Learn the importance of effective Supply Chain Management (SCM) in today’s business world. Know more about the various SCM concepts, strategies, tools, and techniques.
What is Supply Chain?
A supply chain is basically a network between a company and its suppliers that helps it to produce and distribute products. The more efficient the supply chain, the faster the product or service reaches the customer.
Here are a few definitions:
Definition: a set of three or more entities (organizations or individuals) directly involved in the upstream and downstream flows of products, services, finances and/or information from a source to a customer.
Source: Mentzer et al (2001) ‘Defining supply chain management’ Journal of Business Logistics 22 (2) 1 – 25
“Supply chain is a connected series of activities, which is concerned with planning, coordinating and controlling materials, parts and finished goods from supplier to customer. It is concerned with two distinct flows (material and information) through the organization.”
A supply chain is a platform for coordinating three types of flows: material, information, financial
A supply chain is a network of value adding cells with the following characteristics: supply, transformation, demand (Davis 1993).
Watch this video of Starbucks and its supply chain. Take a look at what materials are needed to be delivered at a Starbucks shop?
Upstream and Downstream in Supply Chain
Using the metaphor of a river, upstream production refers to the various activities needed to source the materials required to create a product, whereas the downstream production process involves processing the materials collected during the upstream stage into a finished product.
Upstream is the supply network of company suppliers and their own suppliers. Upstream refers to the material inputs, raw materials that are needed for producing the product. The upstream part however does not do anything with the material itself, such as processing the material.
The upstream includes suppliers who supply the various parts and materials required to put together or manufacture the product.
Companies may make use of several suppliers, sub-contractors, vendors to supply raw materials, and also to produce noncore products (companies outsource a lot of work) and certain components. The parts and raw materials that arrive at the factory are checked for quality and closely inspected to see if they use any hazardous materials. In some industries, the companies are quite strict with their vendors; if they find them in violation of safety standards, they are likely to terminate their agreements.
Downstream is how the final product gets distributed to the end-user. It shows how products are transported from the production facilities and distributed to the end-user. The downstream process includes elements such as distribution, wholesaling and retailing, and has direct contact with customers through the finished product. It also includes customer service.
The distribution network of big companies includes giant retailers such as Walmart, then they have their own distribution centers, specialty stores, and e-commerce websites. Some companies operate year-round consumer outlets and seasonal outlet stores at their own distribution centers.
Supply Chain Management
Big companies around the world are aware that in order to optimize business performance, they need to have a high-performing supply chain (that is aligned with its business strategy). Supply chain management is a critical factor for most manufacturing companies. It allows companies to offer a product when the consumer wants to purchase, which helps them drive better sales and also promotes consumer loyalty. Efficient supply chain management is vital to get the right amount of product onto the shelves (in a cost-effective manner).
Supply chain management (SCM) involves the activities required to make a product and deliver it to the final customer, in a streamlined and cost-effective manner (Harland, 1996). The term was coined by Keith Oliver, a Booz Allen Hamilton executive in 1982.
SCM involves managing the upstream and downstream relationships with suppliers and customers to deliver improved customer value. 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.
Common Supply Chain Management Activities include Sourcing /Procurement, Conversion, Logistics Management, Coordination and Communication between Suppliers, Intermediaries, Third Party Service Providers and Customers
Definition: the systemic, strategic coordination of the traditional business functions and the tactics across these business functions within a particular company and across businesses within the supply chain for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole. Source: Mentzer et al (2001)
- Strategic SCM develops more intelligent ways to choose buy from sell to your business partners
- SCM can be used as a mechanism to gain competitive advantage
- For SCM to provide efficiencies it needs to move out of a ‘function’ and be seen as strategic
Supply chain control is essential to all businesses, no matter how big or small. Supply planning is the component of supply chain management involved with determining how to best fulfill the requirements created from the demand plan. The objective is to balance supply and demand in a manner that achieves the financial and service objectives of an organization.
Reconciling Supply to Demand
Planning and controlling of supply chain involves coordinating all the activities on the supply side and the demand side, including logistical activities.
The supply side
Purchasing and supply management deals with the operations interface with its supply markets. This is sometimes described as sourcing and procurement activities.
Purchasing managers provide a vital link between the operation itself and its suppliers. They must understand the requirements of all the processes within the operation and also the capabilities of the suppliers who could potentially provide products and services for the operation.
The Demand side
Physical distribution management may mean supplying immediate customers, while logistics is an extension that often refers to materials and information flow down through a distribution challenge to the retail store or consumer.
The term third-party logistics indicates outsourcing to a specialist logistics company. Materials management is a more limited term and refers to the flow of materials and information only through the immediate supply chain.
A high-performing supply chain requires a robust set of planning processes. Big companies have invested heavily in supply chain-related information technology (IT) initiatives, for benefits such as enhanced inventory management and better collection efficiency.
Major SCM Decisions
In order to keep a supply chain effective, decisions need to be taken regarding various aspects of its functioning, products or services.
Decisions have to be taken related to:
- Location: Where to put sources of materials, production facilities and stocks.
- Production: What products to produce, where to produce them, allocation of suppliers to plants, plants to distribution centres, and distribution centres to customer markets.
- Inventory: How to deploy goods (raw materials, semi-finished or finished goods), which control policies to use (order quantities, reorder points, safety stock).
- Transportation: Carriers (air, truck, ship), lot sizes, and service decisions.
Various Decision Phases in Supply Chain Management
Successful supply chain management requires decisions to be taken regarding the flow of information, product, and funds and can be categorized under three decision phases.
The three decisions phases are:
- Supply Chain Strategy (Analysis)
- Supply Chain Planning (Planning)
- Supply Chain Operations (Operations)
Supply Chain Structure and Coordination
Supply Chain Structure determines the location, capacity, connectivity and mission of the cells in the supply chain network. Supply Chain Coordination incorporates the information links and decision making hierarchy that determines the flow of materials and services throughout the supply chain.
Make or Buy? Reasons to Outsource
- Want to concentrate on core competencies – ”we can not do everything by ourselves”
- Attempt to improve efficiency – ”you have buy from where you get the lowest price”
- Attempt to improve flexibility – e.g. balancing external capacity much easier than internal
- Divide risk – e.g. when expanding capacity
Several variables have to be considered…
- current know-how
- forecasted demand of an item and own capacity situation
- cost, quality, delivery reliability and flexibility – who would be able and willing to supply certain product?
- external, internal and personal influencing factors – meaning/importance of independence, employment, company size
- company doesn’t want to / isn’t able to produce a certain product
- product can easily be bought from effective market
What are the Risks
Single and Multi-sourcing:
Pros and Cons of Single-Sourcing
- Potentially better quality as supplier quality assurance possibilities
- Strong, durable relationships
- Greater dependency, encourages more commitment
- More vulnerable to disruption if supply failure occurs
- Individual supplier more affected by volume fluctuations
- Pressure on prices if no alternative available
Pros and Cons of Multi-Sourcing
- Purchaser can drive price by competitive tendering
- Can switch sources in case of supply failure
- Wide sources of knowledge and expertise to tap
- Commitment difficult
- Less easy to develop supplier quality assurance
- Suppliers less likely to invest in new processes
Strategic Alliances in Supply Chain Management
Strategic alliance between manufacturer and suppliers increases effectiveness of the various stages in the supply chain.
Here are some advantages of Strategic Alliance:
- Each partner can concentrate on different stages of the supply
- Developing competences and learning form the partners
- Suitability and protection of resources is maintained
- Developing low cost models hence financial benefit.
Types of strategic alliances:
- Joint venture: In this type of alliance two or more firms create legally independent company to develop competitive advantage
- Equity Strategic Alliance: There is sharing of different percentages of the company.
- Non-equity Strategic Alliance: It is alliance on a contractual- relationship to share the unique resources.
- Global Strategic Alliances: It is formed between a company and foreign company.
Some of the Strategic alliance resources are: Products, Distribution channels, Manufacturing capability, Project funding, Capital equipment, Knowledge, Expertise or intellectual property
Information Technology (IT) in Supply Chain Management (SCM)
Supply Chain Visibility
- How far can organisations see across their supply chain?
- Big issue due to outsourcing (and more outsourcing)
- Danger that retailers ‘lose control’ of their supply chain
- Implications for performance – and workers rights
IT is used in Supply Chain management to Address…
Distribution Network Configuration
Number, location and network missions of – Suppliers, Production facilities, Distribution centers, Warehouses, Cross-docks and Customers
Objectives of using IT in SCM
- Providing information availability and visibility
- Enabling a single point of contact for data
- Allowing decisions based on total supply chain information
- Enabling collaboration with partners
Existing IT Tools and Applications in SCM
- Electronic Data Interchange (EDI)
- Bar coding and Scanner
- Enterprise Resource Planning (ERP) Systems
- Warehouse Management Systems
- Transportation Management Systems
- Inventory Management Systems
Influence of internet-based technologies
Internet as sales & marketing channel:
- Consumers: more choices and more knowledgeable about products.
- Companies: can collect more information about consumers (e.g. demographic data, purchase frequency etc)
Internet based technologies:
- Sharing of timely demand and availability information within the supply chain
- Fast and cheap transactions (particularly order processing)
- E-Marketplaces: access to global base of suppliers and customers
Supply Chain Management (SCM) software
Supply chain software is a software program or module designed to control end-to-end business processes across the supply chain, perform demand planning and forecasting, and manage supplier relationships. Top Supply chain management (SCM) software include SAP, Oracle, JDA.
Multimodal transport (also known as combined transport) is the transportation of goods, performed with at least two different means of transport (could be rail, sea or road, for example).
“‘International multimodal transport’ means the carriage of goods by at least two different modes of transport on the basis of a multimodal transport contract from a place in one country at which the goods are taken in charge by the multimodal transport operator to a place designated for delivery situated in a different country”, as per United Nations Convention on International Multimodal Transport of Goods.
The Bullwhip Effect (Supply Chain)
The bullwhip effect is a concept of inventory fluctuations or inefficient asset allocation as a result of demand changes as you move further up the supply chain. As such, upstream manufacturers often experience a decrease in forecast accuracy as the buffer increases between the customer and the manufacturer.
Minimizing the bullwhip effect:
- Every industry has its own unique supply chain, inventory placements, and complexities.
- After analyzing the bullwhip effect and implementing improvement steps, inventories in the range of 10 to 30 percent can be reduced
- Around 15 to 35 percent reduction in instances of stock out situations and missed customer orders can be achieved.
Methods to minimize Bullwhip Effect
A detailed stock analysis of the inventory points from stores to raw material suppliers will help uncover idle excess inventories
Improve the inventory planning process
- Inventory planning is carefully done with historical trends for seasonal demand, forward-looking demand, new product launches and discontinuation of older
- products. Safety stock settings and min-max stock range of each inventory point need to be reviewed and periodically adjusted.
- Regular reporting and early warning system need to be implemented for major deviations from the set inventory norms.
Improve the raw material planning process
- Raw material planning needs to be directly linked to the production plan.
- Production plan needs to be released sufficiently in advance to respect the general purchasing lead times.
- Consolidation to a smaller vendor base from a larger vendor base, for similar raw material, will improve the flexibility and reliability of the supplies.
- This will result in lower raw material inventories.
Collaboration and information sharing between managers
- There might be some inter-conflicting targets between purchasing managers, production managers, logistics managers and sales managers.
- Giving more weight to common company objectives in performance evaluation will improve collaboration between different departments.
- Also providing regular and structured inter-departmental meetings will improve information sharing and decision-making process.
Optimize the minimum order quantity and offer stable pricing
- Certain products have high minimum order quantity for end customers resulting in overall high gaps between subsequent orders.
- Lowering the minimum order quantity to an optimal level will help provide create smoother order patterns.
- Stable pricing throughout the year instead of frequent promotional offers and discounts may also create stable and predictable demand.
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