Supply chain management

Supply chain management is the handling of the

entire production flow of goods or services—
starting from the raw components to delivering the
final product to consumers. A company creates a
network of suppliers that move the product from
raw materials suppliers to organizations that deal
directly with users.
Why is supply chain management
important?
Effective supply chain management systems minimize cost, waste and
time in the production cycle. The industry standard has become a just-in-
time supply chain where retail sales automatically signal replenishment
orders to manufacturers. Retailers can then restock shelves almost as
quickly as they sell products. One way to further improve on this process
is to analyze the data from supply chain partners to see where to improve
further.

By analyzing partner data, CIO identifies three scenarios where effective

supply chain management increases value to the supply chain cycle: 1

Identifying potential problems

When a customer orders more products than the manufacturer can

deliver, the buyer can complain of poor service. Through data analysis,
manufacturers might be able to anticipate the shortage before the buyer
is disappointed.

Optimizing price dynamically

Seasonal products have a limited shelf life. At the end of the season,
retailers typically scrap these products or sell them at deep discounts.
Airlines, hotels and others with perishable “products” typically adjust
prices dynamically to meet demand. By using analytic software, similar
forecasting techniques can improve margins, even for hard goods.

Improving the allocation of “available to promise” inventory

Analytical software tools help to dynamically allocate resources and

schedule work based on the sales forecast, actual orders and promised
delivery of raw materials. Manufacturers can confirm a product delivery
date when buyers place orders—significantly reducing incorrectly-filled
orders.
Key features of effective supply chain
management
The supply chain is the most obvious “face” of the business for customers
and consumers. The better and more effective a company’s supply chain
management is, the better it protects its business reputation and long-
term sustainability.

IDC defines supply chain management by identifying the five Cs of the

effective supply chain management of the future: 2

 Connected: Accessing unstructured data from social media,

structured data from the Internet of Things (IoT) and more
traditional data sets available through traditional enterprise
resource planning (ERP) and business-to-business (B2B) integration
tools.

 Collaborative: Improving collaboration with suppliers increasingly

means the use of cloud-based commerce networks to enable multi-
enterprise collaboration and engagement.

 Cyber-aware: Hardening systems and protecting them from cyber-

intrusions and hacks is a crucial enterprise-wide concern for the
supply chain.

 Cognitively enabled: Collating, coordinating, and conducting

decisions and actions across the chain, the AI platform serves as the
modern supply chain's control tower, enabling most of the supply
chain to be automated and self-learning.

 Comprehensive: Scaling analytics capabilities with data in real

time to ensure that insights are comprehensive and fast is critical,
as latency is unacceptable in the future supply chain.
Benefits of supply chain management

Supply chain management creates numerous benefits that translate to higher profits,
better brand image and greater competitive advantage. These include the following:

 Better ability to predict and meet customer demand.

 Better supply chain visibility, risk management and predictive capabilities.

 More accurate forecasting to support decision-making.

  Fewer process inefficiencies and less product waste.

 Improvements in quality.

 Increased sustainability, both from a societal and an environmental

standpoint.

 Lower overhead.

 Improvements in cash flow.

 More efficient logistics.

5 stages of supply chain management

Supply chain management can be broadly categorized into the following five steps or
areas:

1. Plan. Using supply chain analytics and materials management features in

enterprise resource planning (ERP) systems, organizations create
strategic plans to meet customer demand for product and avoid a bullwhip
effect.

2. Source. Organizations identify and select vendors that can supply

materials in a streamlined and efficient way according to agreements.
Supply chain collaboration starts at this stage and is important throughout
the supply chain management process.

3. Make. In this stage, products are manufactured. This includes production

scheduling, testing, ensuring compliance requirements are followed,
packing, storage and release. Multiple machines are likely to be involved,
especially for larger companies, and these increasingly use technologies
such as internet of things (IoT) and artificial intelligence (AI) to work more
efficiently.

4. Deliver. This stage pertains to logistics and focuses on getting finished

goods to consumers, in whatever manner of transportation is needed.
As the Amazon effect has grown, more focus is on doorstep delivery.
Greater emphasis is now also on supply chain leaders working more
 closely with customer service. Inventory management and warehouse
management systems are especially crucial at this stage.

5. Return. This stage includes all product returns, including defective

products and products that will no longer be supported. The return stage
also includes elements from other stages, including inventory and
transportation management.

Changing business environment

Business environment indicates the aggregate total of all people,
organisations and other forces that are outside the power of industry but
that may affect its production.
Current global and competitive business environment constantly asks for
innovation, continuously thriving for advancement in process
improvement.
Business environments are complex in nature as well as dynamic because
they are dependent upon factors like political, economic, legal,
technological, social, etc. for sustenance
Globalization has encouraged free movement of capital, goods and service
across countries.

Importance of Business Environment-

 Helps in Identifying Opportunities and Threat First Mover
Advantage
 Tapping Useful Resources
 Coping With Rapid Changes
  Assisting in Planning and Policy Formulation
 Improving Performance

Factors influencing SCM Consumer

 Consumer Demand
 Globalization
 Competition
 Information and Communication
 Government Regulation
 Environment

Traditional Supply Chain Management:

Traditional supply chains are reactive. They operate on rules based on
historical transactions. Traditional supply chains usually rely on standalone
systems which function in siloes with little or no data-sharing.

These supply chains involve processes where a product evolves from the
procurement of raw materials to production and delivery to the end
customer. Thus, the key elements of traditional supply chains are:

1. Collection of raw materials: The first step involves the collection of

raw materials required to make the final product. The raw materials
concerned could be of a single type, or may include several other
products to be collected from various sources.
2. Collection of material from the suppliers: The manufacturers must
acquire all the required raw materials to produce the ultimate finished
product.
3. Manufacturing: The manufacturer then initiates and completes all the
processes required for producing the finished product. Various
procedures may be involved like making paper, binding of papers,
covering the book, etc. and different equipment may be used for each
process. The company then packs the books together in boxes and
prepares it for shipping and delivery.
4. Distribution to the customers: A process where the finished
product, i.e. the book in this example, is distributed to the retailers.
 5. Consumption by the end customers: The last step is the purchase
of the finished products by the customer. In this example, the book
may be used for the various purposes by different people.

Disadvantages of traditional supply chains are:

1. Traditional supply chains and SCM focus only on production and

provision, not on customer needs. They also are not optimized and lack
the “intelligence” to spot problems along the value chain quickly.
2. Even after a problem is identified, predicting its likely effects and
finding a fix can require considerable time and effort. That delays
production, introduces errors, and increases the time-to-market — all of
which can harm customer satisfaction and corporate profits.
3. Limited visibility and lack of real-time data, which:
4. Complicates performance analysis and ability to identify gaps
5. Reduces accountability
6. Slows down and reduces the quality of decision-making
7. Impacts ROI
8. Less agile and responsive to changing market conditions
9. Higher cost of goods sold (COGS) and lower profits

This is how the traditional SCM system works.

Modern (Digital) Supply Chain

Management:
Today, as technology has been evolving greatly, traditional methods are
being replaced by modern ideas and strategies. With the advancement in
technology, SCM has become entirely digital and lead to a system called
Modern SCM.

In comparison to traditional supply chains, digital supply chains are dynamic

and able to adapt quickly to changing circumstances (market disruptions,
political turmoil, pandemics, and so forth). They function in real-time and are
highly agile “value networks” with integrated systems and processes.

In these supply networks, contextual, relevant, and timely data from

information technology (IT) and operational technology (OT) systems are
integrated and readily available to every process in the ecosystem.
Key Elements
The key elements that differentiate a digital supply chain from a traditional
supply chain are:

Technology
Digital supply chains incorporate modern processes, strategies, and
technologies, including:

1. Cloud computing and software-as-a-service (SaaS)

2. Artificial intelligence (AI)
3. Machine learning (ML)
4. Natural language processing (NLP)
5. Big data
6. Business intelligence
7. Virtual reality and augmented reality
8. Robotics and robotic process automation (RPA)
9. Internet of things (IoT)
10. These technologies offer automation and predictive analytics
capabilities. Organizations are better equipped to improve time-to-
market, anticipate and resolve problems quickly, shorten planning
cycles, improve decision-making, and deliver value to all stakeholders.
Digital supply chains are more resilient and adaptable to future
challenges and opportunities.

Logistics Management
Today’s supply chains leverage cutting-edge logistics management software.
Such solutions allow supply chain managers to plan, implement, control, and
optimize the flow of goods and materials; all to minimize cost and maximize
ROI.

Partnerships
Unlike traditional supply chains, digital supply chains are not standalone or
static. They are interconnected, dynamic, and agile. They focus on building
mutually beneficial partnerships and nurturing stakeholder relationships.
Digital supply chain management is about collaborating and building
alliances with supply chain partners to help optimize the entire value chain.

Customer Focus
Digital SCM is not just about bringing the product to the customer in a
transactional way. It’s also about delivering value and building long-term
customer relationships. Further, digital supply chains don’t focus on a single
node, shipment, or order optimization. Rather, they evaluate the entire
supply chain as a whole, to achieve the highest possible levels of profit,
service levels, and customer experience.
Drawbacks of Modern Supply Chain System:

1. Of course, digital supply chains are not perfect. Since they leverage
internet-enabled digital technologies, they introduce an element of
cybersecurity risk. For example, IoT sensors and smart systems are
vulnerable to cyberattacks and data breaches. Moreover, since digital
supply chains are so well-connected, an attack or threat on one part of
the network could propagate across the entire supply chain —
sometimes all the way to the customer.
 2. Another potential drawback is that upgrading your supply chain
requires significant capital expenditure. Even though the returns are
measurable, not every company can afford the initial investment in
infrastructure and resources.

These issues, however, are not insurmountable; and they should not deter
your digital transformation efforts. A sustainable supply chain plan is a must-
have to protect your supply chain ecosystem.

Traditional SCM Vs Modern SCM

Here are the key differences between both:

1. Traditional SCM focuses only on production and provision, whereas

Modern SCM focuses on the needs of the customers in general. For
example, most of the freight companies also aim to improve the value
of the product delivered to the customer, rather than just focusing on
the aspect of distribution.
2. Modern SCM allows any business organization to experience the value
in creating a partnership, whereas the traditional SCM allows listed
companies to follow a single pathway.
3. The organizations operating under Modern SCM create and provide
value to the product which is consumed by the final customer.
Whereas, traditional SCM has no such strategies to improve the value
of the finished product.
4. Modern technologies and strategies are incorporated into Modern SCM.
Whereas the traditional SCM follows the old methods. To explain
further, we can consider the example of a book that is yet to be
published. The traditional system involves the collection of raw
materials, supplying them to the manufacturer, manufacture of the
book, printing of content, packing, shipping, and delivery. The Modern
Supply Chain Management cuts down all these processes by simply
publishing an e-book.
5. Modern SCM allows faster progression than Traditional SCM. Modern
SCM enables the companies to use highly advanced and integrated
technology systems to ensure the expansion of the portfolio of the
customers which does not happen with the traditional SCM.
6. Modern SCM also utilizes logistics management which is a system that
plans, implements, and controls the forward and reverse flow of goods.
It ensures the process is effective and efficient, and also ensures the
safe delivery of the goods. Unlike Modern SCM, Traditional SCM does
not use any tool like logistics management which is used by most of
the shipping across the world today.
7. Modern SCM focuses more on building partnerships, alliances, and
collaborations. With improved relationships with the suppliers,
companies can build trust leading to long-term relationships. This has
enhanced the export and import of goods to distant places too.
Five Essential Elements of Supply Chain

Management
Though there are quite a few elements in supply chain management, we
shall discuss the five most important ones here. They are as follows –
1. Integration
Seamless collaboration and communication between different supply
chain stakeholders, like vendors, distributors, etc., and within the primary
manufacturer's different functional wings and departments is crucial. This
error-free and transparent process is known as integration.
2. Operations
The most important functionality of a supply chain is operations. The
operation provides accurate information regarding an organisation’s
inventory position, backlog orders and real-time production schedules &
production and distribution forecast.
Operations help the business to detect the upcoming probable challenges
or risks. The system works towards mitigating the same to make the
process smoother and increase profit.
The operational efficiency of a supply chain improves the profitability of
the organisation. It makes the supervisor’s work easier by helping him
determine and optimise resources for each production sequence.
3. Purchasing
Procurement of raw materials, finished components and specialised
services is an integral part of production. Procurement also determines
what goods, equipment and services must be available internally for the
organisation. These constitute the purchasing function of the supply chain
system.
This function is important because sourcing good raw materials ensures
better quality products. This function utilises the demand
forecast capability of the supply chain to optimise procurement and save
enormously in inventory, thereby saving on cost.
4. Distribution
Another important function of the supply chain system is distribution. The
ordered products or services should reach end customers within a
committed time. Successful accomplishment in this function brings
satisfaction to the client. Return of wrong or damaged products and re-
delivery of the correct ones are also functions of the distribution system.
Logistics plays an important role in this function. There is always room to
optimise and improve upon the existing logistics network. An efficient
distribution system brings in customer delight.
5. Innovation
With all the above elements in place, proper planning and innovation is
the game changer for an organisation. Innovation may be applied to any
or all the four elements: integration, operations, purchasing and
distribution. The sole purpose is to bring down the overall cost and cycle
time, thereby generating a profit and creating a happy customer base.
Demand forecasting as part of better supply chain
management

Demand forecasting is crucial to any highly effective supply chain management

strategy. Done right, it can bring about cost-savings, opportunities for growth, and
more resilience in times of economic turmoil. Here’s everything you need to know to
understand how to improve your demand forecasting capabilities.

Efficient supply chain management is an important factor in operational health at all

times, but it’s especially critical in times of economic uncertainty. It can help
businesses lower costs, boost profitability, and ensure that available working capital
is used to optimum effect. But, perhaps most importantly, it can increase supply
chain resilience – protecting against market risks and making it easier to adapt to
changing conditions.

Supply chain management comprises parts including supplier management,

sourcing, procurement, the accounts payable process, manufacturing, and the
delivery of finished products. Fundamentally, it’s all about organizing supply chain
activities to meet customer demand.

Finding ways to fine-tune your supply chain’s output to better align with demand is
one of the most effective ways to bring about operational efficiency. With the ability
to accurately forecast future demand, you can optimize supply chain activities for
revenue, consistently meet customer expectations to drive loyalty, and avoid costly
overproduction.

What is demand forecasting?

Demand forecasting is the process used by businesses to predict future demand for
a product or service. With improved demand forecasting, businesses can estimate
future demand more effectively. As a result, they can make better-informed decisions
across procurement, manufacturing, inventory management, and more.

A systematic approach is needed to create accurate and relevant forecasts. As such,

the process typically involves the following steps:

 Setting objectives
 Determining duration
 Selecting the method
 Collecting data
 Analyzing the results
There are various demand forecasting methods, but they invariably rely on data. This
can take the form of historical sales data or insights gathered through proactive
research. The more available data, the more likely it is that demand forecasting
efforts will be accurate and valuable.

Why demand forecasting is important in supply chain

management

Without effective demand forecasting as part of their supply chain management

process, businesses lack the information they need to plan procurement and
manufacturing optimally. This, in simple terms, exposes them to cash flow risks.

Accurate demand forecasting predicts the quantity of finished inventory required to

meet market demand. This means businesses can optimize their inventory
management strategy to avoid over or under-stocking, which can be costly, and
minimize inventory carrying costs.

But demand forecasting also allows for improved decision-making in other areas of
operation. Knowing how much you need to spend on inventory to meet demand
means you can more confidently make the most of whatever working capital is left
over.

It’s essential for businesses whose products feature fluctuating demand throughout
the year, whether cyclical or seasonal factors affect them. In these cases, demand
forecasting provides a much-needed insight into how to adjust supply chain activities
strategically to ensure minimized costs during downtime and maximized order
fulfillment when things are busy.

Types of demand forecasting in supply chain

management

Supply chain demand forecasting can be approached in various ways. Four of the
most popular forecasting models used in predicting demand are:

Trend projection

Trend projection is the most straightforward method of demand forecasting, involving

projecting future demand based on historical sales data. However, since this method
assumes that the factors responsible for past trends will continue in the future,
historical anomalies need to be considered, and a degree of uncertainty is inherent.
Market research

Demand can be forecasted through surveying customers or conducting other types

of primary research. This comes with the added benefit of providing insights into
customer demographics, which can be leveraged in marketing. However, collecting
and analyzing the information can be costly and time-consuming – and the results
may also be skewed by respondents’ biases or small sample sizes.

Sales force composite

The sales force composite method leverages the expertise of internal sales teams –
who are arguably closest to the market – to create a demand forecast. This
approach can provide valuable insights and may be broken down into specific
products and geographic locations. On the other hand, sales force composite
forecasts are subjective, based on individual opinions, and they come with the risk of
sales agents deliberately depressing projections in the hope that lower sales targets
will be set.

Barometric forecasting

Barometric forecasting creates a rounded demand forecast using a combination of

leading indicators (predicted future events), lagging indicators (historical data), and
coincidental indicators (indicators that rise or fall in line with economic activity).
However, this approach requires the indicators to be analyzed accurately. Variations
may hinder the forecast accuracy in the lead time between different indicators.

What Is Meant by the Purchasing of

Materials?

Purchasing of materials refers to the procurement of materials

for a price. It is usually handled by a specific department (e.g.,
purchase manager in the procurement department), particularly
in large companies.

A purchasing department can function effectively if:

 It is organized on a centralized basis

 Full co-operation between purchasing department and

other departments is assured
  A close relationship exists between the purchasing
department and the accounts department

 The purchase manager is technically qualified and

sufficiently experienced

 A proper procedure is clearly set out and strictly

adhered to

Purchasing is a critically important and specialized activity in

manufacturing companies. Materials account for a considerable
portion of production costs.

As such, the purchase manager in such a business is responsible

for spending more of its money than anyone else.

Any errors on the part of the purchase manager, therefore, may

be extremely expensive. Furthermore, purchasing sub-standard
materials will undermine product quality, cause wastage, and lead
to costly machine breakdowns.

Hence, it is fundamentally important to ensure that the function

of purchasing materials is performed effectively, efficiently, and
economically.

According to Alford and Beatty, "purchasing is the procuring of

materials, supplies, machines, tools, and services required for the
equipment, maintenance, and operation of a manufacturing
plant."

As noted above, the purchasing function is typically performed by

a separate purchasing department set up under an expert buyer
(or purchase manager). To carry out their duties effectively, the
purchase manager must know:

 What to purchase

 When to purchase

 Where to purchase

 How much to purchase

 At what price to purchase

What to Purchase
Normally, some of the spare parts and components that a
manufacturing concern requires are manufactured in the
company itself rather than being purchased externally.

The various items of stores that the purchasing department

should procure are:

 All the items of materials, stores, spares, and

components that the manufacturing concern cannot
make

 Other items that the manufacturing concern can make

but does not want to make

Decision-making in respect of the items falling under the second

category is an important function of the purchasing department.

The decision about whether to buy or produce a particular item

depends on factors such as:

 Annual requirements for the item

 Purchase frequency for the item

 Availability of spare manufacturing capacity to produce

the item

 The price advantage arising out of the comparative

cost of making and buying

 Product secrecy

The decision to give preference to buying is of the utmost

importance. Such decisions are made by the purchasing
department under the guidance of the planning department and
cost department.

When to Purchase
Materials are generally purchased as and when requisitions are
received from the stores department.

If certain items are only available during a particular season,

purchases are made during the season.
For items restricted by government regulations, the question of
when to purchase will be determined with reference to the date of
the license, quota, or permit, as the case may be.

Where to Purchase
The purchasing department generally maintains a list of approved
suppliers for various items of materials.

Whenever materials are required, purchases are made from these

suppliers after receiving their quotes.

If there are long-term requirements to purchase materials on a

regular basis in bulk, the materials are purchased from specific
suppliers only.

In the case of controlled materials, purchases are also only made

from specific suppliers.

How Much to Purchase

The quantity of materials to be purchased is another important
criterion for decision-making.

The purchase department is guided in this respect by the

purchase requisition received from the stores department.

However, in organizations that use the budgetary control

technique, the purchase budget that is prepared and approved
in advance shows the timings and quantity of purchases.

Thus, in such cases, the approved budget is the guiding factor.

Some manufacturing concerns adopt the control technique

of economic order quantity (EOQ), which indicates the
quantity and frequency of purchases. EOQ ensures that the costs
involved in purchasing materials and carrying inventory are
minimized.

At What Price to Purchase

The price to be paid is a key factor that influences the cost of
materials. In case tenders or quotations have been invited and
received, it is the responsibility of the purchasing department to
select the price at which the materials should be purchased.
Normally, in this case, the tender or quotation that offers the
lowest price is selected.

However, the terms of delivery, credit period allowed, rate of

discount, and the reliability and capacity of the supplier to
execute orders should also be considered.

If materials are supplied through a controlling authority, the

purchase manager has no option but to procure the supply at the
price fixed by the authority.

Types of
Purchasing
Purchasing of materials can be undertaken on a centralized or
decentralized basis. In either case, it is important to keep in view
the nature, size, and requirements of the business.

Centralized Purchasing
Under centralized purchasing, the authority to purchase materials
for all the departments in an organization is placed on one
individual or one department (e.g., the purchasing department
headed by a purchase manager).

Advantages of Centralized Purchasing

The main advantages of centralized purchasing are as follows:

 A uniform and firm policy can be pursued with regard

to the conditions of purchasing (e.g., terms of
payment).

 Purchasing of materials is the sole responsibility of the

purchasing department, meaning that other
departments can concentrate on production.

 Since the materials are purchased in larger quantities,

it is possible to benefit from better rates from suppliers.
  Different items of material can be standardized.

 The buying staff, by concentrating on purchasing alone,

develop specialized knowledge and skills, leading to
expertise and, in turn, economical buying.

 Centralized purchasing facilitates the maintenance of

one complete set of records for purchase
transactions, enabling management to exercise
better control over purchases.

 Centralized purchasing helps to coordinate purchasing

activities and, by placing authority for purchasing on
one person, avoids duplication and overlap.

 Centralized purchasing helps to control inventories and

avoid excessive investment in materials.

Disadvantages of Centralized Purchasing

Centralized purchasing also has several well-defined limitations,
including:

 The procedure used to purchase materials is not

flexible, which may lead to delays in obtaining supplies.

 Setting up a separate purchasing department leads to

high administration costs.

Decentralized Purchasing
Under decentralized purchasing (also known as localized
purchasing), the authority to purchase materials is placed in the
hands of more than one individual or department.

Under this system, each departmental head makes purchases for

their own department.

Advantages of Decentralized Purchasing

Decentralized purchasing is beneficial for the following reasons:

 It enables flexibility in the purchase routine, thereby

helping to avoid procurement delays.
  Under decentralized purchasing, no specialized buying
team is appointed, which reduces administration costs.
 Decentralized purchasing is more efficient than
centralized purchasing because each departmental
head can assess their department's requirements and
problems most effectively.

Disadvantages of Decentralized Purchasing

Decentralized purchasing also suffers from the following
disadvantages:

 Decentralized purchasing is not economical because

materials are purchased in smaller lots (as such,
volume discounts or favorable purchase terms cannot
be obtained).

 Lacks a uniform policy for the purchasing of materials.

 Different prices may be paid for the same materials by

different departments.

 Expert buying staff cannot be engaged for each

department of the organization.

 There is no coordination among departments, which

can lead to duplication and overlap.

 The heads of various operating departments, in being

responsible for purchasing materials, cannot
concentrate fully on their routine duties.

Standard Purchase Orders

A standard purchase order is used when businesses order something for

one time. In other words, if your company wants some goods or services
infrequently, irregularly, or once after a long time, you can make use of
this type of PO. Companies also use it when they order things one time
from different suppliers.

For instance, if a new company needs to set up its office and requires
tables, chairs, and other utilities, a standard purchase order can be used
to order them from a vendor.
Planned Purchase Orders
Planned purchase orders (PPOs) are thoroughly planned and essential for
maintaining a business's pace. Similar to standard POs, every detail of the
product, delivery, and cost is mentioned, but the delivery and payment
dates are tentative. The most crucial aspect of PPOs is the time of issuing
a release against the PPO.

Looking at a planned purchase order example, let's assume that your

retail business that needs a specific item in 1200 quantities in a year,
makes an agreement with a supplier. As a buyer you can issue a release
order against the PPO after selling 100 items in a month to avoid running
out of stock.

Blanket Purchase Orders

In a blanket purchase order (BPO), the delivery location and exact delivery
date are excluded, and item quantity and sometimes item prices are also
not mentioned. Only the types of items are specified. After establishing a
BPO with a supplier, the buyer can issue a release against the contract
whenever they need the specified items, mentioning the item quantity,
price, delivery location, and time.

BPOs are used when a business is unsure of the amount of use of a

particular item in the future. For example, if you have a printing shop, you
will not know when the cartridge will run out as printing demands don't
stay the same throughout the year.

Contract Purchase Orders

This type of purchase order is the simplest form as it does not specify
anything in detail, such as item quantity, date, time, delivery location,
rate, and not even the type of items. It is an agreement to build a
commercial relationship between the seller and the buyer, and orders will
likely be placed based on future needs.
What Is Material Management?
Material Management is a system that effectively controls and manages
materials and supplies used in an organization. The goal of material
management is to ensure that the right materials are available at the right
time and in the right quantities, to support the production process and meet
customer demand.

Here are some key points to consider when exploring material management:

 Material management plays a crucial role in the success of an organization by

ensuring that materials are available when needed and in the right quantities.
 It helps to minimize waste and reduce costs by ensuring no over-stocking or
under-stocking of materials.
 It helps to improve customer satisfaction by ensuring that orders are delivered
on time and with the correct items.
 The critical components of material management include material
planning, procurement, inventory control, and distribution.
 Material planning involves forecasting demand, determining the materials
needed, and developing a plan to acquire those materials.
 Procurement involves sourcing and purchasing materials from suppliers.
 Inventory control involves managing the flow of materials into and out of the
organization and monitoring inventory levels to ensure they remain within
acceptable limits.
 Distribution involves the physical movement of materials from the organization
to the customer.

Types of Material Management

The following are the different types of material management:

 Inventory Management

Inventory management involves the maintenance of a company's stock

of raw materials, semi-finished goods, and finished products. It includes
identifying the optimal inventory level to be maintained, determining
the reorder points, and ensuring that the inventory is stored correctly.

Inventory management aims to strike a balance between the costs of holding

too much inventory and the costs of running out of stock.

 Purchasing Management

Purchasing management involves procuring raw materials, supplies, and

services required for production. It consists of the selection of suppliers,
negotiation of prices, preparation of purchase orders, and management of
supplier relationships.

The objective of purchasing management is to buy the required materials at

the best possible price and quality while ensuring timely delivery.
  Warehouse Management

Warehouse management involves the storage and handling of materials, as

well as the management of the physical movement of goods within a
warehouse. It includes receiving, storing, and shipping materials, as well as
managing inventory levels and the location of materials within the warehouse.

The goal of warehouse management is to optimize the use of space and

minimize the cost of storing and handling materials.

 Material Requirements Planning (MRP)

Material Requirements Planning (MRP) is a computer-based inventory

management system used to plan production schedules and manage the
procurement of materials.

MRP considers the lead time for ordering materials, the time required for
production, and the inventory levels of materials. MRP aims to ensure that
suitable materials are available at the right time and in the correct quantity to
meet production needs.

 Transportation Management

Transportation management involves the physical movement of materials

from one location to another. It includes the selection of carriers, negotiation
of freight rates, preparation of shipping documents, and management of
delivery schedules. Transportation management aims to ensure that the
materials are delivered on time and at the lowest possible cost.

Objectives Of Material Management

The following are the five primary objectives of material management:

 Right Material

The first objective of material management is to ensure that suitable

materials are available for production. It involves identifying the materials
required for production and ensuring that they are of the correct quality,
specification, and quantity.

By ensuring that the right materials are available, companies can minimize
the risk of production delays and ensure customer satisfaction.

 Right Time

The second objective of material management is to ensure that the right

materials are available at the right time. It involves managing the movement
of materials within the warehouse, reducing lead times, and improving the
efficiency of delivery processes.
  Right Amount

The third objective of material management is to ensure that the right

amount of materials are available for production. It involves determining the
optimal inventory level to maintain and implementing processes to manage
the movement of materials within the warehouse.

By ensuring that the right amount of materials are available, companies can
minimize the risk of stock shortages, reduce the cost of storage and handling,
and increase efficiency.

 Right Price

The fourth objective of material management is to ensure that materials are

purchased at the right price. It involves negotiating with suppliers to obtain
the best possible prices and implementing cost-saving measures, such as
reducing waste, reducing lead times, and improving the efficiency of delivery
processes.

 Right Sources

The fifth objective of material management is to ensure that materials are

sourced from the right sources. It involves identifying reliable
suppliers, developing partnerships with suppliers, and ensuring that materials
are purchased from approved suppliers only.

By sourcing materials from the right sources, companies can reduce the risk
of defective materials, minimize the risk of production delays, and ensure
customer satisfaction.

Importance of Material Management

 Cost Reduction

One of the primary objectives of material management is to reduce the cost

of materials. It includes reducing the cost of purchasing materials, as well as
reducing the cost of storing and handling materials.

Cost reduction can be achieved through effective planning, procurement, and

storage processes, as well as through implementing cost-saving measures
such as reducing waste, reducing lead times, and improving the efficiency of
delivery processes.

 Improved Quality

Another objective of material management is to improve the quality of

materials and products. This includes ensuring that the materials and
products used in the production meet specified standards of quality and
implementing processes to prevent defects.
Improving the quality of materials and products can help ensure customer
satisfaction, improve the company's reputation, and reduce the cost of rework
and warranty claims.

 Timely Delivery

A third objective of material management is to ensure the timely delivery of

materials and products. This includes ensuring that the right materials are
available at the right time and in the right quantity to meet production needs
and implementing processes to prevent delays in the delivery of materials.

Timely delivery is critical to any business's success and can help improve
customer satisfaction, reduce inventory costs, and improve production
process efficiency.

 Inventory Optimization

Another objective of material management is to optimize inventory levels.

This includes determining the optimal inventory level to maintain and
implementing processes to manage the movement of materials within the
warehouse.

Inventory optimization can help to reduce the cost of storage and handling
and minimize the risk of stock shortages or obsolescence.

 Efficient Supply Chain

A final objective of material management is to ensure the efficiency of

the supply chain. This includes reducing lead times, improving the efficiency
of delivery processes, and optimizing the movement of materials within the
warehouse.

An efficient supply chain can help to reduce the cost of materials, improve
customer satisfaction, and increase the competitiveness of the business.

What Does A Material Manager Do?

A material manager oversees the procurement, storage, and delivery of
materials required for production. This professional plays a vital role in
ensuring the efficiency and success of a company's supply chain. The
following are the main tasks and responsibilities of a material manager:

1. Facility Management

A material manager is also responsible for managing the facilities used for
storing and handling materials. This includes ensuring that storage areas are
secure, accessible, and compliant with safety regulations.
A material manager must also be able to manage the maintenance of
facilities to ensure that they are in good condition and ready for use at all
times.

2. Inventory Management

A material manager is also responsible for managing the movement and

storage of materials within the warehouse. This involves determining the
optimal level of inventory to be maintained, monitoring stock levels, and
ensuring that materials are stored safely and efficiently.

3. Operations Management

A material manager ensures that operations are running smoothly and

efficiently. This involves coordinating with production and logistics teams,
monitoring performance metrics, and ensuring that materials are delivered to
production on time and in the correct condition.

4. Production Planning

A material manager is also responsible for supporting production planning by

ensuring materials are available when needed. This involves managing
inventory levels, monitoring lead times, and ensuring that materials are
delivered to production in the proper condition.

5. Cost Management

A material manager is responsible for managing the cost of materials,

including reducing the cost of purchasing materials and reducing the cost of
storage and handling. This involves negotiating prices with suppliers, reducing
lead times, and improving the efficiency of delivery processes.

Material Management Best Practices

Here are some best practices that organizations can follow to ensure the
effective and efficient management of their materials:

1. Develop a comprehensive material management plan: A

comprehensive materials management plan outlines the goals, objectives, and
strategies for managing materials. This plan should be developed in
collaboration with stakeholders such as suppliers, production teams, and
logistics providers.
2. Implement inventory management practices: Inventory management
involves tracking and managing the flow of materials to ensure that the right
materials are available at the right time. This can be achieved by using tools
such as inventory software, barcoding systems, and real-time monitoring
systems.
3. Maintain strong supplier relationships: Strong supplier relationships are
critical to the success of materials management. Organizations should work
 closely with suppliers to ensure that materials are delivered on time, to the
correct specifications, and at a competitive price.
4. Continuously monitor and analyze data: Data analysis is a critical
component of materials management. Organizations should collect and
analyze data on materials consumption, supplier performance, and inventory
levels to identify trends and make informed decisions.
5. Adopt digital technologies: Digital technologies such as artificial
intelligence, machine learning, and the Internet of Things can significantly
improve materials management processes. Organizations should adopt these
technologies to automate and streamline their operations, reduce costs, and
improve decision-making.
6. Foster a culture of continuous improvement: Continuous improvement is
critical to the success of materials management. Organizations should
regularly review their materials management processes and make changes to
improve efficiency, reduce waste, and enhance customer satisfaction.

Challenges in Material Management

Materials management is a critical function that involves procurement,
storage, and delivery of materials required for production. Despite its
importance, materials management is not without its challenges. The
following are some of the critical challenges faced by materials managers:

 Supply Chain Management

One of the biggest challenges in materials management is managing the

complex supply chain. This involves coordinating with suppliers, logistics
providers, and production teams to ensure that materials are delivered on
time and to the correct specifications. Materials managers must also be able
to respond quickly to changes in demand and adjust the supply chain
accordingly.

 Cost Control

Cost control is another major challenge in materials management. A material

manager must be able to negotiate prices with suppliers, manage logistics
costs, and ensure that materials are purchased at the best possible prices.

 Quality Control

Ensuring materials meet the required quality standards is another key

challenge in materials management. A material manager must be able to
work with suppliers to ensure that materials are manufactured to the correct
specifications and delivered in the correct condition.

 Data Management

Managing data is another major challenge in materials management. A

material manager must be able to track and manage large amounts of data,
including supplier information, logistics information, and production
information.

Future Trends in Material Management

Material management is an ever-evolving field that is being impacted by new
technologies, changing customer demands, and the growing complexity of
the supply chain. The following are some of the key trends that are shaping
the future of materials management:

 Digital Transformation

Digital transformation is one of the most critical trends in material

management. This involves using new technologies such as artificial
intelligence, machine learning, and the Internet of Things to automate and
streamline materials management processes.

Digital transformation is helping materials managers to make more informed

decisions, reduce costs, and improve the speed and accuracy of their
operations.

 Sustainability

Sustainability is another key trend in materials management. This involves

reducing the environmental impact of materials management processes and
ensuring that materials are sourced, manufactured, and delivered
environmentally and sustainably.

This is becoming increasingly important as consumers and businesses

become more conscious of their environmental impact and demand
sustainable products and services.

 Collaboration

Collaboration is another significant trend in materials management. This

involves working more closely with suppliers, logistics providers, and
production teams to ensure that materials are delivered on time and to the
correct specifications. Collaboration helps materials managers to reduce
costs, improve delivery times, and enhance the overall efficiency of the
supply chain.

 Predictive Analytics

Predictive analytics is another key trend in materials management. This

involves using data to predict future demand and adjust materials
management processes accordingly. Predictive analytics is helping materials
managers to reduce waste, improve inventory management, and enhance the
overall efficiency of the supply chain.
  Blockchain

Blockchain is another trend in materials management. This involves using

blockchain technology to create a secure and transparent supply chain.
Blockchain is helping materials managers to reduce costs, increase
transparency, and improve the security of the supply chain.

What is Just-in-Time (JIT)?

Just-in-time, or JIT, is an inventory management method in which

goods are received from suppliers only as they are needed. The

main objective of this method is to reduce inventory holding costs

and increase inventory turnover.

Importance of just-in-time
Just in time requires carefully planning the entire supply chain

and usage of superior software in order to carry out the entire

process till delivery, which increases efficiency and eliminates the

scope for error as each process is monitored. Here are some of

the important effects of a just-in-time inventory management

system:

Reduces inventory waste

A just-in-time strategy eliminates overproduction, which happens

when the supply of an item in the market exceeds the demand

and leads to an accumulation of unsalable inventories. These

unsalable products turn into inventory dead stock, which

increases waste and consumes inventory space. In a just-in-time

system you order only what you need, so there’s no risk of

accumulating unusable inventory.

Decreases warehouse holding cost

Warehousing is expensive, and excess inventory can double your

holding costs. In a just-in-time system, the warehouse holding

costs are kept to a minimum. Because you order only when your

customer places an order, your item is already sold before it

reaches you, so there is no need to store your items for long.

Companies that follow the just-in-time inventory model will be

able to reduce the number of items in their warehouses or

eliminate warehouses altogether.

Gives the manufacturer more control

In a JIT model, the manufacturer has complete control over the

manufacturing process, which works on a demand-pull basis. They

can respond to customers’ needs by quickly increasing the

production for an in-demand product and reducing the production

for slow-moving items. This makes the JIT model flexible and able

to cater to ever-changing market needs. For example, Toyota

doesn’t purchase raw materials until an order is received.

Local sourcing
Since just-in-time requires you to start manufacturing only when

an order is placed, you need to source your raw materials locally

as it will be delivered to your unit much earlier. Also, local

sourcing reduces the transportation time and cost which is

involved. This in turn provides the need for many complementary

businesses to run in parallel thereby improving the employment

rates in that particular demographic.

Smaller investments
In a JIT model, only essential stocks are obtained and therefore

less working capital is needed for finance procurement. Therefore,

because of the less amount of stock held in the inventory, the

organization’s return on investment would be high. The Just-in-

time models uses the “right first time” concept whose meaning is

to carry out the activities right the first time when it’s done,

thereby reducing inspection and rework costs

How does just-in-time work?

Drawbacks of just-in-time
Even though the just-in-time model saves a lot of costs for

businesses that use it, it also has a few drawbacks:

1. Just-in-time makes it very difficult to rework orders, as the

inventory is kept to a bare minimum and only based on the

customers’ original orders.

2. The model is dependent on suppliers’ performance and

timeliness, which are hard to ensure. Additionally, the

manufacturer needs to be able to cover any sudden increases in

the price of raw materials, since they cannot wait to order during

better pricing.

3. Since the JIT model requires a lot of shipping back and forth

between the supplier, manufacturer, and customer, it can have

detrimental effects on the environment due to over consumption

of fossil fuels and packaging.

4. In case of disruptions, a JIT model can have a major impact on

the business. Since there is no excess stock to fall back on, sales

may come to a halt.

5. A just-in-time system needs to be carefully tracked and

organized, which will be hard if you are doing it manually.

What is vendor management?

Vendor management is a term that describes the processes organizations use to

manage their suppliers, who are also known as vendors. Vendor management
includes activities such as selecting vendors, negotiating contracts, controlling costs,
reducing vendor-related risks and ensuring service delivery.

Vendor management benefits

 Improve vendor selection

  Harness cost savings
 Speed up vendor onboarding
 Reduce the risk of supply chain disruption
 Strengthen supplier relationships
 Negotiate better rates

Vendor management process

The vendor management process includes a number of different activities, such as:

 Selecting vendors. The vendor selection process includes researching and

sourcing suitable vendors and seeking quotes via requests for quotation
(RFQs) and requests for proposal (RFPs), as well as shortlisting and selecting
vendors. While price will inevitably be a consideration during the selection
process, companies will also need to evaluate other factors when deciding
which vendors to appoint for a particular contract, such as a vendor’s
reputation, capacity and track record, as well as the vendor’s ability to
communicate effectively.
 Contract negotiation. It’s important to get the contract right at the outset and
to ensure the terms agreed benefit both parties. Negotiating a contract can
take time, and the process will include defining the goods or services that will
be included, the start and end dates of the arrangements and all essential
terms and conditions. Attention may also need to be paid to areas such as
confidentiality and non-compete clauses.
 Vendor onboarding. This will involve gathering the documentation and
information needed to set the vendor up as an approved supplier to the
company and ensure that the vendor can be paid for the goods or services
they provide. As well as essential contact and payment information, the
onboarding process may also include information such as relevant licenses
held by the vendor, as well as tax forms and insurance details.
 Monitoring vendor performance. As part of the vendor management
process, companies will monitor and evaluate the performance of their
vendors. This may include evaluating their performance against key
performance indicators (KPIs) such as quality and volume of goods or delivery
dates.
 Monitoring and managing risk. Vendors should be monitored for risks that
could impact the company, such as the risk of compliance breaches, lawsuits,
data security issues and loss of intellectual property. Companies will also
need to monitor the risk that a vendor’s actions or a failure to provide goods
and services as agreed may result in disruption to the company’s operations.
 Payment. Ensuring vendors are paid on time for the goods and services they
provide, in line with the agreed terms.