Essentials of Supply Chain Management
Our modern global economy is highly dependent on the efficient delivery of finished goods and raw materials around the world. Even a seemingly minor bottleneck can potentially disrupt the flow of products, leading to a domino effect resulting in shortages and price volatility. A truly efficient supply chain involves many moving parts and requires a host of practical skills to keep everything running smoothly.
In this article, you will learn how supply chains work and how to measure success. You’ll understand the fundamental concepts necessary to manage the supply chain your business depends on. Keeping it all running smoothly is a complex but immensely powerful skill. Let’s get started.
What are the Essentials of Supply Chain Management?
Effective supply chain management (SCM) is centered around five broadly defined activities, – planning, sourcing, manufacturing, delivering, and returning.
Planning starts with forecasting demand and matching that up with available supply. For a single-product company that buys from a single vendor, that might sound like a relatively simple proposition. As the complexity and diversity of a company’s products increases, though, supply chain management quickly gets very challenging. Manufacturers, for example, must predict which raw materials they will need at various times during the manufacturing process. Equipment capacity must be taken into account as well, adding further complexity.
Sourcing involves identifying suppliers, agreeing on product specifications, and negotiating prices and delivery schedules. Depending on scheduling priorities, this process may also be fraught with risk. Supply chain disruptions, for example, can occur when external events prevent the efficient flow of goods. Labor shortages, shipping bottlenecks, or inadequate access to raw materials may result in suppliers delivering their products too late.
Manufacturing involves the transformation of raw materials and components into a finished product. If the product in question consists of distinct items that can be easily counted, this is called “discrete manufacturing”. Other products such as chemicals or fuel oil fall under the category of “process manufacturing.” Manufacturing usually involves multiple sub-processes such as assembly, testing, and inspection.
Delivering products to your customers can also be a complex science unto itself. This can vary considerably, depending on the nature of the product, the location of end customers, and the type of sales channels through which products are purchased. Logistics systems must be capable of ensuring that product gets to the right place at the right time, even when adverse events occur such as major storms or labor actions.
Returning provides for the return of products that are defective, were shipped by mistake, or arrive too late to meet a customer’s needs. Product recalls may also trigger a need to return product to the manufacturer. This process of returning goods is often referred to as “reverse logistics.”
Types of Supply Chains
There are several different models for supply chain management. Which one a company chooses will depend on the nature of its products and its organizational priorities. For mature industries with predictable demand, a “continuous flow” model often works well. For companies with unpredictable demand, or which manufacture products to fulfill incoming customer orders, and “agile” approach to SCM provides greater flexibility.
In industries with high price sensitivity, supply chain managers often prioritize efficiency. A company with a highly differentiated product, on the other hand, might be able to charge a premium for their merchandise. As such, they might be more focused on avoiding out-of-stock scenarios which could result in lost revenue opportunities. In this case, agility is likely to be more important than sheer efficiency.
Why Is Supply Chain Management So Important?
To be successful, supply chain managers must balance a number of competing priorities. If the company lacks the supplies necessary to produce and deliver products to buyers, then those customers will take their business elsewhere. As such, it’s important to avoid running out of finished goods inventory.
On the other hand, excess inventory is also problematic because it ties up working capital, consuming warehouse space and potentially causing the company to incur other costs such as insurance and excise taxes.
SCM often involves tradeoffs between speed and cost, between speed and quality, between customer service levels and gross margins, and so on. Effective supply chain management therefore requires a detailed understanding of the industry, its products and customers, and every stage of the value chain.
What are the Best Books on Supply Chain Management?
If you’re seeking to learn more about SCM, Essentials of Supply Chain Management by Michael H. Hugos is a great place to start. In it, the author explains the fundamental concepts behind supply chain management and describes how effective SCM can provide a foundation for competitive advantage.
We also recommend reading Flow: How the Best Supply Chains Thrive, by Rob Handfield. The author likens SCM to the flows that exist in nature, offering insights for business leaders seeking to improve their supply chains.
Finally, Lean Supply Chain and Logistics Management offers perspectives on a highly agile “just in time” (JIT) approach to SCM. This model has proven highly effective for companies like Dell, which is famous for its lean manufacturing practices.
No discussion of supply chain management would be complete without a mention of software and cloud computing technology. Innovation is driving even more efficient and effective supply chain practices around the world. Artificial intelligence, “Internet of things” (IoT) sensors, cloud-based ERP software, and other developments are transforming the way companies collaborate with suppliers and customers.
Modern manufacturing ERP software serves as the central nervous system for your supply chain. To take full advantage of the latest innovations, look for a technology partner that understands your industry and has deep expertise in manufacturing.
Synergy Resources can help you take your supply chain management practices to the next level. We’d love to discuss your goals and understand the unique factors that drive your business. To begin that conversation, reach out to our team at Synergy Resources today.