What is Supply Chain Management (SCM)?
Supply Chain Management is the management of the flow of goods and services and includes all the processes that transform raw materials into final products. It involves actively optimizing a business's supply-side activities to maximize customer value and gain a competitive advantage in the market. Supply Chain Management (SCM) is a centralized management approach that oversees the flow of goods and services, including all processes that turn raw materials into finished products. Companies can reduce excess costs through SCM and deliver products to consumers more quickly and efficiently. A supply chain manager controls and reduces costs and avoids supply shortages.
The five critical components of SCM are strategy development, sourcing of raw materials, production, distribution, and returns.
Significance
Supply Chain Management (SCM) is crucial because it helps achieve various business objectives. For example, controlling production processes can enhance product quality, reduce the risk of recalls and legal claims, and help build a strong consumer brand. Additionally, implementing controls over shipping procedures can improve customer service by avoiding costly shortages or periods of excess inventory. Overall, Supply Chain Management offers companies opportunities to improve their profit margins and is particularly important for large and international businesses.
How Supply Chain Management (SCM) Works
Supply Chain Management (SCM) represents uppliers' efforts to develop and implement supply chains that are as efficient and cost-effective as possible. Supply chains encompass everything from manufacturing and product development to the information systems required to manage these commitments.
A supply chain manager typically seeks to centrally control or link a product's production, shipping, and distribution. By managing the supply chain, companies can reduce excess costs and deliver products to consumers more quickly. This is achieved through tighter control over internal inventory, in-house production, distribution, sales, and the inventory of the company’s suppliers.
SCM is based on the concept that nearly every product reaching the market results from the efforts of Various Organizations that Form a Supply Chain. While supply chains have existed for many years, most companies have only recently begun to recognize them as a value-added component of their operations.
The 5 Key Components of SCM
A supply chain manager aims to minimize shortages and reduce costs. The role goes beyond logistics and inventory procurement. Supply chain managers oversee and manage operations to maximize the efficiency and minimize the costs of the organization's supply chain. Productivity and efficiency improvements can directly impact a company's bottom line. Effective supply chain management keeps companies out of negative headlines, costly recalls, and legal disputes. The supply chain manager coordinates the logistics of all aspects of the supply chain, which consists of the following five components:
Planning
The process typically begins with planning, which aims to align supply with customer and production demands. Companies must forecast their future needs and act accordingly. This includes managing the raw materials required at each production stage, equipment capacity, and workforce needs throughout the process. Large companies often rely on ERP system modules to gather information and develop comprehensive plans.
Sourcing
Effective SCM processes rely significantly on strong relationships with suppliers to provide the necessary raw materials throughout production. A company must be able to plan and source goods in advance. However, different industries have varying sourcing requirements. Generally, SCM sourcing includes the following assurances:
• Raw materials meet the necessary production specifications required for manufacturing goods.
• Prices paid for goods align with market expectations.
• Flexibility to provide emergency materials due to unforeseen events.
• Suppliers have a proven track record of delivering goods on time and in good quality.
Supply chain management is especially critical when manufacturers work with perishable products. When purchasing goods, companies must pay close attention to lead times and assess how well a supplier can meet these needs.
Production
At the heart of supply chain management, the company transforms raw materials using machinery, labor, or other external forces to create something new. The final product is the ultimate goal of the manufacturing process, although it is not the last stage of supply chain management.
The production process can be divided into sub-tasks such as assembly, testing, or packaging. During production, the company must be mindful of waste or other controllable factors that could lead to deviations from the original plans. For example, suppose a company uses more raw materials than planned due to a lack of employee training. In that case, the company needs to address the issue or revisit earlier stages of the process to correct it.
Delivery
Once the products are manufactured and sales are completed, the company must deliver them to its customers. The distribution process is often seen as a key contributor to brand image, as this stage is typically the first point of direct interaction between the customer and the product. In strong SCM processes, the company possesses robust logistical capabilities and supply channels to ensure product safe, prompt, and cost-effective delivery.
Returns
The supply chain management process concludes with product support and customer returns. It's never ideal for a company when a customer has to return a product, and it’s even worse if the return is due to the company’s error. This return process is often referred to as "reverse logistics," the company must ensure it can receive returned products and properly allocate refunds for accepted returns. Whether a company initiates a product recall or a customer is dissatisfied with the product, the transaction must be rectified to maintain customer trust and satisfaction.
Types of Supply Chain Models
Supply chain management is not the same across all companies. Each business has unique goals, constraints, and strengths that shape its SCM process. Generally, there are six main models that a company can adopt to guide its supply chain management processes.
Continuous Flow Model: One of the more traditional supply chain methods, mature industries often prefer this model. The Continuous Flow Model relies on the manufacturer consistently producing the same product repeatedly, with the expectation that the customer will not require many changes.
Quick Model: This model emphasizes the rapid turnover of products with short life cycles. Using the Quick Model, a company aims to capitalize on trends, quickly produce goods, and sell the product before the trend fades.
Flexible Model: The Flexible Model works best for companies affected by seasonality. Some companies may have significantly higher demand during peak seasons and lower volume requirements during others. A flexible supply chain management model ensures that production can be easily ramped up or scaled down to meet varying demand levels.
Efficient Model: The Efficient Model is designed for companies competing in industries with very low profit margins. A company may seek to gain an advantage by making its supply chain management process as efficient as possible. This includes optimizing the use of equipment and machinery and managing inventory and order processing efficiently.
Customized Model: If no standard models fit a company’s needs, it can always turn to a customized model. This often occurs in highly specialized industries with specific technical requirements, such as automotive manufacturers.
The supply chain management process concludes with product support and customer returns. It's unfortunate when a customer needs to return a product, and it's even worse if the return is due to an error on the company's part. This return process is often called "reverse logistics. " The company must ensure it can receive returned products and properly allocate refunds for accepted returns. Whether the company initiates a product recall or a customer is simply dissatisfied with the product, the transaction with the customer must be corrected.
Many see customer returns as an interaction between the customer and the company. However, a crucial aspect of customer returns is inter-organizational communication to identify defective products, expired goods, or items that do not meet specifications. Without addressing the root cause of customer returns, the supply chain management process will fail, and future returns will likely continue.