What is supply chain management?

Supply chain management (SCM) is the planning, development, manufacturing, and distribution of a product or service. The end-to-end supply chain processes required to transform raw materials into a product, and distribute that product, falls under its umbrella. Supply chain management covers demand and supply planning, sourcing and procurement, product development, production, logistics management, inventory management, sales, and operations. Managed supply chain ensures raw materials, work-in-progress items, and finished goods move from concept to production to the consumer in the most efficient way possible.

Why is supply chain management critical?  

Mastering supply chain management provides organizations with opportunities to improve margins, efficiency, and sustainability. A best-in-class supply chain management process will: 

- Improve profitability

Supply chain management processes help businesses match supply to demand . Closely aligned supply and demand reduce the chance of stockouts or excess inventory, lessen materials waste, and lowers production costs. When plans are inaccurate, costs rise and profitability is decreased. Demand plans that underestimate market demand can result in stockouts and inventory shortages, which then require unplanned procurement and/or urgent, unexpected (and costly) changeovers. The flip side of the coin is plans that erroneously inflate demand. If your demand forecast is inflated, you’ll encounter higher costs due to excess inventory and lower turn rates. Either way, inaccurate plans eat away at profits.   

- Result in efficient, resilient operations

Supply chains, especially global supply chains, are fragile. Of course, regional political, social, economic, or environmental events can completely shut down supply chains, causing significant operational disruptions. But so too can small-scale events. A supplier going out of business, a late or missing shipment, seasonal demand fluctuations, or a change in consumer tastes and preferences can all impact operations. It doesn’t take much to throw a wrench in the gears, and it’s supply chain management’s job to prepare for and react to supply chain disruptions. 

- Be sustainable

The push for ESG has put a magnifying glass on supply chains ethics. Supply chains involve manufacturing, procurement, and global workforces, which inherently have environmental and social effects. Supply chain management processes can help organizations ensure they’re properly choosing suppliers, sourcing raw materials, and engaging workforces ethically and sustainably.  

Supply chains have many moving parts. Without a cohesive management strategy, different parts of the chain operate in isolation, resulting in unexpected demand, incorrect supply, decreased resilience, slower response times and higher costs.  

In summary, supply chain management can:

  • Improve the quality of goods and reduce recalls
  • Ensure customer satisfaction
  • Match supply and demand to reduce excess inventory
  • Optimize business performance
  • Facilitate more efficient and resilient operations
  • Reduce production waste
  • Eliminate unnecessary costs and increase profit margins
  • Identify ESG risks and opportunities to become more sustainable

What are the 5 elements of supply chain management?

The SCM process has 5 activities to consider: planning, sourcing, manufacturing, logistic management and returns management. Let's have a detail look to each one of them.

1 Planning

Supply chain management begins with exhaustive planning across every link in the supply chain. Supply chain managers need to analyze a product’s market and build their understanding of demand to make critical supply planning decisions.  

Planning management aids in reducing costs, improving efficiency, and optimizing margins. A poorly planned supply chain can result in overstocks, stockouts, inventory shortages, missed customer orders, unplanned procurement, production and logistics and frequent production changeovers — all of which increase costs and eat away at margins.  

There is not one supply chain plan, but many. Here are all the plans required to create a resilient, well-oiled supply chain. 

Demand planning

Demand planning is the process of anticipating demand for a product or service to:

  • Meet customer demand
  • Determine inventory requirements
  • Avoid supply chain disruption

Demand management involves creating a demand forecast based on various metrics. Demand management involves an analysis of internal information, like historical sales, inventory, and seasonality data, typically using predictive analytics (artificial intelligence and machine learning.) Often internal conditions are analyzed in concert with external information, like consumer preferences and market trends. Internal knowledge holders will also be called upon to weigh in on the demand plan and provide feedback based on outliers and field observations.  

Once the demand forecast has been created, it becomes a keystone document for sales, supply, and operational plans. Supply chain planners base critical decisions on the demand plan, including the quantity of materials to buy and how much product to manufacture to closely meet demand.

Supply planning

Once the demand plan is approved, planners can turn their attention to the supply plan. The supply plan determines what inventory is needed to meet the demand forecast’s targets. The goal of the supply plan is to balance supply with demand for optimal profitability.  

Supply planning considers:

  • Customer orders: What orders are open, planned, and anticipated? 
  • Inventory on-hand: What inventory has already been produced and is currently available? 
  • Lead times: How long will it take to create and deliver a product? 
  • Minimum order: What is the lowest amount of products you’re willing to sell?
  • Safety stock: How much inventory should you have to protect yourself against forecast errors and fluctuations in demand or supply?
  • Production leveling: What is the optimal production rate for volume, product mix, or type for consistently and predictably producing goods as demand and supply fluctuate?

Production planning

Production planning is a manufacturing plan that dictates how a product will be created. There are many types of production plans, including:

Capacity planning: this continuous planning process determines an organization's capacity to meet changing supply and demand
Master production schedule (MPS): Production schedules for commodities over a given time period
Materials requirements planning (MRP): MRP sets raw material requirements, determines the lowest material and product levels, and plans manufacturing and purchasing activities to minimize costs.

Inventory planning

Inventory planning determines the optimal balance of quantity, timing, and distribution of a product. Its goal is to align available inventory with sales and production capacity. The inventory plan helps companies buy the right amount of stock and determine when to reorder.

Inventory planning includes:

  • Cyclical inventory management
  • Seasonal inventory management
  • Safety inventory management

Sales and operations planning

Sales and operations planning, or S&OP, is a cross-functional process that brings together sales, finance, marketing, and the rest of the supply chain, including demand, sourcing, manufacturing, production, and inventory into one integrated plan. S&OP is responsible for determining staffing levels, evaluating sales territories, and resource planning. S&OP involves collaboration between marketing, procurement, manufacturing, transportation, and finance. Like all other supply chain plans, the goal of S&OP is to match supply and demand, improve efficiency, and expand profit margins by bringing together sales planning and operations planning.

CCH Tagetik Supply Chain Planning is a finance-forward AI-based, predictive supply chain planning solution that connects demand, supply, production and sales and operations planning (S&OP) with finance, providing you with a 360° view of your supply chain.

 

2 Sourcing

Sourcing is a procurement process where planners find, vet, and manage supplier relationships. Suppliers are the companies planners use to procure the goods, materials, or services required to run the business. 

Once suppliers are in place, planners must establish processes to monitor and manage supplier relationships. They must manage ordering, receiving, inventory, and authorizing supplier payments. When well executed, sourcing establishes a consistent supply so that your materials are always in stock.

Sourcing involves:

- Evaluating suppliers

The importance of choosing and vetting suppliers can’t be understated. Suppliers can make or break production, inventory, and sales goals.

- Costing

Supply chain managers must balance optimal pricing, units, and volume in negotiations with suppliers.

- Maintaining supplier relationships

A supply chain is only as strong as its relationships. Building long-term supplier relationships is critical to establishing trust for when issues inevitably emerge.

- Inventory management

Placing orders and managing inventory is time sensitive and critical to maintaining manufacturing timelines and inventory needs.
Supplier payments: One of the best ways to maintain long-standing relationships with suppliers is to pay them fairly and on time. 

3 Manufacturing

Manufacturing is the process of transforming raw materials into finished products. It involves all the activities required to acquire raw materials, manufacture the product, ensure quality, and package for shipping. Manufacturing involves the careful coordination of:

- Attaining goods

Manufacturers collaborate with suppliers to move raw materials to warehouses or factories to generate the end product.

- Labor and equipment

To create an end product, it takes a combination of workers and machinery to put the pieces together. Engineers and product designers must develop the processes and assembly lines required to assemble products. Manufacturers are also responsible for providing safe, fair working conditions for their labor force.

- Production

Production refers to the actual process of converting raw materials into goods. Production includes factories where goods are created and warehouses where supporting activities occur.

4 Logistic management

Transporting raw materials and goods from point A to point B is a leading challenge when managing supply chains. Often, shipments require special handling, and careful considerations have to be made to balance shipping methods, speed, costs, and units. Transportation methods include sea, rail, road, and air. Sequentially, sea is usually the most cost effective and can carry large loads slowly. Air is the most expensive and least able to manage volume but is the fastest trasportation method.

5 Returns management

Returns management is also known as reverse logistics. This refers to the management of customers returns to your company. Returns management considers how warehousing, storage, inventory, depreciating goods, waste, and the bottom line will be impacted when products are returned. Unfortunately, managing returns doesn’t mean the item immediately re-enters the sales cycle. Returns management requires additional processes for quality control, accounting, delivery logistics, and inventory management.

Types of supply chain models 

There are six common supply chain models used to drive supply chain management. 

- Continuous flow

Continuous flow ensures the ongoing, consistent flow of goods. This supply chain model is best used for companies with industries, manufacturers, and buyers that are very stable. In other words, companies produce a uniform set of goods with steady demand. 

- Fast chain

Fast chain is best for businesses with products that have short life cycles. It’s commonly used in the fashion industry.

- Efficient chain

As its name suggests, the efficient chain model is for companies who seek to produce goods efficiently. It relies on production forecasts to inform precise labor, machinery, and raw material needs. While good for the bottom line if all goes to plan, efficient chain is more vulnerable to disruption than other models. A labor or raw materials shortage could cause delays and add additional cost.

- Agile

An agile model is best used by organizations dealing with speciality items that require specific delivery considerations and must be handled with care. This model does not thrive well on high volumes because it has a profitability threshold due to shipping costs.

- Custom-configured

This model marries the agile and continuous flow methods together. Businesses best use it with products requiring extra customization during assembly and production. It’s typically used for prototypes and small batch manufacturing.

- Flexible

The flexible model is best for companies with seasonal peaks and periods of low demand. 

Supply chain management best practices

Not all supply chains are created equal, but there are several best practices you can employ to build resilience and efficiency into your operations.

- Align supply chain planning functions

are inherently interlinked. Demand affects supply. Supply impacts production. Production impacts inventory. Inventory impacts operations. And so on. A change in one plan directly impacts all others. Thus, a central truth for all supply chain plans is critical to aligning plans at the outset creating responsiveness during disruptive events. 

- Use planning automation to combat disruption

Whether there’s a supply issue, a shipping delay, or a labor shortage, the effects of supply chain disruption ripples down every subsequent plan. Planning automation, like what-if scenarios, simulations, and predictive forecasts, can help you respond to change when it inevitably occurs.

- Build strong partnerships with suppliers

Building strong relationships with suppliers can save you in expenses and frustration — strong relationships pay dividends in transparency and customer service. Of course, it takes two to build strong relationships. Buyers should strive to pay suppliers on time and work with them on establishing workable timelines for material availability. In contrast, suppliers should consistently seek to deliver and develop clear lines of communication with buyers. This relationship is dependent on problem solving and transparency on both sides.

- Connect supply chain plans with financial results

Financial implications occur with every supply chain decision. Visibility into the financial ramifications of operational activities and supply chain changes is critical to building a supply chain management process that is resilient and responsive to change.

- Precision forecasts

Inaccurate demand leads to difficulty predicting COGs or hitting revenue targets. Precision planning uses artificial intelligence, predictive analytics, and machine learning to connect the dots between present and historical information and more accurately predict demand trend. Precise forecasts reduce the gap between plans and actuals so you can count on outcomes aligning with operations.

- Purchasing supply volume

You can combat supply shortages and disruption by purchasing in volume. Doing so ensures you have materials on hand and may also allow you to benefit from volume discounts, which will lower your costs. You can set up volume ordering via blanket orders or standing orders. Blanket orders set a price and quantity of materials needed over a year that are delivered as required. Standing orders are predetermined quantities delivered on predetermined dates.

- Track real-time metrics

Keeping an eye on these metrics can help you drive efficiency in the supply chain: Perfect order rate (rate of error-free orders), warehousing costs (the costs of warehouse operations, including labor, rent, utilities, equipment, shelving, pallet racks, machinery, and technology), inventory to sales ratio (inventory for sale vs. how much is sold), inventory velocity (inventory forecasts to sell), and supply chain cycle time (overall supply chain efficiency.)

- Supply chain visibility

With so many moving parts, it’s easy for the parts of the chain to operate in isolation from one another and cost inefficiencies to creep in. Central communication, timely updates, real-time KPIs and optimal performance will keep the supply chain running smoothly.

Learn more about how CCH Tagetik Supply Chain Planning provides: 

  • End-to-end supply chain management 
  • Predictive plans and forecasts 
  • Dynamic supply chain, operations, and financial data 
  • Streamlined workflow and centralized communication 
  • Scenario modeling and risk analysis
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