Supply chain management definition and FAQs

We've got answers to your frequently asked questions about supply chain management, from "What is SCM?" to "What does supply chain software do?" and "What is supply chain collaboration?"

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Compiled by Thomas Wailgum and Ben Worthen

Editor's Note: This article was updated on Nov. 20, 2008, to reflect changes in supply chain management technology.

What is supply chain management?

Supply chain management (SCM) is the combination of art and science that goes into improving the way your company finds the raw components it needs to make a product or service and deliver it to customers. The following are five basic components of SCM.

1. Plan—This is the strategic portion of SCM. Companies need a strategy for managing all the resources that go toward meeting customer demand for their product or service. A big piece of SCM planning is developing a set of metrics to monitor the supply chain so that it is efficient, costs less and delivers high quality and value to customers.

2. Source—Next, companies must choose suppliers to deliver the goods and services they need to create their product. Therefore, supply chain managers must develop a set of pricing, delivery and payment processes with suppliers and create metrics for monitoring and improving the relationships. And then, SCM managers can put together processes for managing their goods and services inventory, including receiving and verifying shipments, transferring them to the manufacturing facilities and authorizing supplier payments.

3. Make—This is the manufacturing step. Supply chain managers schedule the activities necessary for production, testing, packaging and preparation for delivery. This is the most metric-intensive portion of the supply chain—one where companies are able to measure quality levels, production output and worker productivity.

4. Deliver—This is the part that many SCM insiders refer to as logistics, where companies coordinate the receipt of orders from customers, develop a network of warehouses, pick carriers to get products to customers and set up an invoicing system to receive payments.

5. Return—This can be a problematic part of the supply chain for many companies. Supply chain planners have to create a responsive and flexible network for receiving defective and excess products back from their customers and supporting customers who have problems with delivered products..

For a more detailed outline of these steps, check out the nonprofit Supply-Chain Council's website.

What does supply chain management software do?

Supply chain management software is possibly the most fractured group of software applications on the planet. Each of the five major supply chain steps previously outlined is comprised of dozens of specific tasks, many of which have their own specific software. Some vendors have assembled many of these different chunks of software together under a single roof, but no one has a complete package that is right for every company. For example, most companies need to track demand, supply, manufacturing status, logistics (i.e. where things are in the supply chain), and distribution. They also need to share data with supply chain partners at an ever increasing rate. While products from large ERP vendors like SAP's Advanced Planner and Optimizer (APO) can perform many or all of these tasks, because each industry's supply chain has a unique set of challenges, many companies decide to go with targeted best of breed products instead, even if some integration is an inevitable consequence.

It's worth mentioning that the old adage about systems only being as good as the information that they contain applies doubly to SCM. If the information entered into a demand forecasting application is not accurate, then you will get an inaccurate forecast. Similarly, if employees bypass the supply chain systems and try to manage things manually (using the fax machine or spreadsheets), then even the most expensive systems will provide an incomplete picture of what is happening in a company's supply chain.

What is the relationship between ERP, CRM and SCM?

Many SCM applications are reliant upon the kind of information that is stored inside enterprise resource planning (ERP) software and, in some cases, to some customer relationship management (CRM) packages. Theoretically a company could assemble the information it needs to feed the SCM applications from legacy systems (for most companies this means Excel spreadsheets spread out all over the place), but it can be nightmarish to try to get that information flowing on a fast, reliable basis from all the areas of the company. ERP is the battering ram that integrates all that information in a single application, and SCM applications benefit from having a single major source to go to for up-to-date information. Most CIOs who have tried to install SCM applications say they are glad they did ERP first. They call the ERP projects "putting your information house in order." Of course, ERP is expensive and difficult, so you may want to explore ways to feed your SCM applications the information they need without doing ERP first. These days, most ERP vendors have SCM modules, so doing an ERP project may be a way to kill two birds with one stone. In addition, the rise and importance of CRM systems inside companies today puts even more pressure on a company to integrate all of its enterprisewide software packages. Companies will need to decide if these products meet their needs or if they need a more specialized system.

Applications that simply automate the logistics aspects of SCM are less dependent upon gathering information from around the company, so they tend to be independent of the ERP decision. But chances are, companies will need to have these applications communicate with ERP in some fashion. It's important to pay attention to the software's ability to integrate with the Internet and with ERP applications because the Internet will drive demand for integrated information. For example, if a company wants to build a private website for communicating with their customers and suppliers, the company will want to pull information from ERP and supply chain applications together to present updated information about orders, payments, manufacturing status and delivery.

What is the goal of installing supply chain management software?

Before the Internet came along, the aspirations of supply chain software devotees were limited to improving their ability to predict demand from customers and make their own supply chains run more smoothly. But the cheap, ubiquitous nature of the Internet, along with its simple, universally accepted communication standards, have thrown things wide open. Now, companies can connect their supply chain with the supply chains of their suppliers and customers together in a single vast network that optimizes costs and opportunities for everyone involved. This was the reason for the B2B explosion; the idea that everyone a company does business with could be connected together into one big happy, cooperative family.

Of course, reality isn't quite that happy and cooperative. But today most companies share at least some data with their supply chain partners. The goal of these projects is greater supply chain visibility. The supply chain in most industries is like a big card game: the players don't want to show their cards because they don't trust anyone else with the information, but if they showed their hands they could all benefit. Suppliers wouldn't have to guess how many raw materials to order, and manufacturers wouldn't have to order more than they need from suppliers to make sure they have enough on hand if demand for their products unexpectedly increases. And retailers would have fewer empty shelves if they shared the information they had about sales of a manufacturer's product in all their stores with the manufacturer. The Internet makes showing your hand to others possible, but centuries of distrust and lack of coordination within industries make it difficult.

During the last few years most companies have gotten over the trust issue. In many cases "gotten over" is a euphemism for "have been bullied into sharing supply chain information from a dominant industry player." Want to sell your goods in Wal-Mart? Better be prepared to share data and adhere to Wal-Mart's data-exchange standards. (For more on this topic, see "How Wal-Mart Lost Its Technology Edge.")

The payoff of timely and accurate supply chain information is the ability to make or ship only as much of a product as there is a market for. This is the practice known as just-in-time manufacturing, and it allows companies to reduce the amount of inventory that they keep. This can cut costs substantially, since you no longer need to pay to produce and store excess goods. But many companies and their supply chain partners have a long way to go before that level of supply chain flexibility can be achieved.

What is supply chain collaboration?

Let's look at consumer-packaged goods for an example of collaboration. If there are two companies that have made supply chain a household word, they are Wal-Mart and Procter & Gamble. Before these two companies started collaborating back in the '80s, retailers shared very little information with manufacturers. But then the two giants built a software system that hooked P&G up to Wal-Mart's distribution centers. When P&G's products run low at the distribution centers, the system sends an automatic alert to P&G to ship more. In some cases, the system communicates down to the individual Wal-Mart store, allowing P&G monitor the shelves through real-time satellite link-ups that send messages to the factory whenever a P&G item swoops past a scanner at the register. Within the last couple of years, the relationship has expanded to include radio-frequency identification (RFID) technologies to gain even more insight into ridding inefficiencies in the supply chain.

With this kind of minute-to-minute information, P&G knows when to make, ship and display more products at the Wal-Mart stores. There's no need to keep products piled up in warehouses awaiting Wal-Mart's call. Invoicing and payments happen automatically too. The system saves P&G so much in time, reduced inventory and lower order-processing costs that it can afford to give Wal-Mart "low, everyday prices" without putting itself out of business. (For more on Wal-Mart's supply chain, see "How Wal-Mart Lost Its Technology Edge.")

What are the roadblocks to installing supply chain software?

Gaining trust from your suppliers and partners.

Supply chain automation is uniquely difficult because its complexity extends beyond a company's walls. Employees will need to change the way they work and so will the people from each supplier that a company adds to its network. Only the largest and most powerful manufacturers or retailers (i.e. Wal-Mart) can force such radical changes down suppliers' and partners' throats. Most companies have to sell outsiders on the system. Moreover, one company's goals in installing the system may be threatening to their suppliers, to say the least. For example, Wal-Mart's collaboration with P&G meant that P&G would assume more responsibility for inventory management, something retailers have traditionally done on their own. Wal-Mart had the clout to demand this from P&G, but it also gave P&G something in return—better information about Wal-Mart's product demand, which helped P&G manufacture its products more efficiently. In order for a company to get its supply chain partners to agree to collaborate, business leaders and supplier relations managers have to be willing to compromise and help partners achieve their own goals.

Internal resistance to change.

If selling supply chain systems is difficult on the outside, it isn't much easier inside. Operations people are accustomed to dealing with phone calls, faxes, spreadsheets or hunches scrawled on paper, and will most likely want to keep it that way. If management can't convince front-line operations people that using the software will be worth their time, they will easily find ways to work around it. Senior executives cannot disconnect the telephones and fax machines just because they have supply chain software in place.

Many mistakes at first.

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