Supply chain management is the management of the connected network of suppliers (“links” in the supply chain) required to convert raw materials into finished products or services. For a business to optimize its production cycle, lower costs, and ensure a faster production cycle, it needs to properly manage its supply chain.
Whether your company makes products or offers services, it’s an integral part of a supply chain. Having a more complex network can give you more opportunities to purchase materials or sell offerings. Yet the more convoluted your supply chain management system becomes, the more expensive it can be for your business. After all, the supply chain can restrict a substantial percentage of your company’s available funds, which can lead to cash flow problems.
Although good supply chain management (SCM) takes work, it offers many short- and long-term benefits. Not only can cash flow improve while costs decrease, but you can also increase efficiency and gain more control over your business processes. Good supply chain management can enhance your organization’s overall performance and enable growth opportunities.
Supply Chain Management
1. What is supply chain management?
Supply chain management is the management of the entire flow of a good or service and involves coordinating and streamlining all the activities to source, and transform raw materials into a final product to deliver it to the end consumer.
With good supply chain management, you can maximize the value your customers receive while giving your business a competitive advantage.
Managing your supply chain requires overseeing two main components:
- Physical flow, such as manufacturing, storing and transporting goods and materials.
- Information flow, such as handling the data and software used to manage goods and materials.
2. How does supply chain management work?
When your business relies on a multi-step supply chain to deliver its products or services to the end buyers, it’s critical to examine the chain, each of the links, and how they work together. If one link fails, order fulfillment will come to a halt which can be detrimental to your brand and bottom line. Further, if you fail to choose the right links in your chain, you could open your business up to liabilities such as expensive recalls. And, if each part of your chain isn’t optimized, you could end up losing profitability every step of the way.
Supply chain management focuses on keeping a finger on the pulse of the entire chain to optimize it. A supply chain manager will often be in charge of creating a strategy that encompasses all stages of the supply chain from beginning to end. They will focus on ensuring customers can get the products they want, in the quantity they desire, when they want them, and at a reasonable price. Meanwhile, they need to also make the business as profitable as possible.
The steps of the supply chain can involve labor, energy, fuel, security, safety protocols, vehicles, manufacturing plants, materials, equipment, technology, and more. These all come at a cost. Supply chain managers must keep costs low while maintaining quality and delivery speed. They often implement a system to centrally monitor the various supply stages from production and shipment to distribution. Then, each step is continuously analyzed to lower costs while improving efficiency, quality, and productivity.
3. The key benefits of effective supply chain management
Good SCM practices can lead to both short-term improvement and long-term growth. Organizations that take SCM seriously can leverage eight major advantages.
Optimized information flow
According to an Oracle study, fewer than 25% of companies have an automated information flow throughout the supply chain. For many of these companies, isolated data and poor connections between software systems contribute to lower efficiency and limited sales.
With effective SCM, however, information can flow across the network. Each link can share and analyze current data, allowing your business to make informed decisions.
Better quality control
Poor quality control can become expensive for your business, as the cost of repairs and replacements can add up quickly. Because the costs tend to increase at each stage, companies involved in the final steps can face significant expenses.
With effective SCM, you have greater control over the quality of your company’s products and services. By establishing quality metrics, identifying supplier issues, and tracking complaint resolutions, your company can reduce losses and improve revenue.
Increased efficiency
In any industry, procurement problems can lead to serious productivity issues. Manufacturing delays, shipping issues, and lost sales can result.
When your company prioritizes SCM, you can access real-time data about the goods and materials you need to run your business. Since your information flow automatically links to your shipping and logistics networks, you can identify and address procurement issues before they become problems. As a result, efficiency increases throughout, leading to a more productive team and happier customers.
Refined demand predictions
Forecasting and planning will be challenging if you can’t anticipate customer demand for the next week or month. Your team may be forced to act on limited or outdated information, causing artificial inflations or declines across the supply chain.
When your network has good information flow, your suppliers, retailers, and logistics providers can all access accurate data that shows real-time demand. Your team can look for patterns in the data and use their findings to predict future demand more accurately.
Reduced overhead costs
If you aren’t sure how demand will change in the coming weeks or months, your company is likely to maintain inventory inefficiently. Slow-moving inventory could take up valuable space, leading to unnecessary overhead costs.
When you follow SCM best practices, you can reduce overhead costs and enable more revenue generation instead. For example, you can make your warehouse more efficient, automate your storage system, or use more effective inventory management software.
Shipping optimization
Transportation costs have increased substantially in the past decade. Since 2010, UPS and FedEx air shipping costs have increased by 80%, while ground shipping costs have increased by over 75%, according to Logistic. In 2019 alone, trucking costs rose by nearly 8%. If your business doesn’t take preventive measures, these sharply rising costs can affect sales and revenue significantly.
With a smart strategy, your business can identify the right logistics companies and streamline its shipping processes. As a result, you can improve your company’s margin while decreasing costs to customers and cultivating more loyal clients.
Enhanced risk mitigation
If you don’t have much data to use, then it’s difficult to anticipate what the future might hold. As a result, your business may be unprepared for a major setback or overly invested in solutions for a problem that never occurs.
With good SCM, you can access a steady flow of data that you can use to better understand the environment. You can identify risks more easily, allowing you to implement cost-effective backup plans. Since you can be proactive rather than reactive, you can address risks while keeping costs in check.
Improved cash flow
When you establish a smart strategy, your company’s bottom line benefits. Building a reliable supplier network, reducing supply disruption, and lowering shipping costs means you can improve your company’s cash flow. Ultimately, that means less stress for your business and greater capacity to plan for the future.
4. The five basic components of a supply chain management system
Supply chain management can be broken down into five main components. It all starts with developing a strategy that outlines how you will go from raw materials to end products and back (when necessary due to returns). Once you have a plan, you’ll need to implement it through sourcing, making, delivery, and returns. Here’s a closer look at how each of these components works:
- Planning: Before taking any action, you’ll need a plan that outlines the entire supply chain process from start to finish. It’s important to note all of the costs from primary to supporting. For example, will you need boxes to ship your products? How about pallets for the boxes, a forklift to move the pallets, and a forklift driver to operate the machinery? Spare no detail. Additionally, identify the key performance indicators you can measure to ensure your supply chain is effective for your business and customers.
- Sourcing: The first step once you have your plan in place is to source the raw materials necessary to make your product or service. You’ll need to find a supplier that can provide the materials you need (quantity and quality) at a competitive price within your budget. Supply chain managers will then manage the supplier relationship, placing orders as needed, managing inventory levels, paying suppliers, and monitoring quality.
- Making: Once you have a source for the raw materials, you’ll need an entity that can make your product or service. This will include manufacturing, quality control, and packaging. It’s important to find a partner you can trust to meet your quality standards, produce the quantity you need, and do so at a competitive price you can afford.
- Delivering: With a packaged product or service ready, the next step is delivering it to the end consumer. Inventory may be transported to a warehouse where it’s stored until a customer places an order, it may go to a retail store, or it may go directly to the customer. This portion of the process involves managing orders from customers, scheduling deliveries, sending invoices to buyers, dispatching loads, and organizing a transportation solution.
- Returning: Lastly, things won’t always go as planned so it’s important to be prepared, Supply chains should have a system in place to support customers who need to return products. It should be as easy and the sea
5. Examples of supply chain management
Amazon
When looking for a supply chain management role model, it’s near impossible not to think of Amazon. The largest internet-based retailer in the U.S. has supply chain management down to a science. It’s continuously raising the bar of what’s possible by delivering an ever-growing range of products to its customers in record time. What’s its secret? Amazon uses a combination of sophisticated technology, an extensive warehouse network, a large owned transportation fleet, and multi-tier inventory management. Further, it outsources inventory management for products that aren’t top sellers. Third-party sales are estimated to account for half of Amazon’s total sales. Amazon has been able to keep its supply costs to a bare minimum, making it difficult for other companies without such advanced supply chain management strategies to compete.
Walmart
Walmart is another company with an advanced and highly optimized supply chain management system that stocks over 11,500 stores in 28 countries. The company has thrived due to its obsession with lowering supply chain costs which it passes on to customers to help them “save money and live better.” One key to Walmart’s success is removing links from the supply chain. The founder, Sam Walton, started by selectively purchasing bulk inventory and transporting it himself in 1962. Walmart continued on that path by working directly with manufacturers, which evolved into Vendor Managed Inventory (VMI). VMI is a practice where manufacturers manage their products in Walmart’s warehouses. It also focuses on strategic sourcing to find the best possible e-price from suppliers. Even back in 1989, Walmart was recognized for its low distribution costs which were less than half of competitors at the time. It has only continued to optimize, improve, and expand over the years.
Conclusion
Ultimately, good supply chain management can help you prepare for the challenges ahead and boost your company’s bottom line. Whether you’re in the service industry or the manufacturing industry, an effective supply chain strategy can lead to reduced costs, greater efficiency, and increased profits for your business. Since a strong supply chain can also help your business grow in the long term, developing a resilient system can offer benefits for years or decades to come.
