What Is Supply Chain Management (SCM) and Why Is It Important?

Supply chain management (SCM) is the broad range of activities required to plan, control
and execute a product's flow from materials to production to distribution in the most
economical way possible.

Supply chain management (SCM) is the active management of supply chain activities to
maximize customer value and achieve a sustainable competitive advantage. It represents a
conscious effort by the supply chain firms to develop and run supply chains in the most
effective & efficient ways possible. Supply chain activities cover everything from product
development, sourcing, production, and logistics, as well as the information systems needed
to coordinate these activities.

SCM encompasses the integrated planning and execution of processes required to optimize
the flow of materials, information and capital in functions that broadly include demand
planning, sourcing, production, inventory management and logistics -- or storage and
transportation. Companies use both business strategy and specialized software in these
endeavors to create a competitive advantage.

Supply chain management is an expansive and complex undertaking that relies on each
partner -- from suppliers to manufacturers and beyond -- to run well. Because of this,
effective supply chain management also requires change management, collaboration and risk
management to create alignment and communication between all the participants.

In addition, supply chain sustainability -- which covers environmental, social and legal issues,
in addition to sustainable procurement -- and the closely related concept of corporate social
responsibility -- which evaluates a company's effect on the environment and social well-being
-- are areas of major concern for today's companies.

The concept of Supply Chain Management (SCM) is based on two core ideas: 

1. The first is that practically every product that reaches an end user represents the
cumulative effort of multiple organizations. These organizations are referred to
collectively as the supply chain.
2. The second idea is that while supply chains have existed for a long time, most
organizations have only paid attention to what was happening within their “four
walls.” Few businesses understood, much less managed, the entire chain of activities
that ultimately delivered products to the final customer. The result was disjointed and
often ineffective supply chains.

The organizations that make up the supply chain are “linked” together through physical flows
and information flows. 
Physical Flows
Physical flows involve the transformation, movement, and storage of goods and materials.
They are the most visible piece of the supply chain. But just as important are information
flows. 

Information Flows
Information flows allow the various supply chain partners to coordinate their long-term plans,
and to control the day-to-day flow of goods and materials up and down the supply chain.

Benefits of supply chain management

Supply chain management produces benefits such as new efficiencies, higher profits, lower
costs and increased collaboration. SCM enables companies to better manage demand, carry
the right amount of inventory, deal with disruptions, keep costs to a minimum and meet
customer demand in the most effective way possible. These SCM benefits are achieved
through choosing effective strategies and appropriate software to manage the growing
complexity of today's supply chains.
Importance of supply chain management

SCM has significant impacts on both the enterprise and the consumer.

Supply chain management activities can improve customer service. Done effectively, they
have the ability to ensure customer satisfaction by making certain the necessary products are
available at the correct location at the right time. By increasing customer satisfaction levels,
enterprises are able to build and improve customer loyalty.
SCM also provides a major advantage for companies by decreasing operating costs. SCM
activities can reduce the cost of purchasing, production and the total supply chain. Lowering
costs improves a company's financial position by increasing profit and cash flow.
Furthermore, following supply chain management best practices can minimize overuse of
large fixed assets -- such as warehouses and vehicles -- by allowing supply chain experts  to
redesign their network, for example, to maintain customer service levels while operating five
warehouses instead of eight, reducing the cost of owning three extra facilities.

Perhaps lesser known and underappreciated is SCM's critical role in society. SCM can help
ensure human survival by improving healthcare, protecting people from climate extremes and
sustaining life. People rely on supply chains to deliver necessities like food and water as well
as medicines and healthcare. The supply chain is also vital to the delivery of electricity to
homes and businesses, providing the energy needed for light, heat, air conditioning and
refrigeration.

SCM can also improve quality of life by fostering job creation, providing a foundation for
economic growth and improving standards of living. It provides a multitude of job
opportunities, since supply chain professionals design and control all of the supply chains in a
society as well as manage inventory control, warehousing, packaging and logistics.
Furthermore, a common feature of most poor nations is their lack of developed supply chains.
Societies with strong, developed supply chain infrastructures -- such as large railroad
networks, interstate highway systems and an array of airports and seaports -- can efficiently
exchange goods at lower costs, allowing consumers to buy more products, thus providing
economic growth and increasing the standard of living.

Supply chain management processes

Each major phase of a product's movement through the supply chain -- from materials to
production and distribution -- has its own distinct business processes and disciplines. Most of
them began decades ago as paper-based methods but now are usually handled in specialized
software.

The SCM process starts with figuring out what products customers want -- the early stages
of supply chain planning, traditionally considered one of the two overarching categories of
SCM, along with supply chain execution.

Supply chain planning starts with demand planning, a process for gathering historical data,
such as past sales, and applying analytics and statistical modeling to create a forecast or
demand plan that the sales department and operational departments -- such as manufacturing
and marketing -- can agree on. The forecast determines the types and quantities of products to
be manufactured. Some companies perform demand planning as part of a formalized process
called sales and operations planning (S&OP), which prescribes an iterative process of data
gathering, discussion, reconciling of demand plans with production plans and management
approval. Some companies include S&OP in a broader process called integrated business
planning (IBP) that incorporates other departments' plans in a single, companywide plan.

In the next major step, production planning, the company nails down the specifics of where
and how the products called for in the demand plan will be manufactured. (Production
planning is also used in other industries, such as agriculture and oil and gas.) A more fine-
tuned variation -- typically automated in specialized software -- called advanced planning
and scheduling seeks to optimize the resources that go into production and make them more
responsive to changes in demand.

Material requirements planning (MRP) is a process dating back to the '60s that most
manufacturers use to ensure sufficient materials and components (such as subassemblies) are
available for use in the manufacturing process by taking inventory of what's on hand,
identifying gaps and buying or making the remaining items. The central document in both
MRP and production planning is the bill of materials (BOM), a complete list of the items
needed to make a product.

MRP is sometimes done as part of manufacturing resource planning (MRP II) which broadens
the MRP concept to other departments such as HR and finance. MRP and MRP II were the
predecessors of enterprise resource planning (ERP) software, which is designed to integrate
the major business processes of companies in any industry.

Two complex processes play important roles in most of the major steps of SCM: inventory
management and logistics. Inventory management consists of various techniques and
formulas for ensuring adequate supply -- from raw materials in a manufacturing plant,
perhaps managed in an MRP system, to packaged goods in a retail store -- for the least
expenditure of time and resources. Manufacturers are faced with a variety of inventory
management issues, many of which involve coordinating demand planning with inventory at
both ends of the production process. For example, sometimes material requirements planning
leads to more inventory, especially when the system is first implemented and the
manufacturer must work to synchronize MRP parameters with the inventory already on hand.

Logistics is everything having to do with transporting and storing goods from the start of the
supply chain, with delivery of parts and materials to manufacturers, to delivery of finished
products to stores or direct to consumers and even beyond for product servicing, return and
recycling -- a process called reverse logistics. Inventory management is threaded throughout
the logistics process.
Procurement, sometimes called sourcing, is the process of finding suppliers for goods,
managing those relationships, and acquiring the goods economically -- along with all the
communication, such as sending out requests for bids, and paperwork, including purchase
orders, invoices, etc. It is a major component of supply chain management, given how much
is bought and sold at all points along the chain. Most players in the supply chain -- suppliers,
manufacturers, distributors and retailers -- have dedicated procurement staff.

Strategic sourcing is an elevated and more sophisticated type of procurement that aims to
optimize a company's sourcing process by taking advantage of its consolidated purchasing
power and align it with overall business goals.

Supplier relationship management (SRM), in contrast, addresses sourcing issues by

focusing on the suppliers the company deems most critical to success and systematically
strengthening relationships with them while fostering optimal performance.

Supply chain complexity

The most basic version of a supply chain includes a company, its suppliers and the customers
of that company. The chain could look like this: raw material producer, manufacturer,
distributor, retailer and retail customer.

A more complex, or extended, supply chain will likely include a number of suppliers and
suppliers' suppliers; a number of customers and customers' customers, or final customers; and
all the organizations that offer the services required to effectively get products to customers,
including third-party logistics providers (3PLs), financial organizations, supply chain
software vendors and marketing research providers. These entities also use services from
other providers.

The totality of these organizations, which evokes the metaphor of an interrelated web rather
than a linear chain, gives insight into why supply chain management is so complex. That
complexity also hints at the types of issues that can arise from demand planning issues, such
as a release of a new iPhone that chokes demand for old iPhone cases, to natural supply chain
disruptions, such as the halt of transportation due to extreme winter weather or droughts that
kill crops, to political upheaval, such as labor strikes that throttle movement at a country's
container ports.

In response, companies increasingly use  supply chain risk mitigation strategies, such as

shoring up communication with critical suppliers and analyzing their financial stability. Some
are employing specialized supply chain management tools to automate monitoring and
assessment of risk.
Supply chain sustainability is the umbrella term for the strategies that organizations use to
ensure their supply chains are sustainable and can withstand the risks coming from many
quarters, be they financial, social, environmental or political. Regulatory compliance issues
have grown as supply chains have become more global, and trading partners face a
hodgepodge of local laws. Despite the need, the market in specialized supply chain
sustainability software is fragmented, and most companies use other tools and processes to
address the problem.

Logistics vs. supply chain management

The terms supply chain management and logistics are often confused or used synonymously.

However, logistics is just one -- albeit vital -- component of supply chain management. It
focuses on moving a product or material in the most efficient way so it arrives at the right
place at the right time. It manages activities such as packaging, transportation, distribution,
warehousing and delivery.

In contrast, SCM involves a more expansive range of activities, such as strategic sourcing of
raw materials, procuring the best prices on goods and materials and coordinating supply chain
visibility efforts across the supply chain network of partners, to name just a few.

The role of SCM software

Technology is critical in managing today's supply chains, and every major supply chain
management process has a software category dedicated to it. Most vendors of ERP suites
offer supply chain management software, and there are thousands of niche vendors.

Besides managing specific processes, SCM software has an important role to play in tying

together the people, processes, and systems that participate in the supply chain.

Other commonly used SCM modules include the following:

 a transportation management system (TMS) for managing the transport and storage of

goods, especially across global supply chains;

 a warehouse management system (WMS) for all of the activities inside warehouses and

distribution centers; and

 an order management system, to handle processing of customer orders through WMS,

ERP and TMS systems, at all stages of the supply chain. (See "How supply chain systems
process orders.")
The increasingly global nature of today's supply chains and the rise of e-commerce, with its
focus on nearly instant small deliveries straight to consumers, are posing challenges,
particularly in the area of logistics and demand planning, while boosting demand for order
management software capable of handling omnichannel commerce. A number of strategies --
such as lean manufacturing -- and newer approaches -- such as demand-driven material
requirements planning -- may prove helpful.

Emerging technologies in SCM

Technology -- especially big data, predictive analytics, IT, supply chain analytics, robotics

and autonomous vehicles -- is also being used to help solve modern challenges, including
supply chain risk and sustainability. Most of the emerging technologies have the common
goals of making it easier to gather more detailed supply chain data and analyze and act on it