Supply Chain Management (SCM)

Article by: Ben Janse

Last update: November 17, 2023

Supply Chain Management (SCM): this article provides a practical explanation of Supply Chain Management (SCM). Next to what it is (definition and process basics), this article also highlights the relationship with procurement, production and planning. After reading, you will understand the basics of this organizational management element. Enjoy reading!

What is Supply Chain Management? The basics

The definition of Supply Chain Management

Supply Chain Management (SCM) 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.

Goal of Supply Chain Management (SCM)

Supply Chain Management (SCM) 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.

Origin of Supply Chain Management

The term “Supply Chain Management” was first introduced by Keith Oliver in 1982.

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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.

The Supply Chain Management Process

SCM is the process of overseeing and managing the flow of goods, information, and services from the starting point (such as the production of raw materials) to the final destination (the hands of customers). Think of it like this: Imagine you want to buy a product, like a smartphone.

Before the smartphone reaches your hands, it goes through various stages. Supply chain management ensures that all these stages work smoothly together.

First, raw materials like plastic, metals, and electronic components are gathered from different suppliers.

Then, these materials are sent to factories where they are transformed into parts, such as screens, batteries, and circuit boards.

Next, these parts are assembled to create the smartphone. Once the smartphones are ready, they are packaged and transported to distribution centers or warehouses.

From there, they are shipped to retailers or directly to customers.

During the entire journey, supply chain management keeps everything organized. It involves activities like planning, sourcing, manufacturing, logistics, and customer service.

The goal is to ensure that products are available at the right time, in the right quantity, and in the right condition.

Supply Chain Management and procurement

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).

Procurement objectives

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

Ensuring a steady and reliable supply of materials is crucial to maintaining continuous operations and preventing costly disruptions.

Minimising stock costs

Efficiently managing inventory levels helps reduce holding costs and optimize working capital, contributing to overall cost savings.

Quality improvement

Prioritizing quality in procurement processes leads to better products, increased customer satisfaction, and a positive brand image.

Development of supplier networks

Building strong and diverse supplier networks fosters competition, innovation, and flexibility in sourcing, ultimately enhancing the organization’s resilience and business agility.

Access to technology and innovation

Partnering with suppliers who provide access to cutting-edge technology and innovative solutions can drive competitiveness, improve processes, and foster growth.

Lowest total cost of ownership

By considering all costs associated with procurement, including acquisition, maintenance, and disposal, organizations can make informed decisions that lead to long-term cost reduction and improved profitability.

Figure 1 – The Objectives of Procurement in Organisations

Procurement strategies

Designing an effective procurement strategy is a complex process that requires a lot of analysis. It’s an important part of SCM. 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.

Supplier selection

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.

Supply Chain Management and production

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

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 dimensions

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:

Performance
Reliability
Lifespan
Match
Characteristics
Anaesthetics
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 in Supply Chain Management

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.

Supply Chain Management and planning

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

S&OP 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.

Prognoses

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

Supply Chain Management Summary

Supply chain management plays a vital role in today’s dynamic business environment. It involves a comprehensive approach to efficiently plan, coordinate, and execute activities involved in the flow of goods, information, and services from suppliers to customers.

Data analysis is a crucial component of effective supply chain management as it enables organizations to make informed decisions based on accurate insights.

Managing inventory is a critical aspect of SCM, ensuring that the right products are available at the right time. By leveraging data analysis, organizations can better plan and manage their inventory levels, minimizing costs and meeting customer demand promptly.

In contrast to the traditional supply chain, modern approaches focus on collaboration with supply chain partners to streamline operations and enhance customer service.

Implementing an Enterprise Resource Planning (ERP) system allows businesses to integrate various management systems, improving coordination and visibility across the supply chain.

An efficient supply chain can provide a competitive advantage in the market. By optimizing processes, reducing lead times, and effectively managing resources, organizations can enhance customer satisfaction and drive profitability in the long term.

Therefore, effective supply chain management is of utmost importance to businesses looking to thrive in today’s competitive landscape.

Now it’s your turn

What do you think? Do you recognize the explanation of Supply Chain Management (SCM)? 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.

More information

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.

How to cite this article:
Janse, B. (2019). Supply Chain Management (SCM). Retrieved [insert date] from Toolshero: https://www.toolshero.com/management/supply-chain-management/

Originally published on: 07/31/2019 | Last update: 11/17/2023

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Article by:

Ben Janse

Ben Janse is a young professional working at ToolsHero as Content Manager. He is also an International Business student at Rotterdam Business School where he focusses on analyzing and developing management models. Thanks to his theoretical and practical knowledge, he knows how to distinguish main- and side issues and to make the essence of each article clearly visible.