What Is Supply Chain Management (SCM)?

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.

KEY TAKEAWAYS

• Supply chain management (SCM) is the centralized management of the flow of goods and services and includes
all processes that transform raw materials into final products.
• By managing the supply chain, companies can cut excess costs and deliver products to the consumer faster and
more efficiently.
• Good supply chain management keeps companies out of the headlines and away from expensive recalls and
lawsuits.
• The five most critical elements of SCM are developing a strategy, sourcing raw materials, production, distribution,
and returns.
• A supply chain manager is tasked with controlling and reducing costs and avoiding supply shortages.

5 Parts of SCM

Planning

To get the best results from SCM, the process usually begins with planning to match supply with customer and
manufacturing demands. Firms must predict what their future needs will be and act accordingly. This relates to raw
materials needed during each stage of manufacturing, equipment capacity and limitations, and staffing needs along the
SCM process. Large entities often rely on ERP system modules to aggregate information and compile plans.

Sourcing

Efficient SCM processes rely very heavily on strong relationships with suppliers. Sourcing entails working with vendors to
supply the raw materials needed throughout the manufacturing process. A company may be able to plan and work with a
supplier to source goods in advance. However, different industries will have different sourcing requirements. In general,
SCM sourcing includes ensuring:

• the raw materials meet the manufacturing specification needed for the production of goods.
• the prices paid for the goods are in line with market expectations.
• the vendor has the flexibility to deliver emergency materials due to unforeseen events.
• the vendor has a proven record of delivering goods on time and in good quality.

Supply chain management is especially critical when manufacturers are working with perishable goods. When sourcing
goods, firms should be mindful of lead time and how well a supplier can comply with those needs.

Manufacturing

At the heart of the supply chain management process, the company transforms raw materials by using machinery, labor,
or other external forces to make something new. This final product is the ultimate goal of the manufacturing process,
though it is not the final stage of supply chain management.

The manufacturing process may be further divided into sub-tasks such as assembly, testing, inspection, or packaging.
During the manufacturing process, a firm must be mindful of waste or other controllable factors that may cause deviations
from original plans. For example, if a company is using more raw materials than planned and sourced for due to a lack of
employee training, the firm must rectify the issue or revisit the earlier stages in SCM.

Delivering

Once products are made and sales are finalized, a company must get the products into the hands of its customers.
The distribution process is often seen as a brand image contributor, as up until this point, the customer has not yet
interacted with the product. In strong SCM processes, a company has robust logistic capabilities and delivery channels to
ensure timely, safe, and inexpensive delivery of products.

This includes having a backup or diversified distribution methods should one method of transportation temporarily be
unusable. For example, how might a company's delivery process be impacted by record snowfall in distribution center
areas?

Returning

The supply chain management process concludes with support for the product and customer returns. Its bad enough that
a customer needs to return a product, and its even worse if its due to an error on the company's part. This return process
is often called reverse logistics, and the company must ensure it has the capabilities to receive returned products and
correctly assign refunds for returns received. Whether a company is performing a product recall or a customer is simply
not satisfied with the product, the transaction with the customer must be remedied.

Many consider customer returns as an interaction between the customer and the company. However, a very important
part of customer returns is the intercompany communication to identify defective products, expired products, or non-
conforming goods. Without addressing the underlying cause of a customer return, the supply chain management process
will have failed, and future returns will likely persist.

SCM vs. Supply Chains

A supply chain is the network of individuals, companies, resources, activities, and technologies used to make and sell 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 touchpoint 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.

Types of Supply Chain Models

Supply chain management does not look the same for all companies. Each business has its own goals, constraints, and
strengths that shape what its SCM process looks like. In general, there are often six different primary models a company
can adopt to guide its supply chain management processes.

• Continuous Flow Model: One of the more traditional supply chain methods, this model is often best for mature
industries. The continuous flow model relies on a manufacturer producing the same good over and over and
expecting customer demand will little variation.

• Agile Model: This model is best for companies with unpredictable demand or customer-order products. This
model prioritizes flexibility, as a company may have a specific need at any given moment and must be prepared
to pivot accordingly.
• Fast Model: This model emphasizes the quick turnover of a product with a short life cycle. Using a fast chain
model, a company strives to capitalize on a trend, quickly produce goods, and ensure the product is fully sold
before the trend ends.
• Flexible Model: The flexible model works best for companies impacted by seasonality. Some companies may
have much higher demand requirements during peak season and low volume requirements in others. A flexible
model of supply chain management makes sure production can easily be ramped up or wound down.
• Efficient Model: For companies competing in industries with very tight profit margins, a company may strive to
get an advantage by making their supply chain management process the most efficient. This includes utilizing
equipment and machinery in the most ideal ways in addition to managing inventory and processing orders most
efficiently.
• Custom Model: If any model above doesn't suit a company's needs, it can always turn towards a custom model.
This is often the case for highly specialized industries with high technical requirements such as an automobile
manufacturer.

https://www.investopedia.com/terms/s/scm.asp