Supply Chain Management (SCM) is the science of developing a strategy to organize, control, and motivate the resources involved in the flow of services and materials within the supply chain. According to the Council of Supply Chain Management Professionals (CSCMP), supply chain management “encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party providers, and customers. In essence, supply chain management integrates supply and demand management within and across companies.”
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—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.
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.
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 enterprise-wide 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.
Recent events have forced many managers to confront an important message: the old model of managing supply chains simply doesn’t work anymore. In fact, the downturn in the economy has reinforced the need to take waste out of different nodes across the entire supply chain. In industries such as automotive, electronics, transportation and industrial equipment, senior executives realize that raising prices is no longer an option, and neither is the possibility of dramatically increasing sales in a flat economy. This leaves one option: reducing costs across the supply chain.
Many companies today are realizing that in the future, supply chains compete against supply chains. To succeed in difficult as well as prosperous economic times, organizations in a supply chain will need to concurrently “step on the brakes,” as well as “step on the gas.” The new supply chain model was described by Jeff Trimmer (formerly of Daimler-Chrysler), in terms of three principles:
- The only entity that puts money into a supply chain is the end customer.
- The only solution that is stable over the long term is where every element of the supply chain, from raw material to end customer, profits from the business.
- Supply chain management is about economic value added and total content of a product/ service.
What does this new model mean for managers who are still faced with the day-to-day realities of meeting deadlines, schedules and inventory requirements? It ‘simply’ means that the organization needs to re-design its supply chain design infrastructure.
- Ghorban, Maz. (Aug. 29, 2011). “How Technology Can Ease Supply Chain Management and Mitigate Risk” Supply Chain Brain. Retrieved from http://www.supplychainbrain.com/content/general-scm/business-strategy-alignment/single-article-page/article/how-technology-can-ease-supply-chain-management-and-mitigate-risk/.
- Handfield, Robert PH.D. (Jan. 11, 2011). “What is Supply Chain Management?” Retrieved from http://scm.ncsu.edu/scm-articles/article/what-is-supply-chain-management.
- Motiwalla, L., & Thompson, J. (2012). “Supply Chain Management.” Enterprise Systems for Management (2nd ed.) Pearson Education
- Wailgum, Thomas. (Nov. 20, 2008). “Supply Chain Management Definition and Solutions” Retrieved from http://www.cio.com/article/40940/Supply_Chain_Management_Definition_and_Solutions#scm_abc.