What Is Supply Chain Management?
Last Updated July 11, 2023
One of the best ways for businesses to serve their customers well is to make effective supply chain management a strategic priority. What is supply chain management? Simply put, supply chain management oversees all the processes that integrate suppliers to work efficiently together to move a product from creation to the customer’s hands, taking into account supply and demand along the way.
According to David Frayer, Assistant Dean for Outreach & Engagement in Michigan State University’s Eli Broad College of Business and instructor in the MSU’s online Supply Chain Management Certificate programs, this is about enabling a very customized product delivery: “The ultimate focus of the supply chain is to meet the consumer’s value proposition, deliver the product at the location they want it in the form they want it with the unique characteristics they want it.”
What is a Supply Chain?
The supply chain includes all the activities, people, organizations, information, and resources required to move a product from inception to the customer. For example, in the consumer goods space, this likely spans raw materials, production, packaging, shipping, warehousing, delivery, and retailing. The end goal is simple: meet the customer’s request. “By balancing supply and demand across all members of the supply chain,” Frayer says, “organizations and channels work together to move the product.”
The term “supply chain” can take on several meanings, iterations and roles. These include:
- The concept of the supply chain, encompassing the process of moving a finished good from procurement to fulfillment in a cycle.
- The industry, which includes the carriers and regulations that oversee transporting goods.
- The function, which is the practice of managing the operations, logistics and inventory levels as part of coordinating the buyers and suppliers.
These processes and functions, when done well, can add value to any industry, which is why supply chain management should be an essential component of business strategy.
What is Supply Chain Management?
Supply chain management is the process of integrating the supply and demand management, not only within the organization, but also across all the various members and channels in the supply chain so they work together most efficiently and effectively.
There are five basic components in a supply chain management system:
1. Planning
To meet customer demands, supply chain managers have to plan ahead. This means forecasting demand, designing the supply chain intentionally, and determining how the organization will measure the supply chain to ensure it is performing as expected in terms of efficiency, delivering value for customers and helping to achieve organizational goals.
2. Sourcing
Selecting suppliers who will provide the goods, raw materials, or services that create the product is a critical component of the supply chain. Not only does this include creating the contracts that govern the suppliers, but also managing and monitoring existing relationships. As part of strategic sourcing, supply chain managers must oversee the processes for ordering, receiving, managing inventory and authorizing invoice payments for suppliers.
3. Making
Supply chain managers also need to help coordinate all the steps involved in creating the product itself. This includes reviewing and accepting raw materials, manufacturing the product, quality testing and packaging. Generally, businesses evaluate the quality, production output and employee productivity to ensure overall standards are upheld.
4. Delivering
Ensuring the products reach the customers is achieved through logistics and it’s fundamental to supply chain success. This includes coordinating the orders, scheduling delivery, dispatching, invoicing, and receiving payments. Generally, a fleet of vehicles must be managed to ship the products—from tankers bringing product manufactured overseas to fleet trucks and parcel services handling last mile delivery. In some cases, organizations outsource the delivery process to other organizations who can oversee special handling requirements or home delivery.
5. Returning
Supply chain managers also need to develop a network that supports returning products. In some cases, this may include scrapping or re-producing a defective product; in others, it may simply mean returning a product to the warehouse. This network needs to be responsible and flexible to support customer needs.
The foundation for each of these components is a solid network of supporting processes that can effectively monitor the information across the supply chain and assure adherence to laws and regulations. This involves a wide number of departments, including HR, IT, quality assurance, finance, product design and sales, according to CIO.
Why is Supply Chain Management Important?
Supply chain management is crucial for any organization because doing it well can introduce several benefits to the organization; however, poor supply chain management can result in very expensive delays, quality issues, or reputation. In some cases, poor supply chain management can also cause legal issues if suppliers or processes are not compliant. Technology advances have unlocked huge potential for supply chain management, enabling supply chain managers to work closely – and in real time – with members of the supply chain. With supply chain management, organizations can:
- Anticipate problems
- Dynamically adjust prices
- Improve inventory and fulfillment
Examples of Supply Chain Management
Long before cutting-edge technologies like blockchain came on the scene and supported information sharing, Walmart and Proctor & Gamble (P&G) began connecting their supply chains in the late 1980s, according to CIO. By sharing information, the two organizations would be able to reduce costs. For example, Walmart linked its POS system to notify its distribution centers to send additional products to the stores when individual P&G products ran low. If the distribution center fell below its threshold, an automatic alert was sent to the P&G distribution center to ship additional product.
This constant cycle of communication helps balance manufacturing so inventory can meet demand without reaching excess and enables billing and payment to become automated processes.
What are the Benefits of Supply Chain Management?
Effective supply chain management provides three primary benefits to an organization, according to MSU’s online Supply Chain Management I course.
1. Lowered Costs
By integrating suppliers and applying technology, organizations can lower operating costs by responding more dynamically to customer needs. For example, managing based on demand keeps organizations from over-producing, which not only reduces labor and raw materials costs, but also cuts down on inventory management costs and transportation costs.
2. Increased Revenue
When organizations use technology to stay closer to customer demand and respond more quickly (as in the Walmart example keeping shelves stocked), it’s more likely products remain available for customers to purchase. When manufacturing is streamlined to produce just enough, labor and materials can be devoted to developing new items to offer the customer and expand the product mix. Outside the product realm, this may mean offering additional services customers.
3. Asset Utilization
With effective supply chain management, organizations can use capitol assets, like production or transportation equipment, most effectively. Rather than adding wear and tear to manufacturing equipment needlessly, businesses can produce to the need.
Supply chain management allows organizations to deliver more quickly, ensure products are available, reduce quality issues, and navigate returns with ease, ultimately improving value, both within the organization and for the customers.
