Managing the complete lifespan of goods or services means being aware of the many streams that have to come together in order for the river of production to flow. The supply chain is a term used to describe this network of suppliers, starting from the raw materials or concepts and moving through the intermediate inventory to the actual point of sale. It’s important for a business to understand how all of the pieces come together, even points that don't directly interact with their own company, because the importance of supply chain management cannot be overstated.
What Is a Supply Chain Network?
The supply chain network includes not just the companies or services that provide raw materials, or turn those raw materials into intermediate products — it also involves the logistics involved in making sure there’s continuous flow of what’s needed to get to the final product, as well as the marketing, distribution and sales at the point of transaction. The entire supply chain ends at the point where the customer exchanges money for the final product, good or service.
Supply Chain Management System
As an example of supply chain management and its components, consider a clothing company whose product is shirts. The shirts are made from fabric, which is one of the raw materials; others might include thread, elastic or decorations. The company that provides the fabric then has its own textile raw materials that they must ensure can be supplied to meet the demand from the clothing company. At some point, the supply chain goes back to the construction of the actual raw materials for the shirt: wool, polyester, cotton, etc.
The clothing company doesn’t necessarily have to be involved at every single stage, but they need to be aware of this chain and how it might affect their own products. Imagine an acrylic plant shutdown, leading to a lack of a certain fabric, leading to a production shutdown for a specific type of shirt: those in charge of the supply chain need to be prepared for these sorts of upsets and change their product mix appropriately.
The logistics of the actual production of the shirts usually fall under the aegis of operations, rather than supply chain management, but this feeds forward in important ways: how does the plant know which shirts to make? At what production rate? Is there inventory space? If we run out of one kind, will the market take another?
Marketing, Sales and Distribution
Moving forward from production is the forward-facing part of the supply chain strategy: the involvement of marketing, sales, distribution and customer service. These departments work together to get a projected idea of the market demand for these types of shirts, find distributors like department stores to sell the shirts, determine a price point and adjust operation and production based on the sales.
Underneath all of this is the logistical management required to make this work: physical goods and products will need inventory storage after production and require timely shipping to the points of the transaction. Likewise, raw materials will require transport, storage on-site and a timely system guaranteeing supply which could include second sourcing. The logistics of storage, use and transport are key to making sure all of the functions above can happen as projected.
Supply Chain Variance
Using this example, we can see that the supply chain isn’t necessarily the simple three-step flow from supply to production to sales. The chain could be five steps, or seven, depending on how many raw materials suppliers need to be considered before the material is provided to production: for example, does the shirt company need to follow markets all the way back to the polyester plant?
Likewise, the sales step could also be a number of steps, from a warehouse to a distributor to a store and then to a customer. The key to drawing the scope of the supply chain as it pertains to internal business management is understanding the points which offer the most risk or variability.
Do raw materials costs swing widely from season to season? Is production unreliable? Will the stores the company intends to distribute product to still be open by the time the product reaches them? Identifying the places where the supply chain is stable against the places where it could unexpectedly fluctuate is key to gaining control.
Four Elements of Supply Chain Management
The example above highlights the four central elements of supply chain management:
- Supply: This first piece highlights the importance of sourcing, which is the process by which a company surveys and selects suppliers for a certain material; and procurement, which is the purchase of that particular raw material on a set timeline and agreed-upon price point. The purchasing department needs to ensure that the right materials are there at the right time.
- Operation: The second piece is the actual construction of the goods or services that will become the final product. The day-to-day operation of the business ensures that the right things are being made correctly, at the right rate, to be able to provide the product which brings financial value to the company.
- Distribution: The logistics involved in ensuring the right products get to the right customers at the right time is the third piece. This ensures that the products get to the point-of-sale, whether it be directly to a customer or to a distributor who then sells them.
- Integration: The final element is also the most important: all three of the previous pieces have to be communicating with each other and working together in order for the company to be able to efficiently produce their goods and services and make a profit. Those projecting the sales expectations need to work backward with operations and purchasing to make sure the functioning channel of the company will be able to satisfactorily produce the expected output.
Supply Chain Management Models
Supply chain management strategies usually fall into one of two categories: they are either focused on efficiency or focused on responsiveness. There are six generally recognized supply chain models, but they fall into these two generic categories.
Efficient supply chain models are more popular in commodity markets, where cost is low and production is high. Responsive supply chain models are geared toward markets with fluctuation in supply and/or demand. The differentiation involves how the company in question is producing its goods and how many and what markets the business intends to serve. While all of the models focus both on efficiency and responsiveness, clear differentiation can be made in order to group and categorize the six basic approaches.
Supply Chain Models
Supply chain models dedicated to efficiency can loosely be categorized as such:
- Efficient: Best for businesses in competitive markets who need to focus on delivering the most efficient solution at the lowest cost.
- Fast: Best for businesses who target markets with a short life cycle (i.e. trends, or fads) and thus need to focus on timely output.
- Continuous-flow: Best for established commodity markets where demand is high and change is negligible.
Supply chain models dedicated to responsiveness can be loosely categorized as such:
- Agile: Best for businesses that specialize in making individually tailored versions of a product, with the ability to quickly change to meet unexpected demand.
- Custom-configured: Best for businesses who offer set varieties of their product, within a limited number of customizations.
- Flexible: Best for businesses in markets where demand can fluctuate heavily, producing periods of high demand alternating with periods of low workload.
The SCOR Model
The Supply Chain Operations Reference (SCOR) model is an industry-standard reference model for evaluating the supply chain model’s current state and highlighting any potential gaps, roadblocks or room for improvement. It focuses on five key areas to evaluate along the supply chain:
- Plan: How well are supply and demand planned within the company? Does the supply chain plan match with the overall direction and goals of the business? Have resources been balanced with requirements?
- Source: Are the supplier relationships in place positive and mutually beneficial? Can the company handle raw material inventory? Is there infrastructure in place for receiving and storing the raw materials?
- Make: How are operations managed? Does the manufacturing flow have any choke points? How is production planned, and can it withstand an upset?
- Deliver: How are the final products warehoused and transported to the customers? How are customer orders processed and filled? Are all logistics handled properly?
- Return: What comes back to the company — empty containers, packaging? How are defects handled? Is customer service equipped to manage returns and complaints?
SCOR Model Evaluation
In many ways, the SCOR model reflects the four key elements of supply chain management, but the evaluation needs to consider the supply chain as a whole. Each piece has an impact on the others. For example, repeated returns due to a common defect need to be logistically carried back into the earlier steps to determine the cause of the defect.
Was a raw material out of spec? Is there an upset on the production floor? Was the wrong product delivered? As the business evaluates these sorts of issues, they can then correct within the process in the hopes of avoiding similar return issues.
This sort of evaluation can also be linked to the theory of continuous improvement, which many businesses in today’s markets have adopted. For example, exploring new sourcing options, developing second-source suppliers and continually working with the provider can help save the business money on raw materials. Evaluating the process for quality management purposes and finding areas that can be updated, streamlined or improved can also help increase production and decrease costs. The sales department can work to find new opportunities for existing products or spaces a new product could successfully fill.
Supply Chain Management Tools
Many businesses use automated enterprise software systems to help manage the supply chain. Integrating all of these processes into one central software solution can be incredibly difficult, but it ensures that the supply chain is linked forward and backward. For example, when inventory on a certain raw material gets low, the system might trigger a new purchase order, which can then be reviewed, modified and approved by procurement.
These systems manage operational data and provide historical information to help planners understand production rates and limitations. They can also manage customer information, record the locations of products as they are relocated between warehouses and assist in understanding customer service issues.
Integration of the Supply Chain
Overall, though, the integration of the supply chain is as dependent on the people and business strategy as it is on any automated software. It’s important to take time to understand the background to a business’ suppliers, to better understand when they may have upsets or shutdowns.
It’s important to understand operational rates and limitations, and the best way to balance a catalog of products. It’s critical to ensure that the products — the piece the business expects to make its money from — get to the places where they can be exchanged with customers for money. Businesses cannot set proper vision and direction for the company without understanding how all of these processes are tied together.
- Investopedia: Supply Chain Management
- NC State University: What is Supply Chain Management?
- Council of Supply Chain Management Professionals: The Importance of Supply Chain Management
- IBM: What is Supply Chain Management?
- Afflink: The Strategic Importance of Supply Chain Management
- Logistics Bureau: 7 Reasons Why the Supply Chain Matters to Business Success