What is supply chain management (SCM)? Definition and FAQs

We've got answers to your frequently asked questions about SCM, including "What is supply chain management and why is it important," "What does supply chain software do?" and "How will IoT and blockchain affect SCM?"

supply chain

What is supply chain management?

Supply chain management (SCM) enables enterprises to source the raw materials or components needed to create a product or service and deliver that product or service to customers. The six components of SCM include:

  • Planning—Enterprises need to plan and manage all resources required to meet customer demand for their product or service. They also need to design their supply chain and then determine which metrics to use in order to ensure the supply chain is efficient, effective, delivers value to customers, and meets enterprise goals.
  • Sourcing—Companies must choose suppliers to provide the goods and services needed to create their product. After suppliers are under contract, supply chain managers use a variety of processes to monitor and manage supplier relationships. Key processes include ordering, receiving, managing inventory, and authorizing supplier payments.

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  • Making—Supply chain managers coordinate the activities required to accept raw materials, manufacture the product, test for quality, package for shipping, and schedule for delivery. Most enterprises measure quality, production output, and worker productivity to ensure the enterprise creates products that meet quality standards.
  • Delivering—Often called logistics, this involves coordinating customer orders, scheduling delivery, dispatching loads, invoicing customers, and receiving payments. It relies on a fleet of vehicles to ship product to customers. Many organizations outsource large parts of the delivery process to specialist organizations, particularly if the product requires special handling or is to be delivered to a consumer’s home.
  • Returning—The supplier needs a responsive and flexible network to take back defective, excess, or unwanted products.  If the produce is defective it needs to be reworked or scrapped.  If the product is simply unwanted or excess it needs to be returned to the warehouse for sale.
  • Enabling—To operate efficiently, the supply chain requires a number of support processes to monitor information throughout the supply chain and assure compliance with all regulations. Enabling processes include finance, HR, IT, facilities, portfolio management, product design, sales, and quality assurance.

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

What's the role of supply chain management software?

The goal of supply chain software is to improve supply chain performance. Timely and accurate supply chain information allows manufacturers to make and ship only as much product as can be sold. Effective supply chain systems help both manufacturers and retailers reduce excess inventory. This decreases the cost of producing, shipping, insuring, and storing product that cannot be sold.

Roadblocks to installing SCM software may include:

Gaining trust from your suppliers and partners. As a result of the spread of television in the 1950s, manufacturers were able to build so much consumer awareness of their brands that retailers were forced to carry certain products. Unfortunately, executives in some national brands were quite arrogant and used their power to extract concessions from retailers.

Over the next thirty years power shifted from manufacturers to retailers. The explosion of broadcast television channels and the advent of cable television made it more difficult for manufacturers to have as much influence with consumers. During the same period, retailers gathered new insights about consumer purchasing habits from their point of sale (POS) systems. Eventually, Walmart grew powerful enough to dictate terms to manufacturers. Although smaller retailers lacked Walmart’s power, they realized that information about consumers was exceptionally valuable.

This power shift created friction, making many manufacturers and retailers reluctant to share information. While this cultural divide remains in many grocery and consumer products companies, it is fading as retailers realize they have to cooperate with manufacturers or supersize retailers like Amazon will render them irrelevant.

Internal resistance to change. If selling supply chain systems is difficult with customers and suppliers, it isn’t much easier with internal staff. Few people embrace change enthusiastically; in fact, most resist new processes, interfaces and job responsibilities.

An effective organizational change management program can help. The goals should be to convince everyone from front-line operations people to senior staff that the new processes and supporting software make jobs easier. Said another way, the program should help everyone understand, “What’s in it for me.”

What are some supply chain management examples?

Walmart and Procter & Gamble began to work together in the late 1980s and are the classic example of supply chain collaboration. Before these two companies began working to connect their supply chains, retailers and manufacturers shared little information. After Walmart and P&G demonstrated that shared information reduced cost, other retailers became more willing to consider the possibility. In the early 1990s Walmart formalized its Retail Link system and cajoled (some would say strong armed) other retailers to connect.

Over time, the Walmart POS system was able to aggregate 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 Walmart distribution center was notified to ship additional product to the store. As inventory in the Walmart distribution center fell to its threshold, the P&G distribution center was automatically alerted to ship additional product.

Today, this continuous flow of information helps P&G to determine when to manufacture and ship products to Walmart. By avoiding manufacturing too much inventory and by automating the billing and payment process, both firms enjoy low costs.

What is the importance of supply chain management?

Over the last twenty years, the supply chains of manufacturers and retailers have become ever more tightly linked. In many industries, retail sales trigger replenishment orders to manufacturers. Manufacturers with a well-tuned, just-in-time supply chain can automatically restock retail shelves as products are sold.  As collaboration has increased, additional data from supply chain partners has allowed companies to use advanced analytic tool to further improve results. Examples include:

  • Identifying potential problems before they occur. When a customer orders more product than the manufacturer can deliver, the traditional response has been to short the order. This leaves the buyer feeling unimportant and convinced the manufacturer’s service is poor. Manufacturers who anticipate the shortage before the buyer is disappointed may be able to offer a substitute product or other incentive to keep the buyer happy.
  • Optimizing price dynamically. Seasonal products, particularly fashion products, have a limited shelf life. Any that don’t sell by the end of the season are scrapped or sold at deep discounts to empty the warehouse. Airlines, hotels, and other companies with a limited, but perishable product, adjust prices dynamically to meet demand. While this is more difficult with clothing and other products where the supply can vary widely, similar forecasting techniques can improve margins.
  • Improving the allocation of available to promise inventory. Today’s tools dynamically allocate resources and schedule work based on the sales forecast, actual orders, and promised delivery of raw materials. Manufacturers are able to confirm a product delivery date when the order is placed, significantly reducing incorrectly filled orders.

What is the extended supply chain?

The extended supply chain includes all companies that contribute to a product. This means that the extended supply chain includes the suppliers to your suppliers as well as the customers of your customers.

When companies encounter supply chain problems, the initial action is to ask the supplier about the situation. However, organizations that monitor the extended supply chain have the option of reaching back through the primary supplier to the company that supplies components to the primary supplier. As an example, if a popular baseball hat is not available from the manufacturer, the normal reaction of the store manager is to contact the manufacturer. However, if the retailer monitors the extended supply chain, the store manager would know the manufacturer was having trouble getting the brim. If it appears that additional brims will not be available to the manufacturer quickly, the retailer would have time to seek a different supplier.

What is the impact of globalization on the supply chain?

Twenty-five years ago, one of the main reasons companies created global supply chains was to take advantage of lower wages in other countries. In general, it was fairly easy to off-set the increased shipping costs resulting from remote manufacturing. However, salary arbitrage advantages are eroding as wages in lower cost countries are rising, improved process and robotics allows plants to be operated with far fewer people, and local firms are becoming strong competitors in virtually every industry.

One of the advantages of the global supply chain has been the ability to scatter patents and manufacturing sites around the globe. This allowed companies to report profits in countries with low corporate taxes. However, many of these arrangements are being challenged. In 2016, the European Commission ordered Apple to pay Ireland €13bn in back taxes, ruling that Apple’s tax agreement with Ireland amounted to illegal state aid. The antitrust chief of the European Union, Margrethe Vestager, recently began investigating Amazon’s European tax practices. Google and other technology firms are also being investigated by the EU.

How will IoT affect the supply chain?

Today, RFID is deployed widely in most industries to help manufacturers track raw materials, products, pallets, and any other supply chain components. With the explosion of internet connected sensors, RFID is starting to be viewed as a part of the internet of things (IoT).

The hype surrounding supply chain IoT is very similar to the promised benefits of RFID ten years ago.  Advocates focus on object traceability, improved inventory tracking, and POS self-service. In fact, the power of the internet, combined with sensor and cloud technologies, should enable continuous monitoring of all parts of the supply chain.

How do legislation and regulation complicate the global supply chain?

The U.S., the European Union and others have created, over the last few years, new reporting requirements for large companies that manufacture or handle physical products. These reporting requirements can apply even if the company engages a third party to manage its supply chain. Complying with these regulations requires very robust SCM systems making supply chain management ever more difficult. At a minimum, the supply chain team needs to understand the following legislation:

  • Dodd-Frank requires companies covered by the SEC’s Exchange Act and which either manufacture or have “actual influence” over the manufacturing process to report if their product contains gold, tin, tantalum, tungsten or other “conflict minerals.” Conflict minerals are mined in the Democratic Republic of Congo or other war zones with the profits used for continued fighting.
  • California’s Safer Consumer Products Regulation is part of that state's Green Chemistry Law and covers products that contain a “Chemical of Concern.” Manufacturers, importers, assemblers and retailers must notify the Department of Toxic Substance Control of potentially dangerous products and must determine how to limit exposure to them.
  • California’s Transparency in Supply Chains Act seeks to eliminate human trafficking. Retailers and manufacturers operating in California and selling more than $100 million, have to include statements on their web site describing their, “efforts to eradicate slavery and human trafficking from [their] direct supply chain for tangible goods offered for sale.”
  • The U.K.’s Modern Slavery Act contains a Transparency in Supply Chain provision that attempts to eliminate slavery. Companies doing business in England and Wales with sales exceeding £36 million have to include a description, on their website, of their efforts to make sure slaves are not used in any part of their supply chain.
  • The EU’s Regulation on Registration Evaluation, Authorization and Restriction of Chemical (REACH) covers any chemicals in paint, clothing, electronic products, furniture, etc. that might be dangerous. Companies making or selling products in the EU with a restricted chemical, needs to show the European Chemicals Agency that the product offered for sale is safe.
  • Washington State’s Children’s Safe Product Act requires manufacturers of children's products to disclose if the packaging or the product contains formaldehyde, benzene or any other “Chemicals of High Concern to Children.”
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