What is Supply Chain Management?

A supply chain is a network of organizations, processes, and people who build and distribute finished products to the end consumers. It includes everyone right from vendors, logistics companies, third-party warehouses, and thus, it is a major cost center. 

Source: cdn.corporatefinanceinstitute.com/assets/Supply-Chain-Example.png

In short, it is a network between an enterprise and its suppliers to manufacture and distribute a specific product or service from the earliest stage of sourcing the raw materials to the last-mile delivery of the same to its final buyer. It can be further simplified as a sequence of events that helps a commodity (or service) move from manufacturing (original state) to market (finished product). 

A supply chain’s functions may include product development, marketing, operations, distribution, finance, and customer service. In sophisticated supply chain systems, used products may re-enter the supply chain at any point where residual value is recyclable.

Every industry has a supply chain. Supply chains traditionally were straight-line models that looked something like the one illustrated in the picture above. But in the modern world, with such fierce competition, such linear and simple chains are insufficient for maximizing the company’s yield, and getting the supply chain right can either make or break a company. To this end, companies develop complex supply chains that are spread across the globe to reduce their costs and remain competitive in the business landscape. Such supply chains look like a web with the manufacturer in the middle of the web and supply and logistics, forming the web’s trusses. 

The fundamental steps of any supply chain are as follows:

• Sourcing of raw materials.
• Transforming these raw materials into basic parts.
• Assembling basic parts to create a final product.
• Order fulfillment or Sales.
• Product delivery.
• Customer service.

The amount of time taken by any one of these processes from start to completion is known as lead time. Supply chain managers monitor lead time and try to minimize it as much as possible. Supply chains aim to meet customer demands, and to this end, supply chain managers coordinate and optimize the processes at every stage to maximize customer satisfaction. An optimized supply chain can result in lower costs and a faster production cycle, but if a single link breaks down, it can affect the rest of the chain and can prove to be very costly.

With increasing globalization and the efficiency of transporting products from A to B, the costs of doing so decrease, in-turn lowering the final cost to the consumer. While deflation is generally regarded as a negative trait for business, the evolution and increased supply chain efficiencies have played a significant role in curbing inflation.

Why must a company understand its Supply Chain?

Mapping and laying out a supply chain is a critical step in performing an External Analysis in a Strategic Planning Process. 

• When a company decides to venture into a new industry it exercises external analysis, which examines factors such as competitive structure, position, dynamics, and history of the industry to understand the complexity of that industry. Its primary purpose is to identify opportunities and threats in an industry.

• The strategic planning process is a process of researching a company and its operating environment to formulate a strategy. It involves identifying and evaluating the data that is relevant to the company’s strategy. The process defines the internal and external environments to be analyzed and the data is evaluated using several analytic methods such as SWOT analysis, value chain analysis.

Clearly laying out the supply chain helps a company define its own market and envision its possible future trajectory. While developing corporate-level strategies, companies are often faced with tough choices regarding inventory and warehouse management, deciding whether to operate a single line of business or entering into multiple related or unrelated industries.

Each stage of a supply chain is an entire industry in itself. A competing company’s supply chain provides you a rough approximation of the number of industries involved in the said business. Their supply chain also provides you an insight into the attractiveness or competitiveness of the industries your company might want to venture into in the near future.

Specialized Chains

Times have changed since Henry Ford, now, even old-school American carmakers are opening factories abroad. And among this lineage, Tesla is quickly carving a niche for itself and becoming a powerful contender in the automobile manufacturing sector owing to its innovative approaches. Their manufacturing plant is located in California, a location with incredibly costly real estate.

Source: smartsheet.com

Tesla offsets this cost by choosing a vertically integrated supply chain instead of the commonly adopted, long supply chain of cheap part makers. They offer a full-service auto station near its corporate headquarters and also plans for other integrated ventures near the same facility, and Tesla owns it all. 

Tesla retains its customers by providing them with a fulfilling experience through their digital supply chain that pushes new firmware and algorithm updates to existing car owners over the cloud.

Supply Chain Management is the process of planning, optimizing, and executing a smooth flow of raw materials, finished products, and information across stakeholders. It is an integrated approach that spans over all industry departments, including inventory management, warehousing, production, procurement, sales, marketing, and bookkeeping. This leads to an important observation that communication and insights play a big role in defining the supply chains’ efficiency as data transfer between the corresponding parties is equally important as the goods. 

Supply Chain Management is the management of goods and services. It manages the flow of the goods and services and each point of the supply chain until the goods’ end delivery.

The first-ever mention of Supply Chain Management was made by Keith Oliver, a consultant at Booz Allen Hamilton in 1982. Keith had publicly mentioned the term in an interview for Financial Times. Since then, authors and industry leaders have started studying the term and grasping its importance. Nearly a decade later, in the 1990s, books, and novels got published, the importance of Supply Chain Management prominently rose, and many managers started using the term in their job titles. One of the increasing importance of this was it is directly inclined towards inventory management and order management as well. Supply Chain Management became a broader and modern version of traditional logistics. 

As previously mentioned, Supply Chain Management is a modern version of logistics. Let me show you the reason behind it. Logistics is an activity that takes place when the transportation of a product. It is mainly limited to a single organization that is dealing with the procurement, maintenance, and inventory. While Supply Chain Management brings together various organizations and they all work together to make the product reach its end destination. 

Supply Chain Management can absorb the activities of logistics but not vice versa. Instead, Supply Chain Management is looking after the logistics activities as well as marketing, finances, product development and enhancement, and customer services. Supply Chain Management is, indeed, a wider, broader, and modern term.

Core Component #1 - Strategy

The art of creating a plan beforehand is called a strategy. Supply Chain Management meticulously plans each and every step of the way for a smooth passage of the product. It makes sure of all the stages involved in the process, brings together all the organizations, and ensures that the goods are seamlessly transported from source to destination.

Integration is also a very big part of the strategy. Integration is a process were bringing together all the parts of the organization and collaborating them to achieve the goal. This way, there is clear transparency, communication between the teams, and smooth operations throughout the organization. Also, due to the integration, there is a clear message about the areas that can be improved or optimized better.

Core Component #3 - Source of Products

Here, the source of the product clearly means where the product is currently available. It can be the manufacturer, storage unit or the warehouse, or a store. Make sure you are aware of the source of the product itself. This way, you will be able to track the product and quickly act upon delivering activities rather than finding a product. It definitely sounds simpler when talking about ‘a’ product, but, this surely helps when companies are dealing with tens of thousands of products at once. Also, to create a product, a number of tools and raw materials are included. Source of the product also includes making sure the raw materials are always available. This way, you can stay one step ahead of the process and are always prepared for the best and the worst.

Core Component #4 - Returned Goods

The sole purpose of returned goods is to ensure that there is proper tracking of the returned goods. There is visibility in the supply chain management and it becomes easier to track the returned goods. The supply chain management process should end when the product reaches its destination, but, in the case of returned goods, the entire cycle restarts in reverse order. A logistics or returned goods software helps you correctly take the right course of action.

#1 Chief Procurement Officer (CPO)

A Chief Procurement Officer (CPO) is amongst the highest or most authoritative roles in the business organization. They come under the executive level roles and mainly focus on the procurement and sourcing of goods for a business as a part of a successful supply chain management. They take into consideration key elements such as costs, expenditures, smooth functioning of the procurement process, and ensuring the expenses and errors are to the minimum. Without a doubt, they need to make sure the procurement process is in lieu of the company guidelines and adhering to the internal and external guidelines, including the government laws and regulations.

#3 Supply Chain Manager

The main role of a Supply Chain Manager is to create strong collaboration and develop relationships with third-party partners, also known as external parties. This way, they ensure the timely production of the products, calculate the requisite quantities, and generate proper inventory related to the goods,  until the products are sold to the market areas or third-party buyers. Their role includes receiving quotations from the suppliers, evaluating their performances, finding their shortcomings, and negotiating with them to finalize a contract. There have been many similarities between a Supply Chain Manager and an Operations Manager; but the main difference between the two are: Supply Chain Managers are focused on external parties and ensuring the products are completed and activities related to them while the Operations Manager focuses more on internal activities related to the operations of the company or that department.

Supply Chain Management has been deemed very important for the business operations and the growth of a company. It also affects shipping management as well as warehouse management. It surely yields a great number of benefits and overcomes its challenges. An effective supply chain management is always possible by digitizing them and introducing technology for proper tracking of the goods and services from inception to delivery. This way, transparency is maintained and the management is aware of the challenges to rectify the errors and opportunities to modify the chain and make it more efficient than ever before.

Supply chain management is related to all organizational processes involved in delivering the final product to the end consumer, and hence it impacts efficiency. For instance, the amount of buffer stock is determined by the agility of the supply chain. Having an efficient supply chain will lower the need for stocking the raw materials and buffer stock. Thus, supply chain management has an impact on the overall sustainability and profitability.

Read more about the importance of supply chain management.

Supply chain optimization is the process of removing the bottlenecks within the supply chain to improve profitability. This also includes adapting to better operation methods, better tools, and techniques to minimize the waste of resources. The resultant model of the supply chain is generally more agile and dependable despite cutting down on the utilized resources. 

Read more about supply chain optimization and its importance.

All organizations follow supply chain best practices in varying degrees. However, following a systematic approach across all the departments and coordinating it with the logistics companies can help improve your bottom line. In this section, we will look at the best practices that organizations can easily implement from all sectors. They are oriented towards both improving the individual efficacy as well as efficiency as a whole.

Read more about supply chain management best practices.