What Is Supply Chain Management?

So you want to learn supply chain management, but what exactly is a Supply Chain? And what is Supply Chain Management (SCM)? In the world of big business many terms are thrown around haphazardly, without much clear definition or understanding of their meaning. Our goal is to help you fill in the gaps, so without further ado, we present you with an overview of the definition of what Supply Chain Management is.

The Cost of Goods and Services

All businesses must add costs to goods and services depending on many factors. The raw materials are just one component. The goods for materials and packaging must be harvested or manufactured. These products must be boxed, wrapped, and shipped to distribution centers, where they must be moved, stored, and displayed or sold. Each step of the process requires human involvement, so salaries must be paid, and rents, utilities and insurance add to cost of goods.

Manufactured products require raw materials, so the chain can extend even further and each step requires the same handling. All of these steps in the chain add expenses that must be covered in the final price. Managing these steps of the chain of supplies defines the term supply chain management. The chain follows the course of raw materials to final placement in consumer hands. Service-based businesses utilize equipment and personnel, and they have office overhead expenses that must be included in their final price. Hotels are service-based businesses, but they must provide meals, entertainment, and rooms with furnishings that must be cleaned daily. All of the supply chain expenses must be covered by the final cost of service.

Supply Chain Management Combines Art and Science

Someone must monitor and coordinate all the steps of the process for transforming goods into viable consumer products. Typical chains involve consumers, retailers, transporters, wholesalers, manufacturers, and the manufacturers’ suppliers of raw materials. Supply chain management seeks to improve efficiency in the process to reduce the cost of goods. Five steps facilitate getting products into consumers’ hands. These steps are listed below.

  • Planning. Strategies include fulfilling consumers’ needs with cost-effective goods and services. The planning process includes developing a way to monitor the flow of goods.
  • Suppliers. Managers must locate suppliers offering products at reasonable rates, but reliability and service issues require serious attention.
  • Production. The actual manufacturing process must produce quality goods economically. Safety procedures, quality control, and personnel management come into play.
  • Distribution. Finished products must be packaged properly, and may require printed assembly instructions or other information. The manufacturer utilizes transporters to move goods to warehouses, wholesalers and retail outlets, where they finally go on display to consumers, but the process is not yet complete.
  • Returns. A policy must be made to address defective merchandise or allow consumers to make returns when they have problems with the product.

Supply chain management deals with the laws of supply and demand within a company and its outsourcing partners. Chains include manufacturers and suppliers, warehouses, retailers, transporters, and the customers. Fulfilling customer needs requires new product development, distribution strategy, advertising campaigns, and financing options, so these functions become a significant part of managing operations.

Problems Managers Seek to Troubleshoot

Managers seek to create more favorable conditions by identifying areas where greater efficiency can be introduced. Better prices help reduce overall costs, but shipping costs can also affect the bottom line. Delays in shipping goods carry hidden costs because workers must be paid whether they have the necessary materials or not. Waste might occur anywhere along the supply chain, and efficient managers spend a great deal of time reducing and eliminating waste.

Multiple methods of shipping generate different benefits and disadvantages, and these must be weighed as a function of effective management. For example, shipping a fully loaded truck cuts transportation costs. However, delays could cause loss of revenue while waiting for the truck to fill up, or the full load might require an extraordinary effort to store the materials until needed. Inventory control plays a central role in management, requiring sufficient materials to produce products to meet customer demand without risking loss from carrying too many supplies.

Coordinating the flow of inventory and goods defines management success by meeting production goals in a timely, affordable manner. Information technology often plays a key role. Strategic forecasts, marketing efforts, and communications among partners require an effective exchange of ideas. Direct customer shipping can eliminate many of the costs of shipping, storing, and marketing products, so many wholesale companies choose to pursue a strategy of selling directly to consumers to enhance the bottom line.

Managers must always consider cash flow when developing payment methodologies. Suppliers require payment for raw materials. Retailers, wholesalers, and consumers must eventually pay for the goods. Companies could get stuck in the middle with cash flow problems, if they must meet expenses without a corresponding payment from buyers.

Practical History of Supply Chain Management

An industry consultant introduced the term in the 1980s, but the practical considerations of managing resources have played a key role in manufacturing since the introduction of the assembly line. The information technology explosion and global marketing have created a more complex system requiring detailed analysis and monitoring to avoid major problems. For example, a global toy recall by Mattel in 2007 occurred when management failed to identify that some toys manufactured in China contained lead paint. The result was a devastating recall of 20 million toys, so effective management of material movement becomes critical.

Globalization adds additional levels of concern to managers, and many companies choose outside consultants to help follow their chain through foreign manufacturers and distribution points, where politics and tariffs might play an important role. Specialist firms help oversee the process for many retailers, which have taken a great interest in product details to satisfy savvy consumers who demand greater information about the products they buy.

Wal-Mart recently announced sustainability as a key factor in choosing its suppliers. The company plans to demand environmental responsibility from all partners in its supply chain. Decisions of major retailers can exert considerable influence on companies that scramble to satisfy the giants or lose their stores as an outlet for products. Smaller companies might need to make economic sacrifices to implement similar strategies aimed at appeasing consumers. Supply and demand drive business, and companies must balance consumer demands with economic realities for marketing success. Understanding the significance of supply chain management can benefit any company, no matter what the size.

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