What is Supply Chain Management?

Supply chain management (SCM) is the process of planning, implementing and controlling the flow of materials, information and services from the point of origin to the point of consumption. SCM involves a complex network of suppliers, manufacturers, distributors, retailers and customers, each with their own objectives and constraints. SCM aims to optimize the performance of the entire supply chain by balancing the trade-offs between efficiency, effectiveness and responsiveness.

Supply chains are dynamic and complex, and they need to adapt to the changing needs and preferences of end-consumers.

Supply chain management is crucial for any business that wants to achieve competitive advantages, reduce costs, improve quality, enhance customer satisfaction and sustainability. Some of the benefits of supply chain management are:

• Increased efficiency: By optimizing the use of resources, eliminating waste and minimizing delays, supply chain management can help businesses improve their productivity and profitability.
• Reduced risk: By identifying and mitigating potential disruptions, uncertainties and vulnerabilities, supply chain management can help businesses avoid or minimize losses, damages and reputational harm.
• Improved innovation: By fostering collaboration, communication and learning among supply chain partners, supply chain management can help businesses create new value, generate new ideas and solve complex problems.
• Enhanced agility: By enabling faster and more flexible responses to changing customer demands, market conditions and environmental factors, supply chain management can help businesses adapt and thrive in dynamic and uncertain environments.

To implement effective supply chain management, businesses need to adopt a strategic approach that aligns their supply chain objectives with their overall business goals. They also need to employ various tools and techniques that can help them analyze, design, execute and monitor their supply chain activities. Some of these tools and techniques are:

• Supply chain mapping: This is the process of identifying and visualizing the key elements and relationships of a supply chain, such as suppliers, customers, processes, flows, costs, risks and performance indicators.
• Supply chain optimization: This is the process of finding the optimal configuration and operation of a supply chain that maximizes its efficiency, effectiveness and resilience.
• Supply chain integration: This is the process of coordinating and harmonizing the activities and information flows among supply chain partners to achieve seamless collaboration and synchronization.
• Supply chain analytics: This is the process of collecting, processing and interpreting data from various sources to generate insights and recommendations that can support decision making and improvement in a supply chain.

Supply chain management is not a one-time project, but a continuous process that requires constant monitoring, evaluation and adjustment. Businesses need to keep track of their supply chain performance, identify gaps and opportunities, implement corrective actions and preventive measures, and seek feedback from their stakeholders. By doing so, they can ensure that their supply chains are always aligned with their changing needs and expectations.

Supply chain management is a challenging but rewarding field that offers many opportunities for learning and growth. It requires a combination of skills, knowledge and competencies that span across various disciplines, such as operations management, logistics, procurement, quality management, project management, risk management, innovation management and sustainability management. It also requires a mindset that embraces change, complexity and uncertainty.

Trade-Offs

From the outset, it is important to recognize that there is no perfect method for managing a supply chain.

Many factors determine how you should manage your supply chain including:

• what industry you’re in
• stability and predictability of demand from your immediate customers as well as end-user consumers
• product or service availability and how susceptible they are to supply chain shocks
• company policy (see section below)
• company strategy
• budgetary and space constraints as a business – after all, that inventory you purchase has to sit somewhere and how much you can purchase is limited by available funds and expected cash flows
• where and by how much to stock inventory internally in the business, for example, closer to the customers or within centralized warehouses
• existing spare capacity at various points in the supply chain which impact the scalability of supply in the short-term i.e., the throughput of the supply chain can limited by a bottleneck which cannot be immediately resolved
• working with push methods based on demand forecasting (often seen in industries that experience seasonality) or pull methods based on replenishing stocks after customers have purchased goods

Company Policies

SCM depends on the various constraints of time, money and space that affect the supply chain operations. Time refers to the duration of the production process, the delivery time of the goods and the responsiveness to customer needs. Money refers to the cost of production, transportation, inventory, quality and customer service. Space refers to the physical location, capacity and layout of the facilities, equipment and resources involved in the supply chain. SCM tries to optimize these constraints by finding the best combination of strategies, techniques and technologies that suit the specific context and goals of each company within a supply chain.

Where issues and conflicts arise within a supply chain is where companies operating within it have different policies and procedures around how they operate. For example, a retailer that bases their strategy around bulk discounts based on purchasing large amounts of inventory and passing those cost savings to customers will have issues with suppliers who prefer to have leaner inventory stocks due to space and budget constraints.

Company and Organizational Strategies

One of the key aspects of supply chain management is how it relates to organizational strategy. An organization’s strategy can influence its supply chain management in various ways, such as:

• Lowest price based strategies: These strategies aim to offer the lowest price to the customers by reducing the costs of production, distribution and marketing. A company that adopts this strategy can implement it in two ways: they can have a lean and efficient supply chain that minimizes inventory, waste and delays or engage on bulk purchases where suppliers offer substantial rebates and discounts and then pass those cost savings onto customers.
• Customer segmentation: This strategy involves dividing the customers into different groups based on their needs, preferences and behaviors, and offering different products or services to each group. A company that adopts this strategy may have a flexible and responsive supply chain that can customize and differentiate its offerings according to the customer segments. If there are competitors that have lowest price strategies, an organization may pursue up-market opportunities seeking customers who are less price sensitive.
• Level of competition in the defined market: This factor affects how a company positions itself in the market and how it competes with its rivals. A company that faces a high level of competition may have a competitive and innovative supply chain that can deliver superior value, quality and service to the customers. However, this factor also involves some pressures, such as shorter product life cycles, faster changes and higher expectations.

Costs in Supply Chains

Excess Inventory

The costs of excess inventory in the supply chain are often underestimated and can have a significant impact on the profitability and performance of a business. Excess inventory refers to the amount of inventory that exceeds the optimal level required to meet customer demand. Excess inventory can result from poor forecasting, inefficient production planning, overstocking, or slow sales.

Some of the costs associated with excess inventory are:

• Storage costs: These include the expenses of renting or maintaining warehouse space, utilities, security, insurance, and labor. Storage costs can vary depending on the type, size, and location of the inventory. According to some estimates, storage costs can account for 15% to 35% of the total inventory value per year.
• Damages: Excess inventory is more prone to damage, deterioration, obsolescence, or theft. Damages can reduce the quality and value of the inventory and lead to customer dissatisfaction or returns. Damages can also increase the waste and environmental impact of the business.
• Cost of capital: This is the opportunity cost of investing in inventory instead of other more productive or profitable uses of capital. Cost of capital can be measured by the interest rate or the return on investment (ROI) that the business could have earned by investing in other assets or projects. Cost of capital can range from 10% to 25% of the inventory value per year.
• Opportunity costs: These are the lost revenues or profits that the business could have generated by selling or using the excess inventory. Opportunity costs can also include the lost market share or customer loyalty that the business could have gained by offering better products or services. Opportunity costs are difficult to quantify but can be significant in competitive markets.

The costs of excess inventory can add up to a substantial amount and erode the profit margin and cash flow of a business. Therefore, it is important for businesses to optimize their inventory management and reduce excess inventory as much as possible. Some of the strategies that businesses can use to minimize excess inventory are:

• Improve demand forecasting and production planning: Businesses should use accurate and reliable data and methods to forecast customer demand and plan their production accordingly. Businesses should also monitor and adjust their forecasts and plans regularly based on changing market conditions and customer feedback.
• Implement lean manufacturing and just-in-time (JIT) principles: Businesses should adopt lean manufacturing and JIT principles to eliminate waste and inefficiency in their production processes. Businesses should produce only what is needed, when it is needed, and in the right quantity and quality. Businesses should also reduce their batch sizes and lead times to increase their flexibility and responsiveness.
• Adopt inventory reduction techniques: Businesses should use various inventory reduction techniques such as cycle counting, ABC analysis, economic order quantity (EOQ), safety stock, reorder point, vendor-managed inventory (VMI), consignment inventory, or drop-shipping to optimize their inventory levels and avoid overstocking or understocking.
• Enhance inventory visibility and control: Businesses should use advanced technology and systems such as barcodes, RFID tags, scanners, sensors, software, or cloud-based platforms to track and monitor their inventory throughout the supply chain. Businesses should also use analytics and dashboards to measure and improve their inventory performance and identify potential issues or opportunities.

By reducing excess inventory in the supply chain, businesses can not only save costs but also improve their customer service, quality, innovation, sustainability, and competitiveness.

Stockouts

Stockouts are one of the most common and costly problems in the supply chain management. A stockout occurs when a product is not available to meet the demand, either because of insufficient inventory, inaccurate forecasting, or poor replenishment. Stockouts can have serious consequences for both the supplier and the customer, such as:

• Loss of reputation: A stockout can damage the supplier’s reputation and credibility, as well as the customer’s trust and loyalty. Customers may perceive the supplier as unreliable, unprofessional, or incompetent, and may switch to a competitor or seek alternative sources of supply. This can result in lower sales, reduced market share, and decreased customer satisfaction.
• Expedited shipping: A stockout can force the supplier to use expedited shipping methods to fulfill the customer’s order as soon as possible. This can increase the transportation costs and reduce the profit margin. Expedited shipping can also have a negative environmental impact, as it may involve more fuel consumption, carbon emissions, and noise pollution.
• Production planning changes: A stockout can disrupt the supplier’s production planning and scheduling, as it may require adjusting the production capacity, resources, and priorities. This can increase the operational costs and complexity, and reduce the efficiency and productivity. Production planning changes can also affect the quality and consistency of the products, as well as the delivery time and accuracy.

To avoid or minimize the costs of stockouts in the supply chain, suppliers should implement effective inventory management strategies, such as:

• Demand forecasting: Suppliers should use accurate and reliable methods to forecast the demand for their products, based on historical data, market trends, customer feedback, and other relevant factors. Demand forecasting can help suppliers to plan their inventory levels, replenishment frequency, and safety stock.
• Inventory optimization: Suppliers should use appropriate techniques to optimize their inventory levels, such as economic order quantity (EOQ), reorder point (ROP), or just-in-time (JIT). Inventory optimization can help suppliers to balance the trade-off between holding costs and ordering costs, and to avoid overstocking or understocking.
• Reduce order lead times to replenish stock on a daily or weekly cadence
• Inventory visibility: Suppliers should use advanced technologies to monitor and track their inventory status, such as radio frequency identification (RFID), barcode scanning, or cloud computing. Inventory visibility can help suppliers to have real-time information about their inventory availability, location, and movement, and to identify and resolve any inventory issues quickly.

By implementing these strategies, suppliers can reduce the risk of stockouts in the supply chain, and improve their customer service, operational performance, and profitability.

End-Consumer Demand

A big factor that affect supply chains are changes in end-consumer demand. End-consumer demand is the quantity and quality of goods and services that the final customers want to buy at a given price and time. End-consumer demand can change due to various reasons, such as:

• Economic conditions: The income level, inflation rate, interest rate, exchange rate, and other macroeconomic factors can influence the purchasing power and spending behavior of the end-consumers.
• Social and cultural factors: The demographics, lifestyles, values, beliefs, attitudes, and preferences of the end-consumers can shape their tastes and needs for different products and services.
• Technological factors: The innovation, diffusion, and adoption of new technologies can create new opportunities and challenges for the supply chain. For example, e-commerce, digital platforms, artificial intelligence, blockchain, and internet of things can enable new ways of communication, collaboration, coordination, and transaction among the supply chain actors.
• Environmental factors: The natural resources availability, climate change, pollution, regulations, and social responsibility can affect the sustainability and resilience of the supply chain. For example, the supply chain may need to reduce its environmental impact by adopting green practices such as recycling, reuse, renewable energy, and circular economy.
• Changing needs: For many products such as non-perishable goods such as clothing, a person may demand products in a particular week but then never need to return to a clothing retailer again for several months or years.

The changes in end-consumer demand can have significant implications for the supply chain management. Depending on the nature and magnitude of the change, the supply chain may need to adjust its strategies and operations in terms of:

• Product design: The supply chain may need to modify or develop new products or services that meet the changing needs and expectations of the end-consumers. For example, the supply chain may need to offer more customized, personalized, or differentiated products or services that cater to different segments or niches of the market.
• Sourcing: The supply chain may need to select or change its suppliers or partners that can provide the required inputs or resources for the production and delivery of the products or services. For example, the supply chain may need to source from local or global suppliers depending on the cost, quality, reliability, flexibility, and sustainability criteria.
• Manufacturing: The supply chain may need to optimize or reconfigure its production processes or facilities that can produce the products or services efficiently and effectively. For example, the supply chain may need to adopt lean, agile, or hybrid manufacturing systems that can cope with different levels of demand variability or uncertainty.
• Distribution: The supply chain may need to design or redesign its distribution channels or networks that can deliver the products or services to the end-consumers in a timely and convenient manner. For example, the supply chain may need to use multiple or alternative modes of transportation or logistics such as road, rail, air, sea, or pipeline depending on the speed and cost.

Demand Forecasting

Demand forecasting is the process of estimating the future demand for a product or service based on historical data, market trends, and other factors. Demand forecasting is essential for effective supply chain management, as it helps to optimize inventory levels, reduce costs, and improve customer satisfaction and plan for future growth.

There are different methods of demand forecasting, depending on the type and complexity of the product or service, the availability and quality of data, and the time horizon of the forecast. Some of the common methods are:

• Qualitative methods: These methods rely on expert opinions, surveys, focus groups, or market research to gather information about customer preferences, expectations, and intentions. They are useful when there is little or no historical data, or when the product or service is new or innovative.
• Quantitative methods: These methods use mathematical models and statistical techniques to analyze historical data and identify patterns, trends, and correlations. They are useful when there is sufficient and reliable data, and when the product or service has a stable or predictable demand.
• Hybrid methods: These methods combine both qualitative and quantitative inputs to generate a more accurate and robust forecast. They are useful when there is some uncertainty or variability in the demand, or when there are multiple factors influencing the demand.

Demand forecasting is not a one-time activity, but a continuous process that requires regular monitoring and updating. It also involves collaboration and communication among different stakeholders in the supply chain, such as suppliers, manufacturers, distributors, retailers, and customers. By using effective demand forecasting techniques, supply chain managers can improve their decision-making and performance.

Conclusion

In this article, we have discussed the definition, scope, benefits and challenges of supply chain management, as well as some of the best practices as well as issues that are found in this field. There is no perfect solution but this article will have hopefully highlighted to you some of the factors that drive supply chains and how you can optimize your business or the organization you work in to drive positive change.