What is the supply chain management process?
At its core, supply chain management (SCM) involves overseeing the movement of goods, information, and finances associated with a product or service. This process spans from the acquisition of raw materials to the final delivery of the product to its destination.
The supply chain process comprises four broad components that help foster customer satisfaction through steps determined by the industry and operations. These include demand management, supply management, sales and operations planning, product portfolio management and all the initiatives undertaken to achieve these goals - from planning to implementation.
Proper management of the supply chain process cycle results in high business performance, cost-effectiveness and revenue conversion throughout the supply chain.
Why Is Supply Chain Management important?
Supply chain management (SCM) is crucial as it ensures the efficient flow of goods and services from suppliers to customers. Effective supply chain management is crucial for businesses to remain competitive in today's global marketplace. It enhances efficiency, reduces costs, improves customer satisfaction, and minimises risks. By streamlining processes, optimising inventory, and fostering collaboration with suppliers and distributors, supply chain management enables businesses to respond swiftly to changes in demand, mitigate disruptions, and achieve sustainable growth.
Ensuring adequate planning for all steps involved in the supply chain management process requires sufficient funding with timely fulfilment. Bajaj Finserv brings adequate supply chain financing in the form of high-value business loans of upto Rs. 80 lakh* (*Inclusive of Insurance Premium, VAS Charges, Documentation Charges, Flexi fees and Processing Fees) with quick approval to ensure a venture does not run out of funds when they are needed the most.
The History of SCM (Supply chain Management)
Supply chains have been integral to commerce since ancient times, evolving from simple trade routes to complex networks. The Industrial Revolution marked a significant shift, with standardised production processes pioneered by figures like Henry Ford. These advancements laid the groundwork for modern supply chain practices. Over the years, technologies such as computers have enhanced efficiency, yet traditional supply chains remained linear and siloed until recent decades.
Objectives of Supply Chain Management
Apart from understanding the meaning of supply chain management, it's essential to delve into its objectives and why it's crucial for businesses:
- The primary goal of supply chain management is to enhance profitability. This involves maximising the difference between the price a customer pays and the cost incurred in producing and delivering the product.
- Another key objective is to strike the right balance between product quality and production costs. The aim here is to ensure customers feel satisfied with the value they receive relative to the price they pay.
- Additionally, SCM seeks to identify and optimise the sources of revenue involved in the flow of information, products, and finances throughout the supply chain.
- Reducing the time required to fulfil orders is another significant goal. By streamlining the ordering and delivery processes, SCM aims to make these operations more efficient and faster.
- Finally, SCM strives to maintain an equilibrium between supply and demand. This is achieved through developing a flexible planning and control system capable of quickly adapting to changes and ensuring that supply meets demand effectively.
How Supply Chain Management works
Supply chain management involves the coordination of activities and processes involved in sourcing, procurement, production, and distribution to deliver products or services to customers efficiently. It encompasses strategic planning, logistics, inventory management, and collaboration with suppliers and distributors to optimise performance and meet customer demands while minimising costs and risks. It also involves the use of technology and data analytics to optimize the supply chain and respond to changes in demand or market conditions.
5 phases of Supply Chain Management
The five phases of supply chain management include planning, sourcing, making, delivering, and returning.
- Plan: This phase involves forecasting demand, setting objectives, and designing strategies to meet those objectives efficiently. Key tasks include demand planning, resource allocation, and setting inventory levels based on anticipated demand.
- Source: In this phase, the focus is on identifying and selecting suppliers, negotiating contracts, and establishing relationships to ensure a smooth flow of materials or services into the supply chain. It involves activities such as supplier evaluation, selection, and procurement.
- Make: This phase involves the actual production or creation of goods or services. It includes manufacturing processes, quality control, scheduling, and resource allocation to ensure timely production while maintaining quality standards.
- Deliver: This phase focuses on logistics and transportation, ensuring that products are efficiently delivered to customers. It involves activities such as warehousing, order fulfillment, transportation planning, and tracking shipments to optimize delivery times and minimize costs.
- Return: Also known as reverse logistics, this phase deals with handling product returns, repairs, and recycling. It involves processes for managing returned products, refurbishing or disposing of them, and identifying opportunities to improve product quality or customer satisfaction based on feedback from returns.
These phases are interconnected and require seamless coordination to ensure an efficient supply chain.
Types of supply chain models
Supply chain management (SCM) encompasses various models tailored to meet diverse business needs:
- Efficient model: Maximises resource utilisation and minimises costs, crucial for industries with narrow profit margins.
- Continuous flow model: Ideal for stable industries, where production remains constant to meet predictable demand patterns.
- Fast model: Focuses on quick product turnover, essential for industries with short product life cycles or fast-changing trends.
- Agile model: Suited for unpredictable demand or custom products, emphasising flexibility and rapid adaptation to market changes.
- Flexible model: Adjusts production levels to seasonal demand fluctuations, ensuring resources are optimally utilised throughout the year.
- Custom model: Tailored for specialised industries needing unique SCM strategies due to technical complexity or specific market requirements.
Benefits of Supply Chain Management
Supply chain management is crucial for enhancing business profitability and competitiveness. Beyond these core advantages, here are some additional key benefits:
- Improved operational efficiency: Streamlined supply chain processes enhance machine performance and workflow, effectively reducing bottlenecks and boosting overall productivity. This optimisation results in smoother operations and better resource utilisation.
- Anticipating customer demand: SCM helps businesses gain deeper insights into customer preferences and timing, allowing them to plan and adjust their production schedules accordingly. This ensures that businesses can meet customer needs more effectively.
- Improved visibility: With a comprehensive view of the entire supply chain, businesses can identify potential risks and opportunities. This enhanced visibility supports proactive decision-making and helps in mitigating issues before they escalate.
- Accurate forecasting: Through data analysis and forecasting, SCM enables businesses to predict future demand with greater precision. This capability helps avoid bottlenecks, optimise resource allocation, and plan for fluctuations in demand more effectively.
- Enhanced product quality: By monitoring and optimising processes at every stage, SCM contributes to improved product quality. This leads to greater customer satisfaction and loyalty, as well as a stronger market reputation.
- Sustainability: Effective SCM incorporates responsible sourcing, waste reduction initiatives, and efficient transportation practices. These efforts help minimise the overall environmental impact and reduce associated costs, promoting a more sustainable business model.
- Cash flow management: SCM plays a crucial role in managing cash flow by ensuring efficient resource allocation and avoiding costly disruptions. This financial stability supports better operational planning and investment opportunities.
- Efficient logistics: SCM aids in optimising transportation and distribution processes, ensuring timely delivery of products to customers. This efficiency improves overall service levels and helps businesses stay competitive in the market.
- Better customer service: Effective supply chain management leads to improved customer service by enabling quicker responses to customer needs, better delivery times, and the ability to offer personalised products. This enhances customer satisfaction and reinforces competitive advantage.
Challenges of Supply Chain Management
Managing supply chains involves several significant challenges:
- Rising risks: Issues such as fluctuating consumer demand, raw material shortages, and economic uncertainties contribute to increasing risks in supply chain management.
- Unexpected delays: Long distances and multiple steps in the supply chain can lead to delays, especially when dealing with extended lead times.
- Cost control: The rising costs of raw materials, labour, energy, and freight make it challenging for businesses to manage expenses and maintain smooth operations.
- Data synchronisation: Efficient supply chain management relies on accurate and timely data, which can be difficult for businesses to achieve.
- Digital transformation: While adopting advanced technologies like IoT, AI, robotics, and drones is essential for enhancing supply chain management, integrating these technologies into existing systems can be complex.
Example of Supply Chain Management
Consider a smartphone manufacturer. From sourcing raw materials like metals and minerals for components to manufacturing in factories worldwide, coordinating transportation, and delivering products to retail stores or customers' doorsteps, the smartphone manufacturer’s supply chain management ensures efficient operations, timely deliveries, and high-quality products.
Another example of effective supply chain management (SCM) can be seen in the automotive industry. Car manufacturers coordinate with suppliers globally to source raw materials, such as steel and rubber, needed for production. Parts are manufactured, assembled, and distributed to dealerships worldwide. SCM ensures that the right parts are available at the right time, minimizing inventory costs while meeting customer demand. This process involves complex logistics, inventory management, and collaboration between multiple stakeholders to ensure smooth operations and customer satisfaction.
Future of Supply Chain Management
The future of supply chain management (SCM) is characterised by agility and customer-centricity in a global, digital economy. No longer linear, today's SCM networks are dynamic and interconnected, powered by technologies like AI, IoT, and automation—key components of Industry 4.0. Future SCM systems will prioritise real-time responsiveness, integrating planning and execution seamlessly. Blockchain technology will enhance transparency and trust across supply networks, while cloud-based SCM solutions offer scalability and adaptability. Continuous SCM evolution will be essential, aligning with evolving consumer demands and regulatory landscapes for sustainable business success.
SCM and industry 4.0
The connection between AI's transformative impact and the rise of Industry 4.0 highlights how these technologies are dramatically reshaping supply chain management. Embracing these advancements is no longer optional but essential for meeting increasing consumer demands, navigating economic pressures, and addressing environmental concerns. As we explore the intersection of SCM and Industry 4.0, it becomes evident how these advanced technologies work together to enhance supply chain efficiency, responsiveness, and overall effectiveness.
Integrating Industry 4.0 technologies such as AI, IoT, and automation is revolutionising traditional supply chain processes by introducing unprecedented levels of efficiency, transparency, and predictive capabilities.
One critical application of Industry 4.0 technologies is real-time monitoring. IoT sensors track the movement and condition of goods in transit, offering real-time visibility into the supply chain. This capability enables businesses to detect and address potential disruptions, such as shipping delays or product damage, promptly. Immediate intervention helps prevent further issues and ensures the smooth flow of goods.
Beyond real-time monitoring, AI and automation are transforming traditional supply chain processes. For instance, AI algorithms can analyse historical sales data and market trends to generate more accurate demand forecasts. Consider a retail company preparing for the holiday season; AI can predict increased demand for specific products based on past data and current market trends. This foresight enables the company to stock up on popular items and use autonomous vehicles or drones for faster deliveries during peak periods—so don’t be surprised if you see delivery robots making their way down your street.
Demand management
Demand management, one of the essential steps in the supply chain management process, consists of three parts. This primarily involves a forecast for reliable product delivery. Well-planned demand management results in improved revenue forecast accuracy while also achieving improved product profitability.
Merchandise planning refers to merchandise buying, planning, and selling for maximum returns while ensuring merchandise availability across the market.
Trade promotion planning involves marketing techniques that improve demand by stimulating factors such as pricing, demonstrations, etc.
Supply management
This stage of supply management involves planning for supply, production, inventory, capacity and distribution. Production and supply planning comprises supply management, collaboration and production schedule to fulfil requirements related to the demand process and resource allocation for improved production capacity.
Inventory planning helps optimise the inventory quantity and timing for aligned needs of business production and sales. Capacity planning under this process involves determining the staff and equipment required for production, as per assessed demand.
At last, distribution and network planning involve controlling goods movement across the supply chain, including the supplier, manufacturer and the point of sale.
Sales and Operations Planning
An integrated monthly system of managing business process, sales and operations planning refers to the process view of the supply chain involving its key drivers, i.e., sales, production, inventory, demand, the introduction of a new product, etc.
Sales and operations planning aims to improve critical decision-making processes and propagate integrated strategic ideas focused on a business's financial impact. It has a vital contribution to improving the effectiveness of a business's supply chain management process.
Product portfolio management
This step plays a crucial role in a company's overall business strategy to achieve its business goals. It is a process of managing the company's products and the corresponding supply chains, from ideation to its introduction into the market. It also plays a vital role in maintaining the company's competitive position by driving sales and allocating resources for products to meet the market needs.
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Frequently asked questions
The five components of supply chain management are supply, demand, manufacturing, distribution, and logistics. These components collectively ensure the smooth flow of goods or services from suppliers to consumers, covering aspects such as procurement, production, storage, and transportation.
The role of SCM is to facilitate the efficient movement of goods or services from suppliers to consumers. It involves coordinating activities such as sourcing raw materials, managing production processes, overseeing inventory levels, and organising distribution networks. SCM aims to optimise operations, reduce costs, and meet customer demands effectively.
SCM refers to the comprehensive management of the entire production flow of goods or services. It encompasses the strategic planning, coordination, and execution of activities from raw material procurement to product delivery. The goal of SCM is to ensure seamless operations, minimise disruptions, and meet customer needs efficiently and effectively.
The four main functions of SCM include:
- Supply chain planning: Forecasting demand, planning production schedules, and managing inventory.
- Supply chain operations: Sourcing materials, manufacturing products, and distributing goods.
- Supply chain logistics: Handling transportation and warehouse management.
- Supply chain integration: Coordinating activities among suppliers, manufacturers, and distributors to optimise the overall supply chain performance.
The scope of supply chain management encompasses managing supply and demand, sourcing raw materials, overseeing manufacturing processes, handling inventory, processing orders, managing distribution channels, and ensuring timely delivery to customers. SCM aims to streamline processes, enhance efficiency, and achieve competitive advantage through effective coordination and management across the supply chain.
ERP, or Enterprise Resource Planning, in supply chain management refers to integrated software systems designed to manage and streamline a company's core operations. These systems consolidate data from various functions such as inventory management, procurement, production, and sales into a single platform. This integration enhances visibility and coordination across the supply chain, enabling businesses to operate more efficiently. By providing real-time data and insights, ERP systems help optimise processes, improve decision-making, and better meet customer demands, leading to a more effective and responsive supply chain management approach.
The five basic steps of supply chain management are planning, sourcing, making, delivering, and returning. Planning involves developing strategies to manage resources, production, and demand. Sourcing focuses on identifying and selecting suppliers for raw materials and services. Making encompasses the manufacturing of products or processing of services based on demand forecasts. Delivering involves distributing finished products to customers through various channels. Finally, returning handles reverse logistics and the management of returns, addressing issues with defective or unsatisfactory products. Together, these steps ensure an efficient and effective supply chain process.
