This article provides a practical explanation of supply chain management. After reading, you will understand the basics of this powerful management tool.
What is supply chain management?
Supply chain management is the management of all activities related to goods and services; from procuring raw materials for a project to the consumer returning a product. The supply chain consists of a network of channels and connections. The network consists of manufacturers, but also raw material processors, transport companies, suppliers, and retailers. The complete network ensures that products and services arrive at the customer. It consists of a flow of physical products as well as information.
Supply chain management is very broad and covers the design, planning, implementing, managing, and monitoring of activities. The goal of supply chain management is to create net value for the consumer in a way that is as cost efficient as possible. It also relates to balancing supply and demand through demand planning and by creating and utilising a competitive infrastructure. The enormous network of people, companies, technologies, activities, and resources are all intertwined, and each component is crucial for the functioning of the supply chain.
The term supply chain management was first introduced by Keith Oliver in 1982. Keith was working as a consultant at Booz Allen Hamilton, and mentioned the phrase in an interview with the Financial Times. Years later the term garnered attention when books and articles were published on the subject.
Supply chain planning is broad. It consists of countless disciplines, parties, and activities. This article will therefore only focus on several core elements.
Every organisation buys materials, services and other things required to make business activities possible and support them. The focus for procurement is on the total costs and development of durable relationships between buyers and sellers (B2B).
The perspective regarding procurement has changed a lot over the years. Today the general procurement objectives are as follows:
- Consistent delivery of raw materials or components to prevent shutdowns
- Minimising stock costs
- Quality improvement
- Supplied developments and networks
- Access to technology and innovation
- Lowest total cost of ownership
Designing an effective procurement strategy is a complex process that requires a lot of analysis. It’s an important part of supply chain management. For instance, one must determine which products and services will be produced, and whether this will be done internally or externally. After that, the next step is to compose a strategic plan that makes it clear how the external supplier will be approached.
As mentioned, an organisation first has to decide whether the product will be manufactured internally or externally. Read more about outsourcing here. This is the first important step.
For many products businesses can choose from multiple suppliers to buy from. The management team of the organisation that is buying has to determine what exactly will add value for the company in terms of the procured goods. The purchased products have different risk levels when it comes to supply security. A great tool for procurement strategies is the Kraljic Portfolio Purchasing Model.
Many of the companies in the supply chain are active in manufacturing products. Manufacturers deliver added value by combining raw materials, components, and parts into complete products. The goal is that the products meet the expectations and wishes held by the consumer. In order to create a streamlined process, it’s necessary that all materials move through the supply chain in the right way. It’s also important to safeguard quality.
Just-in-time (JIT) is a technique from supply chain management. Its goal is to make all purchased materials move in a way that they arrive at exactly the right moment before the transformation process begins. This minimises the stocks of of raw materials and products in production.
Quality is not easy to measure. After all, quality can mean different things to different people. Everyone wants high-quality products, but it’s not clear what exactly makes them high quality. Quality is usually judged from eight perspectives:
- Ease of maintenance
- Perceived quality
Total Quality Management (TQM)
Because quality is subjective to an extent, quality control is an important part of manufacturer activities. Differing areas of expertise also make the quality problem more complex. A marketing manager would like a product to have as long a lifespan as possible and a good appearance. The production manager, on the other hand, will prefer ease of maintenance of the products.
Total Quality Management (TQM) is a philosophy and technique that ensures that the products have the desired quality and meet the consumer’s demands. The foundation of Total Quality Management (TQM) is that the customer decides what the quality should be and determines that that quality is actually delivered.
Developments and strategy
Which products a manufacturer produces and how many depends on the internal capacity of an organisation and its marketing strategy. Which products will be manufactured and in what way largely determines how the manufacturing process will look.
Some manufacturers spend a lot of money on promoting the brand in order to increase brand awareness. If a consumer recognises the product from the way it’s manufactured, this is referred to as brand power.
The dominant theme in supply chain management is that all activities must be integrated. This unbelievably large puzzle is solved by planning and combining every individual part.
Supply chain planning
A schedule that combines all supply chain activities would be a hundreds of pages long book. The most important elements when it comes to planning are as follows:
- Product demand planning
- Supply planning
- Production planning
- Logistics planning
Supply & Operations Planning (S&OP) is a complex process that compares supply and demand in a technical way. Operations refers to everything related to manufacturing, while sales is about everything to do with supply and demand. The sales department has different wishes than the production manager. A sales manager has targets and has likely been involved with the strategy by the upper management. The production manager, on the other hand, only has the resources he has at his disposal, with which he will have to meet the demands from operations. A tool that is frequently used in S&OP planning is the balanced scorecard. It is used to track and analyse both operational and financial performance.
Sales prognoses largely determine what is produced and in what volumes. Effective logistics is about matching the consumer’s product requirements and the internal capacity of the manufacturer. Consumer demands grow in terms of service, quality, and product variety.
There are three aspects that are important when making prognoses:
- Cooperational planning ensures that the right parties will find each other
- Planning of requirements regarding supply and delivering products
- Inventory management
Now it’s your turn
What do you think? Do you recognize the explanation of Supply Chain Management? Can you make good use of the information provided in this article? According to you, what are essential elements of Supply Chain Management that are not mentioned in this article?
Share your experience and knowledge in the comments box below.
- Mentzer, J. T., DeWitt, W., Keebler, J. S., Min, S., Nix, N. W., Smith, C. D., & Zacharia, Z. G. (2001). Defining supply chain management. Journal of Business logistics, 22(2), 1-25.
- Buurman, J. (2002). Supply chain logistics management. McGraw-Hill.
- Lambert, D. M., & Cooper, M. C. (2000). Issues in supply chain management. Industrial marketing management, 29(1), 65-83.
- Lambert, D. M., Cooper, M. C., & Pagh, J. D. (1998). Supply chain management: implementation issues and research opportunities. The international journal of logistics management, 9(2), 1-20.
- Vollmann, T. E. (2005). Manufacturing planning and control for supply chain management.
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