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Supply Chain Management

Definition

Supply chain management is the management of the flow of goods and services and includes all
processes that transform raw materials into final products.

 It involves the active streamlining of a business's supply-side activities to maximize

customer value and gain a competitive advantage in the marketplace.
 SCM represents an effort by suppliers to develop and implement supply chains that are
as efficient and economical as possible.
 Supply chains cover everything from production to product development to the
information systems needed to direct these undertakings.

Explanation

 A supply chain is the connected network of individuals, organizations, resources,

activities, and technologies involved in the manufacture and sale of a product or service.
 A supply chain starts with the delivery of raw materials from a supplier to a
manufacturer and ends with the delivery of the finished product or service to the end
consumer.
 SCM oversees each touch point of a company's product or service, from initial creation
to the final sale.
 With so many places along the supply chain that can add value through efficiencies or
lose value through increased expenses, proper SCM can increase revenues, decrease
costs, and impact a company's bottom line.
 Typically, SCM attempts to centrally control or link the production, shipment, and
distribution of a product.
 By managing the supply chain, companies are able to cut excess costs and deliver
products to the consumer faster. This is done by keeping tighter control of internal
inventories, internal production, distribution, sales, and the inventories of company
vendors.
 SCM is based on the idea that nearly every product that comes to market results from
the efforts of various organizations that make up a supply chain. Although supply chains
have existed for ages, most companies have only recently paid attention to them as a
value-add to their operations.

Logistics vs. supply chain management

 The terms supply chain management and logistics are often confused or used
synonymously. However, logistics is a component of supply chain management. It
focuses on moving a product or material in the most efficient way so it arrives at the
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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.

Supply chain management software

 Supply chain management software is a business tool that helps you manage your
supply chain with greater efficiency. Most software systems have rich features that can
streamline your supply chain operations from start to finish.

Types of supply chain management tools

The most common features of supply chain management software include:

 Inventory management - for tracking and managing the availability of raw materials,
stocked goods or spare parts. This feature can also help with asset management,
barcode integration and future inventory and price forecasting.
 Order management - for automating purchase order processes. For example,
generating and tracking purchase orders, scheduling of supplier deliveries, and creating
pricing and product configurations.
 Logistics and shipping status - for coordinating transportation channels, improving
delivery performance and boosting customer satisfaction. Warehouse management
features can help with storage optimisation, labelling, labour management and more.
 Forecasting - for anticipating customer demand and planning procurement and
production processes accordingly. Efficient forecasting can help remove the need to buy
unnecessary raw materials or store excess finished goods on warehouse shelves, hence
reducing costs.
 Return management - for inspection and handling of damaged or faulty goods, and
processing of refunds or insurance claims.

Supply Chain Decisions

Decision phases can be defined as the different stages involved in supply chain management
for taking an action or decision related to some product or services. Successful supply chain
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management requires decisions on the flow of information, product, and funds that fall into
three decision phases.
Here we will be discussing the three main decision phases involved in the entire process of
supply chain. The three phases are described below –

Supply Chain Strategy

In this phase, decision is taken by the management mostly. The decision to be made considers
the sections like long term prediction and involves price of goods that are very expensive if it
goes wrong. It is very important to study the market conditions at this stage.
These decisions consider the prevailing and future conditions of the market. They comprise
the structural layout of supply chain. After the layout is prepared, the tasks and duties of each
is laid out.
All the strategic decisions are taken by the higher authority or the senior management. These
decisions include deciding manufacturing the material, factory location, which should be easy
for transporters to load material and to dispatch at their mentioned location, location of
warehouses for storage of completed product or goods and many more.

Supply Chain Planning

Supply chain planning should be done according to the demand and supply view. In order to
understand customers’ demands, a market research should be done. The second thing to
consider is awareness and updated information about the competitors and strategies used by
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them to satisfy their customer demands and requirements. As we know, different markets
have different demands and should be dealt with a different approach.
This phase includes it all, starting from predicting the market demand to which market will be
provided the finished goods to which plant is planned in this stage. All the participants or
employees involved with the company should make efforts to make the entire process as
flexible as they can. A supply chain design phase is considered successful if it performs well in
short-term planning.

Supply Chain Operations

The third and last decision phase consists of the various functional decisions that are to be
made instantly within minutes, hours or days. The objective behind this decisional phase is
minimizing uncertainty and performance optimization. Starting from handling the customer
order to supplying the customer with that product, everything is included in this phase.
For example, imagine a customer demanding an item manufactured by your company. Initially,
the marketing department is responsible for taking the order and forwarding it to production
department and inventory department. The production department then responds to the
customer demand by sending the demanded item to the warehouse through a proper medium
and the distributor sends it to the customer within a time frame. All the departments engaged
in this process need to work with an aim of improving the performance and minimizing
uncertainty.

Supply chain management decision can be classify into two broad categories –

(i) Strategic (Corporate Strategy) and (ii) Operational.

Strategic decisions are made typically over a longer time horizon. These are closely linked to
the corporate strategy (sometimes they also called the corporate strategy), and guide supply
chain policies from a design perspective.

Operational decisions are short term, and focus on activities over a day-to-day basis. The effort
in these types of decisions is to effectively and efficiently manage the product flow in the
"strategically" planned supply chain.

There are four major decision areas in supply chain management:

i) Location

ii) Production

iii Inventory, and

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iv)Transportation (distribution)

There are both strategic and operational elements in each of these decision areas.

Location Decisions

 The geographic placement of production facilities, stocking points, and sourcing points is
the natural first step in creating a supply chain.
 The location of facilities involves a commitment of resources to a long-term plan.
 Once the size, number, and location of these are determined, so are the possible paths
by which the product flows through to the final customer.
 These decisions are of great significance to a firm since they represent the basic strategy
for accessing customer markets, and will have a considerable impact on revenue, cost,
and level of service.
 These decisions should be determined by an optimization routine that considers
production costs, taxes, duties and duty drawback, tariffs, local content, distribution
costs, production limitations, etc. Although location decisions are primarily strategic,
they also have implications on an operational level.

Production Decisions

 The strategic decisions include what products to produce, and which plants to produce
them in, allocation of suppliers to plants, plants to DC's, and DC's to customer markets.
 As before, these decisions have a big impact on the revenues, costs and customer
service levels of the firm. These decisions assume the existence of the facilities, but
determine the exact path(s) through which a product flows to and from these facilities.
 Another critical issue is the capacity of the manufacturing facilities--and this largely
depends the degree of vertical integration within the firm.
 Operational decisions focus on detailed production scheduling.
 These decisions include the construction of the master production schedules, scheduling
production on machines, and equipment maintenance. Other considerations include
workload balancing, and quality control measures at a production facility.

Inventory Decisions

 These refer to means by which inventories are managed. Inventories exist at every stage
of the supply chain as either raw materials, semi-finished or finished goods.
 They can also be in-process between locations. Their primary purpose to buffer against
any uncertainty that might exist in the supply chain.
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 Since holding of inventories can cost anywhere between 20 to 40 percent of their value,
their efficient management is critical in supply chain operations. It is strategic in the
sense that top management sets goals.
 However, most researchers have approached the management of inventory from an
operational perspective. These include deployment strategies (push versus pull), control
policies --- the determination of the optimal levels of order quantities and reorder
points, and setting safety stock levels, at each stocking location.
 These levels are critical, since they are primary determinants of customer service levels.

Transportation Decisions

 The mode choice aspects of these decisions are the more strategic ones.
 These are closely linked to the inventory decisions, since the best choice of mode is
often found by trading-off the cost of using the particular mode of transport with the
indirect cost of inventory associated with that mode.
 While air shipments may be fast, reliable, and warrant lesser safety stocks, they are
expensive. Meanwhile shipping by sea or rail may be much cheaper, but they
necessitate holding relatively large amounts of inventory to buffer against the inherent
uncertainty associated with them.
 Therefore customer service levels, and geographic location play vital roles in such
decisions. Since transportation is more than 30 percent of the logistics costs, operating
efficiently makes good economic sense. Shipment sizes (consolidated bulk shipments
versus Lot-for-Lot), routing and scheduling of equipment are key in effective
management of the firm's transport strategy.

Supply chain decisions have been classified based on their temporal and functional
consideration.

Procurement Decisions

 Supplier/Vendor selection: Where should we source raw materials, components, and

sub-assemblies from? (strategic)
 Direct delivery from suppliers: Can intermediate warehouses be eliminated so that
materials can be delivered directly into manufacturing plants? (strategic)
 Vendor managed inventories: Should the inventories at the plants be vendor-managed?
(strategic)
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 Optimal procurement policy: What are the cost and service trade-offs in alternative
procurement strategies? (strategic/tactical)
 Manufacturing Plant location: How many manufacturing plants should be set up and
where should they be located? (strategic)
 Product line selection: What products should be produced at each manufacturing
location? (strategic/tactical)
 Inventory decisions: What raw materials/Work-in-process (WIP)/finished goods
inventory should be stocked in each center? (strategic/tactical)
 Capacity planning: How much capacity is needed in each plant? (strategic)
 Capacity allocation: How do we allocate plant capacity to products? (tactical)
 Optimal manufacturing strategy: What are the cost and service trade-offs in alternative
manufacturing strategies? For example, what would be the best policy among make-to-
stock, make-to-order, and assemble-to-order? (strategic/tactical)
 Input control: How do we introduce work into the plant? (strategic/tactical/operational)
 Production scheduling: How do we schedule the production to maximize throughput
and minimize cycle time? (tactical/operational)
 Constrained Supply: How do we optimize resource utilization when the supplies are not
enough to fulfill the requirements? (tactical)

Distribution

 Configuration of distribution facilities: What types of distribution centers are required?

(Warehouses, cross-docks, drop-lots, etc.) (strategic/tactical)
 Location: Where should distribution facilities be located? (strategic)
 Customer allocation: Which customers should a facility service? (strategic/tactical)
 Facility configuration: What product should be handled by each facility? What products
and in how many quantities should be stocked at each facility? What should be the
replenishment strategy? (strategic/tactical)
 Optimal distribution strategy: What are the cost and service trade-offs of alternative
distribution strategies? (tactical)

Logistics

 Logistics mode selection: What transport modes and lanes should be used to move
products throughout the network? (strategic)
 Selection of ports: Which ports should be used to bring product into and out of a
country? (strategic)
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 Direct delivery: Which products should move directly from manufacturing centers to
customers? (strategic/tactical)
 Optimal transportation strategy: What are the cost and service tradeoffs of alternative
transportation strategies? (tactical)

Global Decisions

 Product and process selection: What product quantities, by facility, by process, should
be produced and stored in each period to support customer demands? What products
to sell and to which customers to maximize profits? (tactical)
 Planning under uncertainty: What are the implications associated with seasonal or
cyclical demand, capacity availability, cost fluctuations, or raw material availability?
(tactical/operational)
 Global optimization of operations: What are the cost and service trade-offs among
procurement, manufacturing, distribution, and logistics alternative strategies?
(strategic/tactical)
 Real-time monitoring and control: How can the orders be dynamically routed and
scheduled through the supply chain in reaction to occurrence of real-time events?
(operational)

Components of SCM

Supply chain management is made up of a few components that are very important as well as
critical to the system. We shall discuss each of the components in brief.

1. Planning
This is one of the most important stages. Before the beginning of the entire supply chain, it is
essential to finalise the strategies and put them into place. Checking the demand for the
product or service, checking the viability, costing, profit, and manpower etc., are vital. Without
a proper plan or strategy in place, it will be well-nigh impossible for the business to achieve
effective and long term benefits. Therefore, enough time has to be devoted to this phase. Only
after the finalisation of the plans and consideration of all pros and cons, can one proceed
further. Every business needs a plan or blueprint or a roadmap based on which the strategies
are made. Planning helps to identify the demand and supply trends in the market and this, in
turn, helps to create a successful supply chain management system.

2. Information
The world today is dominated by a continuous flow of information. In order to be successful, it
is essential that a business stays abreast with all the latest information about the various
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aspects of its production. The market trends of supply and demand for a particular product can
be best understood if the information is properly and timely disseminated through the many
levels of the business. Information is crucial in a knowledge-based world economy, and
ignorance about any aspect of business may actually spell doom for the prospects of the
business.

3. Source
Suppliers play a very crucial role in supply chain management systems. Products and services
sold to the end user are created with the help of different sets of raw materials. It is therefore
necessary that suitable quality raw materials are procured at cost effective rates. If a supplier is
unable to supply on time, and within the stipulated budget, the business is bound to suffer
losses and gain a negative reputation.
It is crucial that a company procures good quality resources so it can create good quality
products and maintain its reputation in the market. This necessitates a strong role for suppliers
in the supply chain management system.

4. Inventory
For a highly effective supply chain management system it is essential that an inventory is kept
and thoroughly maintained. An inventory means the ready list of items, raw materials and
other essentials required for the product or service. This list has to be regularly updated to
demarcate available stock and required stock. Inventory management is critical to the function
of supply chain management, because without proper inventory management the production,
as well as sale of the product, is not possible. Businesses have now started to pay more
attention to this component simply because of its impact on the supply chain.

5. Production
Production is one among the most important aspects of this system. It is only possible when all
the other components of the supply chain are in tandem with each other. For the process of
production to start it is essential that proper planning and supply of goods, as well as the
inventory, are well maintained. The production of goods is followed by testing, packaging and
the final preparation for delivery of the finished product.

6. Location
Any business, that wants to survive as well as flourish, needs a location which is profitable for
the business. Take for example, a carbonated drink factory is set up in an area where water
supply is scarce. Water is a basic necessity of such business. The lack of water could hamper the
production as well as affect the goodwill of the company. A business cannot survive if it has to
share an already scarce raw material with the community. Hence, a suitable location, which is
well connected, and very close to the source of essential resources for production is vital to a
business’ prosperity. The requirement and availability of manpower must also be considered
while setting up a business unit.
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7. Transportation
Transportation is vital in terms of carrying raw materials to the manufacturing unit and
delivering the final product to the market. At each stage, timely transportation of goods is
mandatory to sustain a smooth business process. Any business which pays attention to this
component, and takes good care of it, will benefit from the production and transportation of its
goods on time.
It is essential that a company works towards a safe and secure transportation process. Be it in-
house or a third-party vendor, the transportation management system must ensure zero
damage and minimal loss in transit. A well-managed logistics system along with flawless
invoicing are the two pillars of secure transportation.

8. Return of goods
Among the various components that create a strong supply chain is the facility for the return of
faulty/malfunctioning goods, along with a highly responsive consumer grievance redress unit.
No one is infallible. Even a machine may malfunction once in a million times if not more. As a
part of a strong business process, one may expect the return of goods under various
circumstances. Even the best quality control processes may have unavoidable momentary
lapses. In the case of such lapses, inevitably followed by consumer complaints, a business must,
instinctively, recall the product/s and issue an apology. This not only creates a good customer
bonding, but also maintains goodwill in the long run.
The eight components discussed here are interdependent and ensure a smooth supply chain
management system. It ensures the success and reputation of a business. A business must
focus on all these components in order to create a flawless supply chain.
Businesses that have a strong supply chain management system in place always put great
emphasis on all the components listed, and also ensure that management, as well as the teams
at various levels, play by the rules. Profit is the bottom line and to make sure that the business
achieves it, it is essential that the supply chain does not have any gaps. Any snag should be
dealt with immediately and the weak links repaired or removed.
Demand and supply are two of the most important aspects of a business. For any business to be
successful, trends, with respect to demand and supply, need to be studied carefully while
implementing an effective plan of execution. A supply chain management system is required
not just for the timely manufacture of goods; it is also a very critical system for ensuring that
consumer requirements are met effectively.
 

 7 Principles of Supply Chain Management

Supply Chain Adapts to Client’s Demands

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In order to comprehend consumer better, we break down customers into various teams and we
call it “segmentation”. The most primitive means to section client is ABC analysis that groups
consumer based on sales volume or productivity.

Customize Logistics Network

When you sector customer based upon solution requirements, you could have to tailor
alternative logistics networks to serve various sector. However, this concept doesn’t
apply for all scenarios.
As an example, if you were contract manufacturer in China, you might currently have
alternative logistics networks for different clients. Each customer in United States or Europe
could already regulate source of resources, ask you to provide specialized manufacturing lines,
choose 3pl firms and air/sea carriers. So, logistics network style is sort of effort driven mostly
by client.

Align Demand Planning Across Supply Chain

Supply chain professionals are instructed to share needed data with trading partners so nobody
needs to keep unnecessary stock. In basic, this principle holds true. In reality, Walmart is
actively sharing need data to trading partners.

Differentiate Products Near to Client

Standardization is the complete opposite of differentiation. Some cosmetics manufacturers

create items and select packaging and labelling that comply with laws of multiple nations in
Asia. They just make one SKU that can be offered in 15 nations instead of 1 SKU/Country.

Outsource Tactically

Do not ever outsource your core expertise; this principle stands the test of time.

Establish IT that Support Multi-Level Decision Making

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IT job shouldn’t be performed in seclusion; business process reengineering is something that

you have to do prior to IT project. This will equip you with full understanding about procedure
insufficiencies then you can identify what sort of innovation that you really require.

Adopt both Service and Financial Metrics

Activity based costing (ABC) should be implemented so you can determine customer’s
profitability. However, there is the interesting twist about ABC concept.
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Role of Supply Chain in Business to Business Model