Supply Chain Management Definition
Supply chain management is an integral part of how businesses operate and is essential to their success and customer satisfaction.
Supply Chain Management Definition
Supply chain management (SCM) refers to the range of activities involved in the planning, control and execution of a product’s flow. This extends from acquiring the raw materials through to the distribution of the final goods to the consumer, all in the most streamlined and cost-effective way possible. Therefore, SCM signifies the supplier’s effort to develop and realise supply chains that are as efficient and economical as they can possibly be.
SCM encompasses the planning and execution of processes that are necessary for the optimisation of material flow, financial capital and information in areas that usually include demand planning, sourcing, production, inventory management and storage, transportation, logistics and return for excess or defective products.
How does supply chain management work?
Essentially, SCM strives to control and link together the production, shipment and distribution of a product, whether that be the iPhone that you’re reading this on, or the shoes on your feet. With good SCM, companies can cut out excess costs and quicken delivery times to the consumer. This is achieved by keeping a close eye on internal inventories, internal production, distribution, sales and the inventories of vendors. The overarching idea of SCM is that almost every product on offer across the globe is accessible to the consumer due to the efforts of numerous organisations that combine to form the supply chain. Supply chains have existed for many years, but it is only more recently that companies are starting to appreciate and emphasise the importance of them.
Supply chain management is a complex process which is heavily reliant on each partner running well. For this reason, effective SCM involves collaboration, change management and risk management in order for the entities to align and communicate the best they can.
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What are the benefits of supply chain management?
SCM makes processes more efficient, which in turn lowers costs and boosts profits. It helps companies manage their demand and disruptions, have the right amount of inventory, keep costs low and meet customer demand in the most economically beneficial way. These advantages can be realised through the right software and strategies that are instrumental in managing the increasingly complex nature of supply chains in today’s society.
The Complexity of Supply Chains
At its most basic level, a supply chain includes a company, its suppliers and the customers. So, the chain would look like: raw material producer, manufacturer, distributor, retailer and customer. If the supply chain is more complex, it will include a number of suppliers and the suppliers’ suppliers, and/or a number of customers and the customers’ customers, and all the organisations that provide essential services for customers to receive their products. This could include financial organisations, third-party logistics, marketing research providers and supply chain software vendors. The organisations that make up the supply chain are connected through information and physical flows.
Information Flows
Information flows are in place to allow the different supply chain organisations to coordinate their long-term plans. They are also instrumental in controlling the flow of materials and goods across the supply chain on a daily basis.
Physical Flows
Physical flows refer to the transformation, movement, and storage of materials and goods. They are more visible than information flows but equally as important.
When imagining how these organisations work together, conceptualise an interrelated web instead of a linear chain. The complex nature of supply chains can lead to a number or problems arising. For example, when a new iPhone is released and the demand for old iPhone cases reduces, or when transportation is halted due to extreme weather conditions, or when a drought effects the growth of crops, etc.
Supply Chain Sustainability
Supply chain sustainability (SCS) covers the environmental, social, economic and legal issues relating to a supply chain’s components. This, combined with corporate social responsibility, are two areas of major concern for organisations across the globe. Factors that influence SCS include carbon footprint and emissions, amount of waste, air pollution, deforestation, labour violations and staff health and safety.
Fundamental to SCS is the notion that products and practices that are socially responsible are not only beneficial for the planet and humans, but also for creating positive brand awareness and improving profitability in the future.
Logistics or Supply Chain Management?
Logistics and supply chain management are two terms that are often confused and used to mean the same thing. However, logistics is actually a component of SCM that focuses on transporting a product in the most efficient way so it can arrive at the right place at the right time. So, this includes processes like packaging, transportation, distribution, warehousing and delivery.
Whereas, SCM encompasses even more activities, including the strategic sourcing of raw materials, obtaining the best prices on goods and materials, and organising supply chain visibility efforts across the supply chain network. Supply chain visibility refers to how parts, components or products in transit are tracked all the way from where they are made to their final destination. This is a strengthening strategy to improve the supply chain by allowing all data to be accessible to stakeholders, and even the customers.
How can the supply chain be measured and monitored?
A well-executed supply chain can be measured in different ways. Metrics allow organisations to focus on the most important activities and enhance existing processes. Critical metrics support safety, regulatory compliance or contractual obligations, whilst other metrics improve service, efficiency and can generate bigger profits. Common metrics used in the supply chain include:
- ‘Cash to cash cycle’ time. This refers to how many days there are between purchasing the raw materials and getting paid for the final product.
- Perfect orders. This is the percentage of orders that are free from error.
- Fill rate. This is the percentage of orders that are delivered and ordered as part of the very first shipment.