What is Supply Chain Management?
The concept of supply chain management is not new but it has become increasingly important for the last few years. With the shifting of business focus from manufacturing to customer value, companies are not much concerned about manufacturing costs or producing high-quality products.
Rather the major challenge is to deliver the correct product, at the correct location, at the time the customers need, in the appropriate quantity, and at the lowest possible cost. Meeting this challenge entails the need for supply chain management (SCM).
Supply chain management (SCM) is a business and technology discipline that refers to the ways of coordinating the activities involved in purchasing, designing, building, and selling a product.
It used information technology to create a cross-functional inter-enterprise (involving more than one organization) system called SCM information systems.
These systems integrate the business processes of suppliers, purchasing firms, distributors, and custom logistics in order to improve the efficiency and effectiveness of manufacturing and distribution.
They automate the flow of information between a company and its supply chain partners to optimize the sourcing and procurement, manufacturing, and delivery of products or services.
The Supply Chain
In simplest terms, supply chain management is all about managing the supply chain-a network of organizations and the business processes for acquiring the raw materials, transforming them into finished goods, and distributing the products to the customers.
The supply chain links many business entities, such as supplier, manufacturer, transporter, distributor, retailer, and the customers themselves.
Note that the supply chains of different organizations may differ in the number of entities and it is not always required for a supply chain to have all the entities. Each entity in the supply chain contributes to the goal of reaching the customers.
The supply chain is driven by three main inputs namely information, materials, and funds which flow among the supply chain members.
The raw material sources from suppliers are transformed into intermediate products and finished goods through manufacturing facilities. The finished products are shipped to distribution centers and from there to retailers and ultimately to customers. However, the supply chains, especially of large manufacturers, can have primary, secondary, and tertiary suppliers also.
The ultimate goal of supply chain management systems is to efficiently manage the flow of information, materials, and funds across the entire supply chain, thereby reducing the cost of the supply chain while bringing a firm’s products from concept to market.
Types of Supply Chain Management (SCM) Systems
Depending on the functions the supply chain management systems perform, they are classified into two categories, namely, supply chain planning systems, and supply chain execution systems.
1. Supply Chain Planning Systems
These systems provide information that helps businesses in the planning of their supply chain. Some of the important supply chain planning functions are as follows:
- Forecasting demand for specific products and preparing sourcing and manufacturing plan for those products.
- Estimating the quantity of the product to be manufactured in a given time period
- Deciding the location where the finished goods are to be stored
- Identifying the transportation mode to be used for delivering the products
- Setting the inventory levels for raw materials, intermediate products, and finished goods
- Determining the product quantity a business should make in order to meet all its customers’ demands
2. Supply Chain Execution Systems
These systems provide information that helps businesses in the execution of their supply chain steps. Some of the major supply chain execution functions are as follows:
- Managing the flow of products from the manufacturers to distributors to retailers and finally to customers in order to ensure the accurate delivery of products
- Providing information about the status of orders being processed so that the vendors could provide the exact delivery dates to customers
- Tracking the shipment and accounting for the products that have been returned or are to be repaired and serviced
Benefits of Supply Chain Management (SCM)
Effective Supply Chain Management (SCM) systems provide the following benefits to optimize the organization’s performance.
- Improve customer service by delivering them the right product at the right time and at the right location, which in tum increases the organization’s sales.
- Enable the companies to bring the products to the market at a quicker rate. Thus, the companies get their payment sooner than those who lack an efficient supply chain.
- Lower the total supply chain cost, including procuring materials cost, transportation cost, inventor, carrying cost, etc. The reduction in supply chain costs helps to increase the firm’s profitability.