Definitions of Supply Chain Management
Supply chain management (SCM) is the management of a network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers (Harland, 1996). Supply Chain Management spans all movement and storage of raw materials, work-in-process inventory, and finished goods from point of origin to point of consumption (supply chain).
Another definition is provided by the APICS (The Association for Operations Management) Dictionary when it defines Supply Chain Management as the “design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand, and measuring performance globally.”
Supply Chain Management (SCM) as defined by the Council of Supply Chain Management Professionals (CSCMP): “Supply Chain Management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, supply chain management integrates supply and demand management within and across companies. Supply Chain Management is an integrating function with primary responsibility for linking major business functions and business processes within and across companies into a cohesive and high-performing business model. It includes all of the logistics management activities noted above, as well as manufacturing operations, and it drives coordination of processes and activities with and across marketing, sales, product design, finance and information technology.”
Supply chain management is the active management of supply chain activities to maximize customer value and achieve a sustainable competitive advantage. Supply chain activities cover everything from product development, sourcing, production, and logistics, as well as the information systems needed to coordinate these activities. The responsiveness and efficiency of a company’s supply chain arising from its design and management is integral to the firm’s ability to successfully compete in the global marketplace.
Read More: Evolution of Supply Chain Management
A supply chain involves the various parties who came together to fulfill a customer request. Manufacturers, suppliers, transporters, warehouses, distributors, wholesalers, retailers and customers together make up the supply chain. These entities are supported by various functions such as sales, product development, operations, logistics, after sales service and finance. At the heart of the supply chain lies the flow of information, products and cash flows. Some of these flow towards and some away from the customer. The main objective of any supply chain is to deliver value to customers in optimal fashion. Value can, in simple terms, be understood as the difference between the price the end customers are prepared to pay and the costs incurred in meeting their needs.
Read More: Components of Supply Chain
Today, the ever increasing technical complexity of standard consumer goods, combined with the ever increasing size and depth of the global market has meant that the link between consumer and vendor is usually only the final link in a long and complex chain or network of exchanges.
This supply chain begins with the extraction of raw material and includes several production links, for instance; component construction, assembly and merging before moving onto several layers of storage facilities of ever decreasing size and ever more remote geographical locations, and finally reaching the consumer.
Although many companies and corporations today are of importance not just on national or regional but also on global scale, none are of a size that enables them to control the entire supply chain, since no existing company controls every link from raw material extraction to consumer.
Many of the exchanges encountered in the supply chain will therefore be between different companies who will all generally seek to maximize company revenue within their sphere of interest but will have little or no basic knowledge or interest in the remaining players in the supply chain except those to which it is directly linked.
Read More: Supply Chain Management Processes
Importance of Supply Chain Management in Modern Businesses
Complicated outsourcing arrangements backed by information technology mean that supply chains are no longer linear but quite intricate, taking the shape of a network. Several suppliers, factories and logistics providers may be involved, making Supply Chain Management (SCM) a fairly challenging task.
Supply Chain Management must be treated as an integral part of competitive strategy. Indeed, SCM drives corporate strategy in the case of companies like Dell. There must be a strategic fit between competitive strategy and SCM, i.e. consistency between the customer needs that competitive strategy focuses on and the capabilities that SCM is building.
A company must have a broad vision of how the supply chain will function and evolve over time. Accordingly, investment decisions must be made. These include manufacturing facilities, warehouses, transportation infrastructure and information technology. Supply chain design decisions typically have long term implications. So they must be made carefully, taking into account uncertainty and anticipated market conditions over the next few years.
These strategic design decisions must be backed by appropriate medium term planning decisions and short term operational decisions. Planning may involve making forecasts typically for a year and breaking it down into quarterly figures. Supply chain operations are more focused on handling incoming customer orders in the best possible manner. The design, planning and operation of a supply chain can have a major impact on a company’s overall success in many industries. The computer manufacturer Dell, the Spanish retailer Zara and the Hong Kong trader Li & Fung are good examples.
Efficiency and responsiveness make up the two conflicting demands of a supply chain. Depending on the market realities, Supply Chain Management must arrive at a suitable trade off. Usually as investments are made to improve responsiveness to market needs, costs tend to go up. Similarly, as efforts are made to cut costs, responsiveness often suffers. Of course, there are situations, where intelligent supply chain configuration can simultaneously improve responsiveness and lower costs. Thus, in the computer industry, Dell builds-to-order thereby cutting the costs associated with inventory obsolescence. But Dell has also cut down response time and increased the opportunities to customize, so that responsiveness to customer needs has not been compromised.
The effectiveness of a supply chain depends critically on how different activities are coordinated. Coordination problems arise because of conflicting objectives or poor information flows. These challenges have increased in recent times on account of multiple ownership of the supply chain and increased product variety. One manifestation of the problem is the bullwhip effect. Fluctuations in orders get amplified as they move backwards along the supply chain from retailers to wholesalers to manufacturers to suppliers. Suppose, there is a random increase in customer demand at the retailer level. Interpreting this rise in demand as a growth trend, retailers may order more than the observed increase in demand to cover anticipated future growth. Similarly the wholesalers may order more than the observed increase in demand from the retailer. This phenomenon extends right down to the suppliers. The bullwhip effect can be minimized by greater coordination across the supply chain by streamlining information flows, by aligning incentives and by improving trust.
Another challenge today in Supply Chain Management is mass customization, the ability to execute small customized orders, without sacrificing the cost advantages of a mass production system. A key tool here is the principle of postponement. Companies must delay the final configuration of a product till the order is received. In general, the demand for intermediate products/components is more stable than that for finished goods. Take the example of paints. The only difference between two shades of a paint could be the addition of a small quantity of pigment. This can always be done at the retail outlet. By only keeping a few primary colors as the core inventory and generating new shades based on actual customer demand, there is scope to reduce inventory and improve customer responsiveness simultaneously. The demand for primary colors fluctuates less than that for individual shades.
Information Technology (IT) has a key role to play in Supply Chain Management. Inventory is nothing but a hedge against uncertainty. Uncertainty arises due to poor information flows. So by streamlining the flow of information, IT can significantly improve the functioning of a supply chain. However, it is wrong to equate SCM with IT as many computer software companies do. The essence of SCM is managing relationships among the different entities involved both within and outside the organization, like customers, suppliers and third party logistics providers. Trust and fair play are the key ingredients for good relationships.