS, HR, product design, sales, quality control and assurance, and the accounting department.
Working Principle of Supply Chain Management
The supply chain management system is developed to produce, control, and deliver the goods, information, and capital. Although, SCM helps the business to lower costs and provide competitive prices of the product in the market.
However, the customers also demand faster delivery cycles in the B2B business. As it requests in lower inventory control for the B2B customer. Thus, the SCM isn’t just focused to lower the production costs. But also, to streamline the flow of goods, information, and capital to faster the delivery cycle.
Furthermore, the business must keep an eye on the supplier inventory, warehouses, production capacity, distribution efficiency, and sales strategy.
Moreover, as every manufacturer has a customer and every customer has a supplier. So, the vertical chain of value addition from raw material to finished goods in the customer’s hand requires multiple checks to eliminate the loss of resources at each level.
Therefore, the key components of the supply chain process are product development, raw material procurement, manufacturing facility, distribution network, and feedback system. However, the business should give special attention to the feedback system. It helps the business to improve productivity, efficiency, quality, and service.
Many businesses take the concept of SCM as the management of procurement and logistics functions. However, this concept is wrong and should be corrected timely to avoid loss of business unearned profit.
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Flows of Supply Chain Management
The SCM processes involve every stakeholder who is connected to the supply chain network from raw material to finished good delivery. The business has the main three types of flow: Goods or Materials, Information, and Money.
The success of SCM processes is to optimize these flows over the whole supply chain network. As the finished good of lower manufacturing facility is the raw material of high manufacturing facility on the SC network.
So, the uninterrupted flow of materials over the whole supply chain network helps to lower the inventory costs. Furthermore, every organization of SC wants to maintain a minimum stock of raw material or finished goods in the warehouses. Thus, the SCM works to smoothen and quicken the flow of materials.
Similarly, the streamline and balance in the flow of information are also important. It assists the flow of goods and money. As the flow of goods and money is directly linked with the instructions given by the authorities.
Information means the communication of data such as proforma invoices, purchase orders, commercial invoices, technical documents, and shipping documents. Furthermore, the feedback system is also a part of the flow of information.
It helps the SCM process to streamline the process based on the feedback received from the stakeholders. Any issue is addressed via a feedback channel to see the positive impact of improvement over the supply chain network.
In some cases, the flow of money occurs before the flow of material. It depends on the payment terms agreed between the parties mentioned in the commercial invoiced.
However, the smooth flow of money is very critical to release goods on time for advance payment terms. However, businesses use telegraphic transfer, cheques, credit notes, and the letter of credit as payment means.
Supply Chain Management Processes
There are several levels of a supply chain network and each level involves a moment of goods, information, and money. However, every entity linked to the supply chain network has its disciplines and processes.
Many old businesses are following the practice of manual paper-based flow of information and money. However, most businesses are now using specialized ERP systems.
Firstly, the SCM system focuses on the determination of product demand. Therefore, supply chain planning and execution are very critical activities of the SCM process.
The supply chain planning process is a stepwise approach to find out the customer demand for the product. So, it passes through the stage of demand planning. Moreover, the sales team use historical data of past sales and market analysis to forecast the product demand.
The demand forecasting estimates the product mix required to fulfill customer demand. So, it consists of the data of product type along with the estimated demand quantity of each product.
Although, demand planning isn’t performed formally in all the companies. Yet, some businesses work on the strategy of sales and operations planning (S&OP) to formally forecasting and planning for customer demand.
The sales and operations planning is an iterative process of data collection, exploration and integration of demand planning with the production planning. On the other hand, many companies prefer to use a broader strategy for demand planning known as integrated business planning (IBP). Thus, this strategy focuses on integrating all the business functions with demand planning.
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Secondly, the production planning strategy defines how the customer demand for the product will be realized. So, it describes the details of where, when, and how the required quantity of each product will be produced.
The companies use MS Excel sheets and professional planning and scheduling software for the optimization of production planning. These tools work to maximize the productivity of business resources. Thus, the overall equipment effective and lean manufacturing strategies are helpful in the production planning stage.
The production planning stage is linked with many other processes that work to ensure the availability of all the resources required for the production and delivery of goods.
Material Requirement Planning (MRP)
The material requirements planning is a very critical process of SCM. As it ensures the availability of sufficient stock of materials and components essential for the manufacturing of the required quantity of the product.
Thus, the planning phase of SCM components helps to create a breakup of materials along with quantities required to manufacture the demanded quantity of product. However, SC managers use a bill of materials (BOM) term for the said list.
Moreover, the MRP process uses the BOM to identify the availability of the required quantity of materials in stock and the remaining quantity to purchase.
Manufacturing Resource Planning (MRP-II)
Some companies use the broader concept of MRP known as MRP-II. The MRP-II focuses on the arrangement of resources other than materials. It includes an arrangement of HR, MIS, finance, and accounts teams.
Enterprise Resource Planning (ERP)
The businesses use enterprise resource planning systems to integrate all the business functions of a company. So, it is companywide integrations of processes of demand planning, production planning, MRP, MRP-II, procurement, inventory management, logistics and more.
Inventory Management and Logistics
The inventory management and logistics processes are very complex and play a crucial role in many steps of supply chain management. Inventory management is a subset of the MRP system. Thus, it ensures the availability of an adequate supply of materials and components accordingly to the production plan.
Additionally, the inventory management process uses several strategies and techniques to maintain the optimum stock level of all types of stocks such as raw materials, work-in-process stock, finished goods, spare parts, and consumables stock.
Furthermore, inventory management helps the business to lower costs. So, the company can generate more profit and lower the product price to raise demand and customer buying power. Thus, it ultimately helps in the economic growth of the company and country as well.
Although, many manufacturers face a lot of issues in managing inventory due to the demand planning process. Furthermore, MRP leads to a significant rise in inventory level. However, things get streamline with the passage of time and close integration in MRP and inventory management helps to produce greater benefits of both processes.
The logistics process is all about dealing with the handling and delivery of goods at every level of the supply chain. Thus, it includes everything from the delivery of materials and components to the manufacturer, finished goods to stores or distributors, and finally to end consumers.
The concept of reverse logistics also exists. It focuses on the aftersales servicing, returning or recycling of the products.
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Procurement and Sourcing
Many companies misunderstood the concept of supply chain management as just limited to procurement or sourcing of parts and goods.
Although, procurement is just one process of SCM that focuses on finding the suppliers for raw material and other components. Furthermore, it involves the management of the relationship with suppliers, acquisition of goods, and communication of information.
Thus, the communication aspect of procurement includes everything from sending out requests for the offer, and paperwork of deal like demand requisition, purchase orders, invoices, shipping documents, etc.
The procurement is also sometimes referred to as sourcing. Although, sourcing is a very sophisticated type of procurement. Thus, its focus to optimize the sourcing process of the company as per its purchasing power to achieve the overall business goals.
Supplier Relationship Management (SRM)
Supplier relationship management is considered very important for many processes of supply chain management. As it is integrated with the production planning, MRP, inventory management, and procurement processes.
SRM aims to partner with the key souring suppliers to address the souring issues. Thus, it’s a systematic approach to strengthening the relationship to achieve optimal performance of supply chain management.
Complexities of Supply Chain
The basic supply chain model only includes a company, its raw material and components suppliers, and customers. However, this network is connected with raw materials producer, component suppliers, manufacturer, distributor, retailer, and end-consumer.
Furthermore, the intricate version of a company’s supply chain will include several suppliers of raw material and components, several distributors and customers, third-party logistics companies, financial organizations, auditors, supply chain professionals, and marketing researchers.
These all organizations are interrelated as a web form and make SCM a very complex process. Any organization on the supply chain can face any type of issue that may halt the whole supply chain. Such as if a packing material manufacturing firm shuts down due to a shortage of paper raw material. The packaging industry won’t be able to provide any product to the distributor for end customers. Thus, the whole supply chain will get disturbed.
Similarly, the release of new technology will risk the sale of old technology stock of distributors and retailers. Furthermore, labor strikes or transportation issues will also affect the manufacturing or delivery of the product. So, the manufacturing firm will end up holding a lot of stock and shut down the production due to a lot of tied capital. Thus, the raw material supplier will face the loss of demand from the manufacturers.
That’s why companies are making use of the SCM risk management process to keep on addressing potential risks faced by organizations of the supply chain. The focus of risk management is to devise risk mitigation strategies via a feedback system. So, the financial stability of the organizations’ linked supply chain can be monitored.
Thus, the supply chain sustainability term leads all the strategies that a business devises to ensure the stability of the supply chain against social, environmental, economic or political risks.
Working Strategy of Supply Chain Management Software
The supply chain management of companies has become very complex due to the involvement of hundreds of organizations in the supply chain network. It has become nearly impossible for large companies to execute supply chain management strategies without technology.
Thus, enterprise resource planning systems are now integrated with supply chain management features. These systems not only manage business processes. But also integrates all the systems, processes, and people of an organization.
The concept of Computer Integrated Manufacturing (CIM) is used by companies. It explains the use of computing technology in the management of manufacturing functions and supporting functions.
Some businesses use the SCM in modules as per the nature of business. Like the companies use a transportation management system (TMS) to manage the transport of goods to warehouses or distributors. Similarly, the warehouse management system (WMS) is linked with the handling of goods inside warehouses or distribution centers.
Finally, the order management system manages the processing of customer orders through ERP, TMS, WMS, etc. at all levels of the supply chain network.
The companies using technology now become a part of the global supply chain network. Thus, the direct approach to customers through eCommerce platforms minimize the lead time of products. Although, it is posing challenges for the distributors, retailers, logistics, demand planning, and other organizations linked to the distribution side of the supply chain network.
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Future of Supply Chain Management
To oblige the needs of complex supply chain versions. Giant businesses are focusing to make use of technology to deal with modern challenges of supply chain management.
Supply chain risk management and sustainability are also relatively newer concepts. Furthermore, the latest ERP suites, analysis software, IoT, use of robotics and automated guided vehicles taking off the future of SCM.
However, most of the new strategies focus on the quick and real-time collection of the supply chain essential data for analysis. So, risk assessment techniques can help to mitigate risk or act on time before the destruction of the whole supply chain network.
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In conclusion, the supply chain management is a very complex process works to streamline and optimize each function of the organizations linked to the supply chain network of a product.
Furthermore, it defines the strategies for the management of all the functions of a product supply chain such as demand planning, sourcing, manufacturing, delivering, returning, and supporting.
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