BACKGROUND IMAGE: iSTOCK/GETTY IMAGES
Supply chain management (SCM) is the broad range of activities required to plan, control and execute a product's flow, from acquiring raw materials and production through distribution to the final customer, in the most streamlined and cost-effective way possible.
SCM encompasses the integrated planning and execution of processes required to optimize the flow of materials, information and financial capital in the areas that broadly include demand planning, sourcing, production, inventory management and storage, transportation -- or logistics -- and return for excess or defective products. Both business strategy and specialized software are used in these endeavors to create a competitive advantage.
Supply chain management is an expansive, complex undertaking that relies on each partner -- from suppliers to manufacturers and beyond -- to run well. Because of this, effective supply chain management also requires change management, collaboration and risk management to create alignment and communication between all the entities.
In addition, supply chain sustainability -- which covers environmental, social and legal issues, in addition to sustainable procurement -- and the closely related concept of corporate social responsibility -- which evaluates a company's effect on the environment and social well-being -- are areas of major concern for today's companies.
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 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 (SCV) efforts across the supply chain network of partners, to name just a few.
Benefits of supply chain management
Supply chain management produces benefits such as new efficiencies, higher profits, lower costs and increased collaboration. SCM enables companies to better manage demand, carry the right amount of inventory, deal with disruptions, keep costs to a minimum and meet customer demand in the most effective way possible. These SCM benefits are achieved through the appropriate strategies and software to help manage the growing complexity of today's supply chains.
Importance of supply chain management
The impact of benefits, such as those discussed above, are what make SCM important to both the enterprise and consumer.
SCM activities can improve customer service. Effective supply chain management has the ability to ensure customer satisfaction by making certain the necessary products are available at the correct location at the right time. SCM can also increase customer satisfaction by delivering products to consumers on time and providing fast service and support whenever needed. By increasing customer satisfaction levels, enterprises are able to build and improve customer loyalty, making the boost in customer service important for both the customer and business.
SCM also provides a major advantage for companies by decreasing the overall operating costs. SCM activities can reduce purchasing cost, production cost and total supply chain cost. By lessening operating costs, SCM is also able improve a company's financial position. The reduced supply chain costs can greatly increase a business's profits and cash flow. Furthermore, SCM can diminish the use of large fixed assets -- such as warehouses and transportation vehicles -- by allowing supply chain experts to redesign their network in order to properly serve and operate with five warehouses instead of eight, reducing the cost of owning an additional three facilities.
The lesser known importance of SCM can be found in its critical role in society. SCM can help ensure human survival by improving healthcare, protecting humans from climate extremes and sustaining human life. Humans rely on supply chains to deliver necessities like food and water as well as medicines and healthcare. The supply chain is also vital to the delivery of electricity to homes and businesses, providing the energy needed for light, heat, air conditioning and refrigeration.
SCM can also improve the overall quality of life by fostering job creation, providing a foundation for economic growth and improving standards of living. A multitude of job opportunities are opened up since supply chain professionals design and control all of the supply chains in a society as well as manage inventory control, warehousing, packaging and logistics. Furthermore, one commonality between most poor nations is their lack of a developed supply chain. Societies with strong, developed supply chain infrastructures -- such as large railroad networks, interstate highway systems and an array of airports and modern ports -- can efficiently exchange goods a lower costs, allowing consumers to buy more products, thus providing economic growth and increasing the standard of living in the respective society.
Supply chain complexity
The most basic version of a supply chain includes a company, its suppliers and the customers of that company. The chain could look like this: raw material producer, manufacturer, distributor, retailer and retail customer.
A more complex, or extended, supply chain will likely include a number of suppliers and suppliers' suppliers, a number of customers and customers' customers -- or final customers -- and all the organizations that offer the services required to effectively get products to customers, including third-party logistics providers, financial organizations, supply chain software vendors and marketing research providers. These entities also use services from other providers.
The totality of these organizations, which evokes the metaphor of an interrelated web rather than a linear chain, gives insight into why supply chain management is so complex. That complexity also hints at the types of issues that can arise, from demand management issues, such as a release of a new iPhone that chokes demand for old iPhone cases; to natural supply chain disruptions, such as the halt of transportation in the U.S. in 2015 due to extreme winter weather, or California's drought and its effect on crops; to political upheaval, such as the strikes in India that throttled movement at its largest container port.
The role of supply chain management software
Technology is critical in managing today's supply chains, and ERP vendors offer modules that focus on relevant areas. There are also business software vendors that focus specifically on SCM. A few important areas to note include:
- Supply chain planning software for activities such as demand management.
- Supply chain execution software for activities such as day-to-day manufacturing operations.
- Supply chain visibility software for tasks such as spotting and anticipating risks and proactively managing them.
- Inventory management software for tasks such as tracking and optimizing inventory levels.
- Logistics management software and transportation management systems for activities such as managing the transport of goods, especially across global supply chains.
- Warehouse management systems for activities related to warehouse operations.
The increasingly global nature of today's supply chains and the rise of e-commerce, with its focus on nearly instant small deliveries straight to consumers, are posing challenges, particularly in the area of logistics and demand planning. A number of strategies -- such as lean -- and newer approaches -- such as demand-driven material requirements planning -- may prove helpful.
Technology -- especially big data, predictive analytics, internet of things (IoT) technology, supply chain analytics, robotics and autonomous vehicles -- is also being used to help solve modern challenges, including in the areas of supply chain risk and disruption and supply chain sustainability.
As just two examples, IoT can help with transparency and traceability to help boost food quality and safety by using sensors to monitor the temperature of perishable food while it's in transit. And analytics can help determine where to put smart lockers in densely populated areas to cut the number of single-item deliveries and lower greenhouse gas emissions.