Basic Knowledge

What is Supply Chain Management? Definition, Example & Objectives!

| Author/ Editor: Florian Winterstein / Alexander Stark

Supply chain management is the integrated process-oriented planning and control of the flow of goods, information and money across the entire value and supply chain from the customer to the raw material supplier.

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Complex production and delivery processes confront companies with huge challenges.
Complex production and delivery processes confront companies with huge challenges.
(Source: © zapp2photo - Fotolia)

The Council of Supply Chain Management Professionals (CSCMP) defines SMC as follows:

“Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third party service providers, and customers. In essence, supply chain management integrates supply and demand management within and across companies.”

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Why Does Supply Chain Management Matter?

The concept of labor division is undergoing a revolution. To increase profitability, companies used to divide the various work steps between their employees. Today, global organizations divide the various tasks in the value chain amongst each other. The sub-products travel gigantic distances. Nevertheless, the companies can manufacture more quickly and more cheaply than a single company could. In this way, integrated planning can open up new markets. However, the companies become dependent on each other. These business relationships require closer cooperation and a more intensive exchange of information.

The Difference Between Logistics and Supply Chain Management

Previously used as a synonym, supply chain management, in contrast to logistics, goes beyond the confines of a company. Both supply chain management and logistics deal with the organization of object flows along the process stages of the supply chain. Both are aimed at increasing customer benefits (effectiveness) and system-wide improvement of the cost-benefit ratio (efficiency).

Modern supply chain management goes a step further, especially in the areas of transport and warehousing within the company. SCM explicitly includes the organization and coordination of autonomous business units within a value chain its the analysis. This accentuates the inter-organisational aspect of logistics management. SCM takes a cross-company perspective on all business processes and connects all areas of business administration, such as purchasing, production, distribution, marketing, controlling, etc. Focused on the strategic aspects of functional areas, SCM leaves tactical questions to the individual participants.

Arizona State University demonstrates how supply chain management works by giving an example. Do not miss it!

Tasks and Objectives of Supply Chain Management

SCM ensures cross-company, process-oriented planning and control of the entire value chain. Consumers force logistics to rethink, which is why high customer expectations and short product life cycles are taken into account. Furthermore, relationships with suppliers are considered in order to optimally design and control goods deliveries, cash flows and information flows (Supplier Relationship Management).

Functions Within Supply Chain Management:

  • Customer Relationship Management: Consistent focus on end customer demand to meet the increasing customer requirements and ensures a high degree of flexibility.
  • Flexibility and demand-oriented production: Continuous cost reduction and resource optimization across all stages of the value chain.
  • Synchronization of supply and demand: Increasing the adaptability and development capability of the supply chain.

Several sub-objectives can be derived from these long-term objectives:

  • Inventory reduction along the value chain,
  • Reduction of warehousing costs,
  • Safeguarding the just-in-time supply,
  • Acceleration of cash-to-cash cycles,
  • Improvement of delivery reliability,
  • Reduction of throughput times.

Supply Chain Management with Zara as an Example

How successful supply chain management works is demonstrated by Inditex, one of the largest textile companies in the world based in Arteixo (Spain), with its fashion brand Zara. There are many case studies about the success story of the Inditex model and they are worth reading. Zara's supply chain management expertise is confirmed by the benchmark of US market research firm Gartner, which provides an overview of the best supply chains in Europe.

In brief, the case is as follows:

Fashion brands are relocating their production to China. This saves costs, but complicates the management of the supply chain. Fashion trends, in particular, are short-lived. The journey of cargo in container ships halfway around the world complicates the principle of fast fashion.

Inditex, on the other hand, purchases more than half of its products from Spain, Portugal and Morocco. The costs are higher, but shorter supply chains allow them to react more quickly to trends. Zara no longer speculates on the latest fashion. Production is suspended until it is certain what the customer is actually going to buy. The goods are sold at full price and stocks remain minimal.

Motivation and Advantages of Supply Chain Management

Today, companies cannot guarantee competitiveness for their products and services on their own. The entire supply chain contributes to success. No longer are individual companies in competition, but entire supply chains. With the promise of a long-term win-win situation for each individual participant, companies can be persuaded to become part of a supply chain. Tip: The Guide for the successful integration of companies in supply chains provides valuable support!

Unsolved Supply Chain Management Problems Can Lead to Disadvantages

The rapid development in information technology has made all of this progress possible. Nevertheless, there are numerous problems along the supply chain that make successful implementation of supply chain management difficult in practice.

  • Mutually exclusive goals: The companies involved in the supply chain can pursue different, sometimes mutually exclusive goals.
  • Distribution of costs, risks and profits: A further hurdle is the fair distribution of cost and financing burdens or risks and the distribution of value-added shares.
  • Lack of transparency of the processes: The different competence levels of the partners and the fear of the exploitation of knowledge causes a lack of transparency of the processes between the actors.
  • Lack of uniform key figures: Agreement with the partner companies on internal, uniform key figures and technical transfer standards.
  • Increasing dependency: Companies need to work more closely together and exchange information more intensively.
  • Legal issues: What do contracts look like between partners exchanging sensitive internal company data and how are violations of the agreement punished?
  • Building relationships based on partnership: How do you organize trust without being dependent on a handful of employees who maintain these relationships? Management concepts for building and maintaining such relationships are required.

Sustainability through Sustainable Supply Chain Management

Sustainability - a principle of resource consumption in which the preservation of essential properties, stability and the natural regenerative capacity of a system take top priority - is becoming a worldwide trend. The SSCM is guided by this approach. Driven by the demands of stakeholders such as the end consumer, the criteria of ecology, economy and society are derived. It is important for companies that strive to achieve the future-oriented mindset of the SSCM to pay equal attention to the three dimensions of sustainability. In contrast to conventional supply chain management, both the origin of the products and their use and disposal after sale are important. If your SSCM does not correspond to the practical situation in German companies, there are 5 approaches for sustainable intralogistics to keep in mind.

7 Prerequisites for a More Successful SCM

For companies, SCM entails a change of processes and culture. Its objective is to optimize processes, increase performance characteristics, reduce costs and increase customer satisfaction. In order to be successful in supply chain management, you must meet these seven requirements:

1. Interdisciplinary Cooperation

Process networking requires comprehensive cooperation. This awareness is necessary to build up the necessary know-how.

Our recommendations:

  • Make yourself aware that SCM does not end at the company premises.
  • Know and understand the process chain and its relationships.
  • Focus on joint solutions instead of self-optimization.
  • Make your contribution to optimization.
  • Minimize the risk in the entire chain and not only your own risks.
  • Adapt the SCM process to changing circumstances.

2. Open Exchange of Information

Aim for an open exchange of information with all companies involved in the supply chain. Confirm unrealistic plans: The intelligent and the qualified are successful, not the stronger one.

Our recommendations:

  • Talk openly about the strengths and weaknesses of your technical processes.
  • Admit internal risks to your business partners.
  • Report changes openly and at short notice.
  • Position your business partner so that his or her strengths can help you.
  • Use the opportunities to motivate your business partner with your honesty.

3. Fast Responsiveness

The ability to react more quickly to changes represents qualified process networking.

Our recommendations:

  • Create opportunities to illustrate the required changes, e.g. a change in customer needs.
  • Adjust customer and material purchase orders to current material replacement times so that the planning horizon corresponds to the supply documents.
  • Identify the need for action by projecting the actual status within the process chain using key figures.
  • Motivate your employees to embrace this rapid responsiveness.
  • Prevent any delay to avoid lasting damage to the process chain.
  • Pay attention to quality despite this speed.

4. Short Process Times

The relation between the production times and the process times in the upstream processes serves as an indicator for the reaction speed. While the production times amount to a few hours or days, the operative process times in upstream processes may take several days. Put these times into question.

Our recommendations:

  • Measure the process times away from production.
  • Determine how long it takes for a customer to be provided with a reliable order confirmation.
  • Capture all process times and develop a concept to shorten them.
  • A lengthy process time is often caused by the quality of the work tools, the lack of transparency and the lack of process speed. The key to success is an ERP system.

5. Powerful ERP System

The prerequisite for the required speed and dynamism within the supply chain is a qualified ERP system. The manual execution of standard processes is a thing of the past. We recommend to examine the suitability of the ERP system carefully. Establish a sustainable performance profile with IT systems to reduce complexity in logistics.

Suitable ERP systems support your employees in the following areas:

  • Automated production planning processes,
  • Intelligent review processes in order management,
  • Notification of employees in charge if action is required,
  • Automated dunning processes,
  • Automated import of parts lists,
  • Support tools for quotation calculations.

6. Holistic Logistics

The integration of information, material and process logistics is not a simple task. Adjust these processes to fit into the chain and do not underestimate the impact of disturbed chain links.

Our recommendations:

  • Are you familiar with batch sizes, framework agreements and customer purchase commitments?
  • Avoid delays in communicating changes.
  • Reduce risks by using comprehensive logistics systems.
  • Facilitate fast action by establishing time-saving IT connections between the participants in the supply chain.
  • Increase the chance for your own adaptation by acting quickly without causing damage.
  • Safeguard the success of supply chain management by integrating all areas concerned: Production planning, customers, suppliers, purchasing, sales and production.

7. Clear and Binding Rules

A qualified supply chain can only be created if clear process rules and responsibilities are established. A discreet omission of these guidelines poses a typical vulnerability. Define clear rules and follow them.

We recommend the adoption of the following rules:

  • Processes including process times,
  • Responsibilities,
  • Requirements within the supply chain,
  • Harmonized key figures for internal and external evaluation,
  • Escalation mechanisms that ensure successful conflict management.

Supply Chain Management Software and Systems

Software solutions for the value chain are required. Companies are aiming for higher investments in software and technology in their supply chain. At the same time, the focus is shifting from pure cost reduction and resource optimization in the process chain to the needs of customers. In view of the constantly changing industry environment, choosing the right software is crucial. What are your long-term objectives? The guide to software for the manufacturing industry is intended to help manufacturers find the best system. The guide discusses five key areas relevant to any successful manufacturing operation, including supply chain management software systems.

Identifying Limits — Even in Supply Chain Management

Due to lower transport costs, the shipping costs per volume or mass unit is often no longer a factor in planning.

Just-in-time systems cause two major problems in practice:

  • Overloaded docks and loading ramps due to CEP services and small-scale deliveries
  • Vulnerable structures (traffic jams, strikes, ...) due to long and frequent transport operations

Telematics systems alleviate the symptoms, but do not eliminate the cause. Clear guidelines put pressure on suppliers to cooperate and minimize risk by introducing additional criteria when planning the value chain. No matter how sophisticated supply chain management may be, lack of communication between customer and supplier and inadequate specifications can lead to major losses in the market or for the customer.

Jobs, Salary and Career in Supply Chain Management

Supply chain management as a sub-area of logistics is gaining in importance. Applicants for job offers in Supply Chain Management are advised to complete a business training at a logistics service provider. Studying economics with a specialization in logistics increases the chance of obtaining a managerial position at middle management level. One of the main tasks of a Supply Chain Manager is the selection and coordination of suppliers. In order to negotiate better terms with business partners, it is advantageous to be able to exploit synergies. Negotiation skills and organizational talent are important traits. English language skills are a basic requirement. The companies are mostly internationally active. Logistics and transport companies as well as manufacturing companies may be potential employers.

Speaking of the future: the digitalization of logistics is resulting in the transformation of traditional job profiles. Nevertheless, the supply chain manager will remain irreplaceable for the foreseeable future.

Further reasons why you should work in Supply Chain Management? Isn't that enough? Here are some more useful sources!

1. In "Agile Optimization in Companies" you will learn what the agile optimization of supply chains can look like and which potentials for success can be exploited if flexible supply chain management is adopted.

2. Journal of Supply Chain Management: Leading academic journal especially in Supply Chain Management.

3. Institute for Supply Management: First and largest non-profit supply management organization worldwide.

This article was first published by MM Logistik.

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