The supply chain needed to take these products from raw materials to manufacturing and processing and ultimately to consumers are some of the most sophisticated systems ever built. And they’re almost always global.
How can something so complicated possibly be managed? That’s where supply chain management (SCM) — the discipline devoted to planning, controlling and executing the creation and distribution of products — comes in. SCM began a century ago in efforts to optimize manufacturing, and later the logistics of transporting and storing things. Then electronic computers made the math easier and more accurate, and digital networks speeded up the information flow and broadened and deepened the connections.
Supply chain management and computers have been intertwined ever since.
Goals of SCM
As supply chain management has matured and the technology that powers it advances, its importance to businesses operations keeps growing. The goals companies hope to achieve by using supply chain management to optimize the flow of goods and materials include the following:
- cost savings from acquiring goods and services as cheaply as possible and minimizing expenses on capital goods, such as inventory, facilities and equipment;
- efficiency that comes from avoiding waste and duplication;
- revenue increases when higher levels of demand can be met with sufficient supply;
- profit from lower costs and higher revenue;
- customer satisfaction from balancing supply and demand, and delivering the products consumers want;
- quality improvements from sourcing better materials, avoiding production errors and gathering customer feedback; and
- stability from effective risk management, visibility and collaboration.
Supply chain management processes, step by step
Each major phase of a product’s movement through the supply chain, from materials to production and distribution (see Figure 1), 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 supply chain management software.
Figure 1. SCM encompasses every step in making products and delivering them to customers.
The SCM process starts with figuring out what products customers want. This phase involves 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 — for example, manufacturing and marketing — can agree on. The forecast determines the types and quantities of products to be manufactured. Getting the forecast right is critical for avoiding costly problems such as the bullwhip effect, in which small fluctuations in retail demand are magnified further up the supply chain, leading to severe shortages or surpluses of inventory.
Some companies perform demand planning as part of a formalized process called sales and operations planning (S&OP), which encompasses 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 (APS; alternatively, APO for optimization) 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 1960s 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), which is designed to integrate the major business processes of companies in any industry. As you’ll see, ERP software has become integral to SCM.
Two other 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 MRP 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 raw materials to manufacturers or processors, 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.
Figure 2. SRM involves three major steps.
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 area 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 aligning it with 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. Figure 2 shows the SRM process in brief.
Importance of supply chain management
SCM can have a significant impact on companies, individuals and society. Indeed, many experts believe SCM’s critical role in society is underappreciated.
SCM typically improves customer service and ensures customer satisfaction by making certain the right products are available on time at the right locations. By increasing customer satisfaction, companies can build loyalty, which usually leads to more sales over the long term.
SCM can also reduce company operating costs by cutting expenses on purchasing, production and the entire supply chain. Lower costs improve 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, for example, allowing supply chain experts to redesign their networks to maintain customer service levels while operating fewer warehouses.
SCM’s impact extends well beyond a company’s bottom line. SCM can help ensure human survival by improving healthcare and protecting people from climate extremes. People rely on supply chains to deliver necessities like food and water as well as medicines. 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 improve the 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 and manage the labor-intensive functions of 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 cost, allowing consumers to buy more products, thus providing economic growth and increasing the standard of living.
Levels of supply chain management
Some experts find it helpful to divide SCM into three broad levels that categorize its functions and help ensure that it serves business goals: strategic, tactical and operational.
Strategic SCM takes in the entire scope of a company’s supply chain network and processes. It addresses the major long-term elements in a comprehensive strategy, including the type and number of facilities, technologies and suppliers.
The tactical level nails down the specific means of executing the strategy, be they production schedules, logistics processes, contracts or software applications. Time horizons are shorter than in strategic SCM. Here’s where standards and best practices are identified for key deliverables like customer service, efficiency and cost.
The operational level encompasses the daily operations of SCM. Forecasting, production scheduling, shipping and invoicing are typical operational tasks.
Interestingly, some observers say the globalization of manufacturing has turned SCM into a mostly strategic function as longer, more complex supply chains present challenges and opportunities that require much more planning and analysis. In this view, the tactical and operational levels mostly focus on logistics.
The three levels influence each other. A strategy is just an idea if it isn’t translated into tactics and operations. Conversely, operational decisions and tasks can be wasteful, ineffective or risky if they conflict with the organizing principles of the tactical level and the larger goals and mechanisms in the strategy.
This three-level SCM approach is critical in building supply chain resilience for handling disruptions like the COVID-19 pandemic. To cite a prominent example, the unavailability of supplies that would normally ship from virus hotspots and lockdown areas required manufacturers and retailers to drop their longstanding preference for the cost savings gained from using just-in-time inventory models, and instead give priority to storing safety stock closer to customers — with less regard to the cost. Availability of supply became paramount.
Besides helping companies reach the usual goals of SCM, the improved efficiency, coordination and quality that come from mastering the planning, control and execution of supply chain processes can produce secondary advantages, including the following:
- better relationships with suppliers, distributors and retailers;
- improved brand image;
- environmental sustainability;
- improved cash flow;
- safer products and services;
- lower overhead;
- improved accountability and compliance; and
- more innovation.
Because SCM is inherently complex, it is difficult to execute at a consistently high level. Thus, complexity itself is the biggest challenge facing practitioners, who are also challenged by not having enough information, technology, labor, skills, time and resources to stay on top of every area of supply chain management.
- Capacity and resource availability. Executives worried they wouldn’t have enough people, facilities, IT capabilities and other resources to support growth.
- Talent. Hiring or retaining industrial engineers and other supply chain professionals was a major concern.
- Complexity. New products and expanded product options create pressure to find new suppliers. The growth in omnichannel commerce, especially direct-to-consumer channels, called for deploying new systems and threatened longstanding success in traditional channels such as wholesale.
- Threats. Respondents cited risks from natural disasters, the failure of key suppliers, rogue employees who cause or call attention to supply chain disasters, product recalls and inadequate planning for business continuity.
- Compliance. Fast-changing product regulations, international trade rules and inconsistent customs enforcement made compliance demands too numerous and complex to manage.
- Cost and pricing issues. Downward price pressure in industries such as healthcare, pharmaceuticals and raw commodities put pressure on suppliers to minimize their costs.
Volatility is another common challenge, as sharp changes in supply or demand — or both at the same time — can strain supply chains and create new challenges, such as shortages, delays, surpluses, spoilage and price gouging, to name only a few.
Reference Source from Searcherp.techtarget