Every company runs on the idea of supplying goods or services to its consumers. Supply chain management is a term that is used across companies to talk about the management of the whole process of supplying goods and services.
For some companies, the supply chain is straightforward but for some, it is the other way round. Yet they all have to manage a supply chain.
The supply chain is concerned with the steps involved in the delivery of a product or service to consumers. From receiving the demand to manufacturing, finishing, and supplying a good, the process of extending services involves a lot of people, organizations, resources, and technologies.
Supply chain management, hence, becomes a crucial exercise for organizations. The manager needs to look after the whole process and ensure the process to be efficient.
But do we know everything about the process of Supply Chain Management (SCM)? What is Supply Chain? Why is SCM important for a company? We will try to find answers to all these questions through this blog.
What is Supply Chain?
A supply chain is a network that connects the manufacturers, suppliers, vendors, and the final buyers. The network includes all the processes, people, entities, information, and resources.
We can also define the supply chain as the series of steps involved in delivering a product or service to the end-consumer. This series of steps can involve collecting raw materials from suppliers, converting them into finished goods, distributing them to the vendors, and selling them to the end-consumer.
The entities involved in a supply chain include producers of the goods, vendors, warehouses where the produced goods are kept, transportation companies that ensure that the goods reach the vendors, suppliers, retailers, and customers.
To make sure the goods reach from the manufacturers to customers, the supply chain requires to be managed. Supply chain management is the process that does the work for a company.
What is Supply Chain Management?
Going by the basic definition of Supply Chain Management, also reckoned as SCM, it is the active management of supply chain activities that affect the flow of goods and services.
IBM defines SCM as, “Supply chain management is the handling of the entire production flow of a good or service — starting from the raw components all the way to delivering the final product to the consumer.”
Supply Chain Management aims at maximizing customer value and achieving sustainable advantage. It is an effort by firms to develop and run supply chains in the most effective and efficient way possible.
Since the Supply Chain includes a lot of processes, entities, and people; the possibilities of occurrence of an error goes up. SCM ensures that no such error takes place and also the efficiency of the chain remains intact throughout.
Alongside this, the different links in the supply chain require skill and expertise, and they all come at a cost. An effective SCM becomes so crucial for a business because it can lower the overall costs and increase the profitability of a company.
An optimized supply chain that has all the links working effectively results in lower costs and faster production cycles. SCM also ensures the optimization of supply chains.
How does SCM work?
The prime job of Supply Chain Managers is to centrally control the supply chain and also link all the processes starting from production, the shipment, and at the end, distribution of the products.
SCM works on the core idea that nearly every product that is released in the market is the result of the efforts of various organizations that make up the supply chain. Although supply chains have existed from the very beginning, companies have recently paid attention and considered them as a value-add to their operations.
Components of SCM
There are five basic components of a traditional supply chain management system:
The process of supply chain management starts with the planning on how to meet the customers’ demands for a product or service. Once an order is received, supply chain managers plan ahead.
This also involves the determination of metrics to measure the efficiency of the supply chain, its effectiveness, and whether it is able to deliver value to customers while meeting the company’s goal.
Once the planning phase is over, it comes down to selecting the suppliers who will provide the raw materials, goods, or services required to create the product. Suppliers are a critical component of the supply chain.
In the sourcing phase, processes are established to monitor and manage supplier relationships. It includes creating contracts that govern the new suppliers as well as looking after the existing relationships.
Strategic sourcing is a term used among supply chain managers which means overseeing the processes for ordering, receiving, managing inventory, and authorizing invoice payments for suppliers.
After the accumulation of raw materials required to create a product, the process of manufacturing takes place.
Supply chain managers are required to keep a check on all the steps involved in the manufacturing of the product. This includes reviewing and accepting the raw materials, manufacturing, quality testing, and finally packaging.
Coordinating the process of manufacturing allows businesses to evaluate the quality, production output, and employee productivity. This helps in ensuring that overall standards are upheld.
Modern-day technologies play a key role in manufacturing industries such as IoT in manufacturing.
Once a product is manufactured it is crucial that it reaches the end consumer. SCM ensures the delivery of a product and that is achieved through logistics.
The supply chain manager coordinates customer orders, schedules deliveries, dispatches the loads, invoicing, and receiving of the payments.
Generally, the delivery process involves a fleet of vehicles from tankers bringing products manufactured overseas to fleet trucks and parcel services handling last-mile delivery.
Thus, some organizations outsource delivery to other organizations that specialize in-home delivery and special handling.
The responsibility of supply chain managers does not end after getting the product delivered. They need to create a network that supports returning products.
Returning can either mean scraping or re-producing a defective product or it may simply mean returning a product to the warehouse. The network should be flexible and responsible for supporting customer needs.
Enabling is an additional component of the supply chain management system. It means taking the support of different departments of an organization to monitor the processes staying within compliance with all regulations.
Enabling processes include finance, HR, IT facilities, portfolio management, product design, sales, and quality assurance.
Importance of Supply Chain Management
Supply Chain management is crucial for businesses because implementing SCM brings several benefits with it. An effective SCM can minimize the overall costs and increase the efficiency of processes carried out.
However, poor supply chain management can result in very expensive delays, quality issues, or even affect the reputation of the organization. An SCM that is not legally compliant can cause legitimate problems for a company.
Technological advancements like branches of Artificial intelligence- have enabled managers to work closely and in real-time with links of the supply chain.
An effective SCM allows an organization to anticipate problems, dynamically optimize prices, and improve inventory and fulfillment.
Benefits of SCM
Throughout the blog, we have discussed the need for Supply Chain Management among organizations. It is a process that has many benefits to offer to an organization.
Benefits of SCM
The three major benefits of an effective SCM are:
Since SCM keeps a check on all the processes involved in the manufacturing to delivery of a product, it can integrate suppliers and apply technology to respond more dynamically to customer needs.
For example, managing based on customer demands keeps organizations away from over-producing. This further cuts down the labor and raw material costs, transportation costs, and inventory management costs.
When organizations leverage technology like big data analytics to keep a record and stay closer to demands from the customers, they are able to respond quickly to their requirements.
They can keep products available for purchase whenever the customers need them resulting in better revenue generation.
The other benefit of SCM is that it allows organizations to streamline production and deploy labor and raw materials to produce new items and expand the product mix.
This would enable the organization to offer additional services outside the product realm.
Effective SCM also allows organizations to effectively and efficiently utilize their capital assets like production and transportation equipment.
Knowing about customer demand prevents organizations from overproducing and further saves their manufacturing equipment from additional wear and tear.
Supply chain management enables organizations to deliver more quickly, ensure products are available whenever needed, reduce quality issues by keeping a quality check, and facilitate returns with ease, ultimately improving value, both within the organization and for the customers.