Supply Chain Management: Importance and How it Works

In this comprehensive exploration, we delve into the fundamental principles of supply chain management, examining its intricate phases, diverse models, real-world applications, and the growing importance of ethics in the field.

From understanding how SCM functions to its pivotal role in companies’ profitability and growth, this journey through the world of supply chain management sheds light on why it’s at the heart of modern business practices.

What is Supply Chain Management?

Supply chain management (SCM) constitutes the intricate process of overseeing the flow of goods and services to and from a business. It encompasses every facet involved in the transformation of raw materials and components into final products and their ultimate delivery to customers.

Effective SCM plays a pivotal role in streamlining a company’s operations, eradicating waste, optimizing customer value, and securing a competitive edge in the marketplace.

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How does the Supply Chain Work?

Supply chain management stands as an ongoing endeavor by companies to make their supply chains as efficient and cost-effective as possible. Essentially, SCM seeks to centralize the control and linkage of product production, shipping, and distribution.

This enables companies to curtail superfluous costs and redundant steps, ensuring the swifter delivery of products to consumers. This level of control is achieved by closely managing internal inventories, production, distribution, sales, and the supplies from company vendors.

The concept underpinning SCM is the acknowledgment that nearly every product brought to the market results from collaborative efforts between various organizations constituting a supply chain.

While supply chains have long existed, it’s only recently that most companies have recognized their pivotal role as value-additions to their operations.

The 5 Phases of the Supply Chain

A supply chain manager is entrusted with the mission of controlling costs, averting supply shortages, and ensuring efficiency. Typically, the SCM process is categorized into five fundamental phases:

1. Planning

To derive optimal results from SCM, the process invariably commences with strategic planning. This stage focuses on aligning supply with customer demands and manufacturing requirements.

It also factors in the raw materials and components necessary at each stage of production, equipment capabilities and limitations, and staffing needs.

For large enterprises, enterprise resource planning (ERP) software often assists in coordinating these processes.

2. Sourcing

Effective SCM relies heavily on robust vendor relationships. Sourcing involves collaborating with suppliers to provide the materials essential for the manufacturing process.

SCM sourcing requires ensuring that raw materials or components meet production specifications, pricing is in alignment with market expectations, the vendor possesses the flexibility to deliver emergency materials in unforeseen events, and a proven track record of delivering goods on time and of exceptional quality.

3. Manufacturing

This phase constitutes the heart of the supply chain management process, where companies employ labor and machinery to transform raw materials or components received from suppliers into a finished product.

This represents the ultimate goal of the manufacturing process, albeit not the concluding stage of supply chain management.

Manufacturing can encompass subtasks like assembly, testing, inspection, and packaging, and during this process, companies must be vigilant about waste or any other factors that might lead to deviations from the original plan.

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4. Delivery

Once products are manufactured and sales are finalized, the company must ensure the prompt, secure, and cost-effective delivery of these products to customers.

An efficient SCM system encompasses robust logistics capabilities and delivery channels to guarantee timely and safe product distribution.

This might include contingency distribution methods for instances where a primary transportation method becomes temporarily unavailable.

5. Returns

The supply chain management process culminates with providing support for products and handling customer returns. Addressing the customer return process, often termed reverse logistics, is essential for rectifying errors and ensuring customer satisfaction.

Returns can also serve as valuable feedback, helping companies identify defective or poorly designed products, which can then be addressed.

Without remedying the underlying causes of customer returns, the supply chain management process would fall short, and recurring returns might persist.

Diverse Supply Chain Models

Supply chain management doesn’t take on a uniform shape for all companies. It’s tailored to suit each business’s unique objectives, constraints, and strengths. Various supply chain models exist, including:

– Continuous Flow Model: Suitable for mature industries, this model involves producing the same goods consistently while expecting minimal fluctuations in customer demand.

– Agile Model: Ideal for companies with unpredictable demand or custom-order products, this model prioritizes flexibility to accommodate shifting needs.

– Fast Model: Emphasizing quick product turnover, this model is suitable for goods with short life cycles, allowing companies to capitalize on trends and ensure the full sale of products before a trend ends.

– Flexible Model: Designed for industries subject to seasonality, this model enables businesses to scale production up or down based on demand fluctuations.

– Efficient Model: Companies operating in industries with narrow profit margins often adopt this model to gain an edge through the efficient use of equipment and machinery, streamlined inventory management, and optimized order processing.

– Custom Model: For highly specialized industries with demanding technical requirements, like automobile manufacturing, a custom model may be crafted to suit the company’s specific needs.

The Importance of Supply Chain Management

Supply chain management is of paramount importance as it contributes to the achievement of several business objectives.

Efficiently controlling manufacturing processes can enhance product quality, reducing the risk of recalls, lawsuits, and bolstering brand reputation. Simultaneously, effective management of shipping procedures enhances customer service by avoiding inventory shortages and excesses.

Ultimately, supply chain management presents numerous opportunities for companies to enhance their profit margins, especially those with large international operations.

Ethics and Supply Chain Management

In recent times, ethics has emerged as a critical component of supply chain management. An established set of principles known as supply chain ethics has gained significance, reflecting the increasing investor interest in how companies produce their products, treat their workforce, and protect the environment.

Consequently, companies have instituted measures to reduce waste, improve working conditions, and minimize their environmental impact, all of which fall under the domain of supply chain management.

Remuneration in Supply Chain Management

Supply chain managers in the United States received average annual salaries ranging from $108,718 to $139,234 as of September 2023, as reported by Salary.com.

In Conclusion

The supply chain commences with the acquisition of raw materials or components and culminates in the delivery of finished products or services to end consumers. Within this supply chain, each link presents an opportunity to add value and reduce inefficiency.

A well-executed SCM program has the potential to increase a company’s revenue, reduce costs, and bolster its overall financial performance.

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