What is Supply Chain Management? Many business people talk or read about supply chain management (SCM) without really understanding what it means or the impact it can have on a company’s profitability and market share.
Whether you’re a seasoned professional or just starting out in supply chain management, here’s some help.
Supply Chain Management Definition
APICS, the global association for supply chain management professionals, defines supply chain management as: “the design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand, and measuring performance globally.” (1)
That’s a tall order.
It encompasses virtually every aspect of a company’s business, from planning through after sale service and requires understanding and optimizing the financial and market impact of every product and material related decision or transaction that occurs anywhere in the company.
In fact, in a APICS keynote to supply chain management professionals, no less an authority than Jack Welch said about supply chain professionals “You are the heart and soul of the place.” (2)
Supply Chain Planning and Supply Chain Execution
Many experts divide supply chain management into two distinct areas: supply chain planning and supply chain execution.
Supply chain planning focuses on setting policies and procedures for promotional activities, inventory replenishment policies and production replenishment policies. Basically, it defines the parameters for the supply chain.
Supply chain execution, on the other hand, encompasses activities for effectively procuring and balancing supplies of goods and materials. It includes manufacturing, warehousing, logistics management and transportation.
Visibility across the entire supply chain throughout all phases is a key determinant of supply chain excellence because it enables rapid response to changes in supply or demand.
Supply Chain Planning Activities
Before executing across the supply chain, the company needs to decide on how it wants to orchestrate its supply chain.
Forecasting should be a joint activity shared by sales and production. Production often forecasts based on product history, using an algorithm that closely fits past requirements. Sales usually forecasts based on their intimate knowledge of goings on in the market and their customers’ upcoming plans.
On its own, neither forecast is likely to be accurate or meet the company’s revenue objectives, leading to the next step in supply chain planning.
Sales and Operations Planning (S&OP)
Sales and operations planning, usually simply called S&OP, is a cross-departmental exercise for rationalizing the varied forecasts to come up with a common plan. During this process, all aspects of the forecasts are taken into account, including capacity constraints and revenue requirements.
The S&OP process should be repeated at least quarterly. Some companies do this process off line, while others use a master scheduling program in their ERP system. The important part of S&OP is not the tool used to reach consensus—it is in achieving the consensus.
Supply Chain Execution
Once the company has reached consensus, the supply chain management team can begin to execute.
When the decision is to buy materials or external manufacturing capacity, the procurement team is responsible for sourcing the best source or sources of supply.
Factors in the decision include price, quality, supplier delivery performance, payment terms, supplier location, supplier responsiveness, supplier reputation or previous relationship and even the supplier’s ability and willingness to communicate quickly—perhaps using EDI or a portal.
Warehousing includes receiving, storage and shipment of goods and raw materials. An important factor in supply chain management is deciding on the number and locations of warehouses and storerooms.
Using bar coding, RFID or other data collection technologies can help improve the effectiveness of warehouse operations. An effective warehouse improves on time delivery performance of customer orders and may help prevent production delays due to late materials.
Logistics management is the science of directing the movement of goods and materials to and from company locations. It often includes inbound logistics (materials coming from suppliers), outbound logistics (materials shipping to customers or distributors) and reverse logistics (managing returns).
Logistics is a complex activity that requires understanding rates for shipping various commodities, routes of various carriers and even special packaging or handling requirements for chemicals, batteries and certain materials.
There are many metrics that can help measure the health of a supply chain. For supply chain planning, the most common and useful metric is forecast accuracy since the more accurate the forecast the better the team can execute against the plan.
Supply chain execution metrics vary by the area.
Procurement is often measured on supply delivery performance, supplier quality and purchase price variance or landed costs.
Warehousing measures include delivery in full and on time, backorder rates, cycle count accuracy and material handler efficiency.
Production is often measured on throughput, efficiency, utilization or on time completions and performance to schedule. For logistics, total freight expenditures, premium freight expenditures and on time performance are the most common metrics.
When choosing a supply chain management software, look for one that includes KPIs for measuring supply chain performance.
Supply chain effectivity is one of the best ways to achieve dominance in a market. Home Depot, for example, is acknowledged as having one of the best supply chains in the ‘big box” retail category. Wal-Mart has made its global supply chain a key differentiation by helping it to keep prices and inventories low.
Clearly orchestrating and optimizing your supply chain for maximum efficiency and visibility is a quick route to beating your competition.