As businesses are sourcing raw materials from suppliers all over the world in the globalized marketplace, the concept of Supply Chain Management (SCM) has become an important consideration for firms – supply chains have simply become increasingly complex.
What is supply chain?
Supply chain is the sequence of activities from the production of a good or service to it being delivered to the end management.
It includes the systems and networks used by a business organization to move the product from the origin to the point of sale. This includes the movement of raw materials to the production facility and then on to the final consumer.
The term supply chain is also often used to refer to all businesses involved in getting products from the point of production to the final consumer: producer (manufacturer), wholesalers and retailers. With all suppliers in the supply chain are interdependent.
Example 1: The retailer of snacks is dependent on the manufacturer of chocolate bars and chocolate cakes, who in turn depends on cocoa farmers which are suppliers of materials. Retailers sell chocolate products to the final consumers in the tertiary sector. There is little need to harvest cocoa, if there is low consumer demand for chocolates. Hence, it is in the best interest of all firms in the supply chain to work collaboratively for their common benefits.
What is Supply Chain Management (SCM)?
Supply Chain Management (SCM) is the process of planning and organizing members of the supply chain and all of its activities as efficiently as possible.
Managing the network of businesses that are involved in the provision of products to the final consumer will allow to control these logistics. They must must be efficient and cost effective for a business to be profitable in the long-term
Key functions of Supply Chain Management (SCM)
Supply Chain Management (SCM) usually involves several key functions:
- Supplier networks. The business must decide which suppliers or intermediaries to use. Smooth collaboration between the partners in the supply chain can improve logistics helping to reduce costs without compromising quality.
- Stock control methods. Business managers must plan, implement and monitor the movement and storage of all stocks including raw materials, work-in-progress and finished goods. The most suitable method of stock control needs to be chosen depending on the business circumstances.
- Quality control methods. Quality must be ensured throughout all stages in the supply chain. It is because the production process adds value to attract customers to buy quality products, thereby generating profit for all businesses in the supply chain.
- Transportation. The business must decide on the most cost-effective methods of distributing products to customers. Distribution networks will depend on factors such as the cost, speed, frequency and reliability of different transportation systems. Large businesses usually have their own distribution networks, whereas small businesses typically use subcontractors and couriers.
Reasons for using Supply Chain Management (SCM)
Supply Chain Management (SCM) is an essential part of any business, but it is especially important for businesses that operate in global markets. In order to be successful, global businesses need to be able to manage complex supply chains that often involve multiple countries and different cultures.
Businesses mainly use Supply Chain Management (SCM) because of the following reasons:
- Eliminating mistakes. Effective Supply Chain Management (SCM) can prevent mistakes that can happen when things go wrong in long supply chains that would otherwise adversely affect the business.
- Preventing disruptions. Greater interdependence also means that a single problem can cause major disruptions to the entire supply chain. Partners in the supply chain can collaborate by sharing information, building trust and necessitate resources.
- Controlling supply levels. Supply Chain Management (SCM) can help to ensure that appropriate levels of stocks are hold and used to meet the level of demand from the market. Effective procedures can help to identify and prevent such bottlenecks and shortages.
- Reducing costs. Effective Supply Chain Management (SCM) will prevent the business from holding too much inventory which causes stockpiling. This is associated with additional costs. Additionally, a lack of stock will cause delays to the rest of the supply chain causing the firms in the supply chain to incur extra costs.
- Eliminating waste. Supply Chain Management (SCM) can help the firm to achieve lean production by identifying areas of wastage and inefficiency. Elimination of waste will enable to business to get maximum output for minimal input.
Example 2: Amazon.com was born in 1995 and it has become a Global Brand with over 41 million customers in more than 200 counties and 9,000 employees by 2005. The company has fairly low labor costs for such a large company which offers customers low prices, convenience and a wide range of products. To deal with the cost of delivering large quantities of products to customers, Amazon has distribution centers all over the world. As Amazon faces strong levels of competition from other online retailers such as Play.com and Ebay in the UK, Amazon continuously tries to find ways to keep ahead of the competition. One of the ways is to improve its website so that it is faster, easier and a more enjoyable shopping experience for the customer.
Maintaining supply chain efficiency
In order to ensure efficiency in the supply chain, the business will need to look at a number of areas in operations:
- Demand forecasting. Accurate forecasting customer demand helps with production and distribution planning. Therefore, it can help to improve the supply chain.
- Sourcing of raw materials. Sourcing raw materials is usually a trade-off between cost, quality and availability. Raw materials should not be located too far away, otherwise it will lead to higher transportation costs and a longer lead time.
- Supplier relationships. Working closely with suppliers and building supplier relationships are essential elements of every supply chain. When suppliers are located close physically to the main production facility and working on a Just-in-Time (JIT) basis, it could reduce average levels of stocks.
- Efficient management of orders. This is essential, if the business is to reach optimum efficiency.
- Customer communication systems. When selling directly through E-Commerce (B2B as well as B2C), the business must ensure that it has efficient communication systems.
- High quality IT hardware and software systems. These days many supply chains are managed by high quality software and hardware systems required to minimize or even eliminate any down-time.
- Efficient inventory management. An efficient stock control system is an important part of any supply chain. Efficient management of stock levels can help to reduce costs.
- Cost-effective distribution. Logistics management can make sure that the product gets to the customer as cost-effectively as possible. Efficient logistics typically requires the use of vehicle routing analysis systems.
- Suitable production locations. This mainly includes ensuring an appropriate mix of production locations in order to serve all customer markets quickly and conveniently.
Possible problems with Supply Chain Management (SCM)
There are a number of challenges that businesses face when managing their supply chains. Some of the most common problems Supply Chain Management (SCM) face include:
- Complexity. With increased globalization, global supply chains are complex and can be difficult to manage. International sourcing becomes more complex because there are more partners in the supply chain to deal with from various parts of the world, speaking in different languages and working in different time zones. Potential conflicts may delay getting the right product to the right customer in a cost-effective way.
- Interdependence. Greater interdependence among world businesses also means that a single problem in the supply chain can cause major disruptions Trust between partners in the supply chain must be built to collaborate effectively. This will necessitate sufficient time and resources.
- Sustainability. Businesses need to manage their supply chains in a sustainable way and this often requires them to invest in expensive technology to support their supply chain processes. Businesses need to Identifying and managing potential risks to their supply chains is also necessary to provide continuity.
Solving issues with Supply Chain Management (SCM)
New technologies as well as new methods of handling supply chains have allowed for ever-increasing flexibility in supply channel processes:
- Physical Distribution Management (PDM). It is carried out by specialist companies, which use logistics and computer-controlled distribution, to maximize channel efficiency and create cost-effective distribution.
- Outsourcing distribution. It means outsourcing the entire supply chain management to a specialist supply chain company when a business does not have the skills or expertise within the firm.
Despite the challenges, SCM is an essential part of any successful business. Businesses that can effectively manage their supply chains will be able to reduce costs, improve efficiency, increase customer satisfaction, and gain a competitive advantage.
Supply Chain Management (SCM) vs. Logistics
There is often some confusion between the two terms of logistics and Supply Chain Management (SCM). Let’s take a look at the differences.
* Supply Chain Management (SCM) is generally considered to have a broader focus and apply to the whole process of managing relationships with suppliers, customers and perhaps retailers. In other words, it the management of the supply chain across multiple enterprises.
* Logistics on the other hand is usually considered to refer to the procedures and processes for distributing products internally within a single company.
In summary, Supply chain management (SCM) is the process of planning, executing, and controlling the flow and transformation of goods and services from raw materials to the end customer. It involves coordinating the activities of suppliers, manufacturers, distributors, retailers, and other stakeholders to ensure that products are delivered to customers on time, in full, and at the lowest possible cost.
Because globalization has led to radical changes in supply chains, it is essential for a business to ensure that their supply chain remains competitive.
