A supply chain, or logistics chain, is a system of processes, people, activities, information, and resources needed to get a product or service from producer to consumer.
Most manufacturers understand the importance of the supply chain, which is that connected network of organizations, resources, technologies, and individuals involved in the manufacture and sale of their products. Supply chain management (SCM) is the management of the flow of these goods and services and includes every process that converts raw materials into final products.
SCM embodies an effort by supply chain firms to create and implement supply chains that are efficient and economical. Its ultimate goal is to streamline a company’s supply-side activities to maximize customer value and achieve a competitive advantage in the marketplace.
How Does Supply Chain Management Work?
In most cases, SCM is looking to control and link the production, shipment, and distribution of a product. When they can manage the supply chain, manufacturers can cut costs and get products to the consumer faster. They accomplish this by maintaining tighter control of internal inventories, production, distribution, sales, and also the inventories of their vendors.
Supply Chain Management is based on the notion that every product comes to the market as a result of the work of the organizations that comprise a supply chain. Even though supply chains have been around for a long time, it’s only recently that companies have started paying attention to them as something that adds value to their operations.
There are five primary components of a supply chain management system.
All of the organizations that constitute the supply chain are joined together through both physical flows and information flows.
Physical flows are the transformation, movement, and storage of goods and materials.
Information flows allow the various supply chain partners to coordinate their long-term plans, and to control the day-to-day flow of goods and materials up and down the supply chain.
In SCM, it’s the responsibility of the supply chain manager to coordinate the logistics of all aspects of the supply chain, which consists of five parts:
- The plan or strategy: Every organization must plan and manage all the resources needed to meet customer demand for their product or service. They must also design their supply chain and determine which metrics they will use so that they ensure the supply chain is efficient, effective, delivers value to customers, and meets the company’s goals.
- Sourcing: It’s essential to choose suppliers that can provide the goods and services that are needed to produce their product. Once the suppliers are under contract, the supply chain manager can use various processes to monitor and manage supplier relationships. Some of the critical processes are ordering, receiving, managing inventory, and authorizing supplier payments.
- Manufacturing: Once again, the supply chain manager will direct the activities that involve accepting raw materials, manufacturing the product, inspecting the product for quality, packaging for shipping, and scheduling deliveries. Most manufacturing companies measure quality, production output, and worker productivity to ensure that the company is making products that meet all quality standards.
- Delivery and logistics: This component entails coordinating customer orders, scheduling deliveries, dispatching loads, creating and sending invoices, and receiving payments. Shipping products to their customers could require a fleet of vehicles, or, as many companies do, outsourcing the delivery process to companies that specialize in shipping and delivery. This method is preferred if the product is large, requires special handling, or is to be delivered to the consumer directly.
- The return system: Every supplier needs a network that is quick to respond and flexible to take back defective, extra, or unwanted products. If the product is faulty, it must be repaired or scrapped. If the product is either excess or undesirable, it should be returned to the warehouse for sale.
The supply chain manager is tasked with reducing shortages and keeping costs down. The job entails making recommendations to boost productivity and improving quality, in addition to purchasing inventory and the various logistical duties of the role.
Excellent supply chain management is what helps keep companies profitable while mitigating expensive lawsuits and recalls.
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Here are two examples of successful supply chain management
Walmart and Procter & Gamble
Walmart and Procter & Gamble offer a classic example of supply chain collaboration. Before the companies started connecting their supply chains, few retailers and manufacturers had ever shared information. After they showed that sharing information could reduce costs, other retailers became willing to consider the possibility at least. In the early 1990s, Walmart enacted its Retail Link system and persuaded other retailers to connect.
Eventually, the Walmart Point of Sale (POS) system began to amass sales of individual P&G products at each store. When the POS indicated that inventory for a particular product had fallen to a predetermined threshold, the system notified the Walmart distribution center to ship additional products to the store. When stock in the Walmart distribution center fell to its limit, the system automatically alerted the P&G distribution center to ship the additional merchandise.
Walgreens Boots Alliance, Inc., which operates one of the largest pharmacy chains in the United States, focused on transforming its supply chain in 2016. Realizing the importance of SCM to its business, the company decided to efficiently manage and revise its supply chain so it could stay ahead of the ever-changing trends and continues to add value to its bottom line.
Walgreens has invested in the technology portion of its supply chain by implementing an SCM that synthesizes relevant data and uses analytics to forecast customer purchase behavior. It then works its way up the supply chain to meet that expected demand.
The company can anticipate things such as flu patterns, which allows it to forecast needed inventory for over-the-counter flu remedies accurately. Their forward-looking SCM helps the company to create an efficient supply chain with a minimum of waste. Walgreens can reduce excess inventory and all of its associated costs, such as warehousing and transportation.
Summing things up
- Supply chain management (SCM) is the centralized management of the flow of goods and services and includes all processes that transform raw materials into final products.
- Managing the supply chain gives companies the means to cut costs and deliver products to the consumer faster.
- Proper supply chain management keeps companies profitable and helps them to avoid expensive recalls and lawsuits.