If you are involved in a business that provides any type of goods or services, you’re involved in supply chain management (SCM), whether you know it or not. Although the term only came into vogue in the 1990s, the basic processes involved have been used for millennia, from the very first time a product or service was created and sold (or traded). Let’s go over what supply chain management means today, and discuss what’s needed in order to optimize this vital business process.
In very basic terms, supply chain management is the coordination and management of a business organization’s flow of products, goods, and/or services, from the procurement of any necessary raw materials to delivering the product or service in its final form to the customer.
In the broadest sense, SCM includes data, finances, logistics, procurement, supplier/vendor sourcing and management, demand planning, supply planning, sales and operations planning (S&OP), production, quality control (QC), inventory/warehousing, marketing, sales, distribution/fulfillment, and post-sales customer service management, including returns.
Although the process entailed have been performed in some fashion since the first product was sold to a buyer, the term “Supply Chain Management” was coined by British consultant and logistician Keith Oliver, who used it in a Financial Times interview in 1982. The term gained wider popularity in the 1990s, and by the turn of the 21st century, multiple books and articles had been written on the subject by the darlings of the business world.
The definition of supply chain management is as varied as the people defining it. Definitions can be generically business-oriented, such as in the Journal of Business Logistics’ 2011 article “Defining Supply Chain Management”: “The systematic, strategic coordination of traditional business functions and tactics across all business functions within a particular company and across businesses within the supply chain, for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole.”
Or, the definition can be firmly customer/consumer oriented, such as Tony Hines in his 2004 book Supply Chain Strategies: Demand Driven and Customer Focused: “Supply chain strategies require a total systems view of the links in the chain that work together efficiently to create customer satisfaction at the end point of delivery to the consumer. . . . The main focus is turned to efficiency and added value, or the end user’s perception of value. Efficiency must be increased, and bottlenecks removed. The measurement of performance focuses on total system efficiency and the equitable monetary reward distribution to those within the supply chain. The supply chain system must be responsive to customer requirements.”
Both of these definitions are certainly valid, and the end goals are the same, whether specifically stated or not. Though supply chain management is a vastly complex subject, each aspect of which has had entire books written about it, the multiple tasks involved can be grouped into 5 major processes:
To achieve the best results, the supply chain management process must begin with and be regularly informed by gathering data, analyzing it, and planning how to best produce and match the optimal supply with real customer demand. In an ideal world, a company would only produce and inventory the exact number of products that their current and future customers will purchase in the short term. However, even with advanced software and streamlined processes, this balance effectively never happens perfectly. SCM leads use demand planning/forecasting, supply planning, and data teams to help inform decisions and create strategies to maximize efficiency and minimize needless expenses. Planning needs to happen not only before the product cycle begins but along the way, and regular S&OP meetings help monitor ongoing processes and highlight issues that need to be addressed.
Procurement can look very different from one company to another. For a business that manufactures things using raw materials and/or parts, procurement entails sourcing those materials and items, identifying suppliers or vendors, negotiating pricing and delivery schedules, contracting with vendors and suppliers, and purchasing any parts, sub-assemblies, and/or raw materials needed to manufacture finished products. On the other hand, for a retailer, wholesaler, or distribution company, procurement is the process of obtaining finished goods.
The procurement stage is where many well-publicized supply chain problems historically occur. These may include (but are not limited to):
Once any necessary raw materials, components, and/or sub-assemblies are procured, the SCM process moves to the manufacturing of the final products that will be sold and distributed to customers. Design, engineering, production, testing, inspection/QC, and packaging are the primary sub-tasks here, whether for hard goods, products, or software/services. Potential problems are myriad, and may include: issues with materials or defective parts; production line inefficiencies or technical issues; labor problems or shortages; poor training or poor management resulting in wasted time or resources; miscommunication resulting in delays; and multiple other factors.
This portion of SCM incorporates all aspects of getting completed products into the hands of customers, including marketing and sales (on a broad scope), management of distribution centers, warehousing, inventory management, order fulfillment, delivery, and logistics. Challenges include potential physical issues with distribution centers or warehouses, excess or insufficient inventory, problems with the customer interface or ordering processes, spiking fuel/delivery costs, insufficient drivers or last-mile workforce, global or weather events, social unrest, and poor management of data during the ordering/fulfillment/delivery process.
Today’s customers are spoiled with choice and expect to be delighted at every step of the sales process. Unfortunately the management of dissatisfied customers and product returns is a necessary part of the SCM process. Sometimes called “reverse logistics,” the SCM team needs to have a handle on this task. Excess inventory, defective/expired or outdated products, and products that have reached the end of their lifecycle all need to be accounted for, whether through options such as clearance sales (in the case of excess inventory) or physical disposal/destruction and waste processing. In the case of consumer products that may be recalled by a government order, the SCM plan must include strategies and financial safeguards that enable massive numbers of product returns.
As you can see, the potential problems relating to SCM are persistent, unpredictable, and varied. Intelligent data management and integrated processes have enabled huge improvements in SCM over the past 20 years. Every supply chain management team should take advantage of well-designed, industry-specific software tools (where possible) and streamlined processes that improve efficiency, reduce errors, and ultimately result in a larger number of happy customers.
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