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. Supply chain management 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.
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.
A well-planned supply chain 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 is the process of anticipating demand for a product or service to:
- Meet customer demand
- Determine inventory requirements
- Avoid supply chain disruption
Demand planning involves creating a demand forecast based on various metrics. Demand plans involve 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.
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 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 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 operational planning
Sales and operational 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 operational planning.