Supply chain management (SCM) is the broad range of activities required to plan, control and execute a product's flow from materials to production to distribution in the most economical way possible.
SCM encompasses the integrated planning and execution of processes required to optimize the flow of materials, information and capital in functions that broadly include demand planning, sourcing, production, inventory management and logistics -- or storage and transportation. Companies use both business strategy and specialized software in these endeavors to create a competitive advantage.
Supply chain management is an expansive and 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 participants.
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.
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 choosing effective strategies and appropriate software to manage the growing complexity of today's supply chains.
Importance of supply chain management
SCM has significant impacts on both the enterprise and the consumer.
Supply chain management activities can improve customer service. Done effectively, they have the ability to ensure customer satisfaction by making certain the necessary products are available at the correct location at the right time. By increasing customer satisfaction levels, enterprises are able to build and improve customer loyalty.
SCM also provides a major advantage for companies by decreasing operating costs. SCM activities can reduce the cost of purchasing, production and the total supply chain. Lowering costs improves a company's financial position by increasing profit and cash flow. Furthermore, following supply chain management best practices can minimize overuse of large fixed assets -- such as warehouses and vehicles -- by allowing supply chain experts to redesign their network, for example, to maintain customer service levels while operating five warehouses instead of eight, reducing the cost of owning three extra facilities.
Perhaps lesser known and underappreciated is SCM's critical role in society. SCM can help ensure human survival by improving healthcare, protecting people from climate extremes and sustaining life. People 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 quality of life by fostering job creation, providing a foundation for economic growth and improving standards of living. It provides a multitude of job opportunities, 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, a common feature of most poor nations is their lack of developed supply chains. Societies with strong, developed supply chain infrastructures -- such as large railroad networks, interstate highway systems and an array of airports and seaports -- can efficiently exchange goods at lower costs, allowing consumers to buy more products, thus providing economic growth and increasing the standard of living.
Supply chain management processes
Each major phase of a product's movement through the supply chain -- from materials to production and distribution -- has its own distinct business processes and disciplines. Most of them began decades ago as paper-based methods but now are usually handled in specialized software.
The SCM process starts with figuring out what products customers want -- the early stages of supply chain planning, traditionally considered one of the two overarching categories of SCM, along with supply chain execution.
Supply chain planning starts with demand planning, a process for gathering historical data, such as past sales, and applying analytics and statistical modeling to create a forecast or demand plan that the sales department and operational departments -- such as manufacturing and marketing -- can agree on. The forecast determines the types and quantities of products to be manufactured. Some companies perform demand planning as part of a formalized process called sales and operations planning (S&OP), which prescribes an iterative process of data gathering, discussion, reconciling of demand plans with production plans and management approval. Some companies include S&OP in a broader process called integrated business planning (IBP) that incorporates other departments' plans in a single, companywide plan.
In the next major step, production planning, the company nails down the specifics of where and how the products called for in the demand plan will be manufactured. (Production planning is also used in other industries, such as agriculture and oil and gas.) A more fine-tuned variation -- typically automated in specialized software -- called advanced planning and scheduling seeks to optimize the resources that go into production and make them more responsive to changes in demand.
Material requirements planning (MRP) is a process dating back to the '60s that most manufacturers use to ensure sufficient materials and components (such as subassemblies) are available for use in the manufacturing process by taking inventory of what's on hand, identifying gaps and buying or making the remaining items. The central document in both MRP and production planning is the bill of materials (BOM), a complete list of the items needed to make a product.
MRP is sometimes done as part of manufacturing resource planning (MRP II) which broadens the MRP concept to other departments such as HR and finance. MRP and MRP II were the predecessors of enterprise resource planning (ERP) software, which is designed to integrate the major business processes of companies in any industry.
Two complex processes play important roles in most of the major steps of SCM: inventory management and logistics. Inventory management consists of various techniques and formulas for ensuring adequate supply -- from raw materials in a manufacturing plant, perhaps managed in an MRP system, to packaged goods in a retail store -- for the least expenditure of time and resources. Manufacturers are faced with a variety of inventory management issues, many of which involve coordinating demand planning with inventory at both ends of the production process. For example, sometimes material requirements planning leads to more inventory, especially when the system is first implemented and the manufacturer must work to synchronize MRP parameters with the inventory already on hand.
Logistics is everything having to do with transporting and storing goods from the start of the supply chain, with delivery of parts and materials to manufacturers, to delivery of finished products to stores or direct to consumers and even beyond for product servicing, return and recycling -- a process called reverse logistics. Inventory management is threaded throughout the logistics process.
Procurement, sometimes called sourcing, is the process of finding suppliers for goods, managing those relationships, and acquiring the goods economically -- along with all the communication, such as sending out requests for bids, and paperwork, including purchase orders, invoices, etc. It is a major component of supply chain management, given how much is bought and sold at all points along the chain. Most players in the supply chain -- suppliers, manufacturers, distributors and retailers -- have dedicated procurement staff.
Strategic sourcing is an elevated and more sophisticated type of procurement that aims to optimize a company's sourcing process by taking advantage of its consolidated purchasing power and align it with overall business goals.
Supplier relationship management (SRM), in contrast, addresses sourcing issues by focusing on the suppliers the company deems most critical to success and systematically strengthening relationships with them while fostering optimal performance.
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 (3PLs), 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 planning 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 due to extreme winter weather or droughts that kill crops, to political upheaval, such as labor strikes that throttle movement at a country's container ports.
In response, companies increasingly use supply chain risk mitigation strategies, such as shoring up communication with critical suppliers and analyzing their financial stability. Some are employing specialized supply chain management tools to automate monitoring and assessment of risk.
Supply chain sustainability is the umbrella term for the strategies that organizations use to ensure their supply chains are sustainable and can withstand the risks coming from many quarters, be they financial, social, environmental or political. Regulatory compliance issues have grown as supply chains have become more global, and trading partners face a hodgepodge of local laws. Despite the need, the market in specialized supply chain sustainability software is fragmented, and most companies use other tools and processes to address the problem.
Logistics vs. supply chain management
The terms supply chain management and logistics are often confused or used synonymously. However, logistics is just one -- albeit vital -- 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 efforts across the supply chain network of partners, to name just a few.
Learn the basics of logistics in this one-minute video.
The role of SCM software
Technology is critical in managing today's supply chains, and every major supply chain management process has a software category dedicated to it. Most vendors of ERP suites offer supply chain management software, and there are thousands of niche vendors.
Besides managing specific processes, SCM software has an important role to play in tying together the people, processes, and systems that participate in the supply chain.
Other commonly used SCM modules include the following:
- a transportation management system (TMS) for managing the transport and storage of goods, especially across global supply chains;
- a warehouse management system (WMS) for all of the activities inside warehouses and distribution centers; and
- an order management system, to handle processing of customer orders through WMS, ERP and TMS systems, at all stages of the supply chain. (See "How supply chain systems process orders.")
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, while boosting demand for order management software capable of handling omnichannel commerce. A number of strategies -- such as lean manufacturing -- and newer approaches -- such as demand-driven material requirements planning -- may prove helpful.
Emerging technologies in SCM
Technology -- especially big data, predictive analytics, IoT, supply chain analytics, robotics and autonomous vehicles -- is also being used to help solve modern challenges, including supply chain risk and sustainability. Most of the emerging technologies have the common goals of making it easier to gather more detailed supply chain data and analyze and act on it quickly.
As just three examples, IoT logistics technologies can aid 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. 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. And blockchain -- tamper-proof distributed electronic ledgers -- can guarantee the accuracy and ownership of documents used in supply chain logistics and the millions of other documents exchanged every day throughout the global supply chain.