Every day, consumers around the globe receive orders at their doorsteps and pick goods from shelves with little thought about how items go from raw materials to manufacturer and into their hands. That ease and predictability is a testament to the fine-tuned supply chains companies have painstakingly constructed over many years.
Businesses spend a lot of resources — time, cash and brainpower — producing and delivering the right products at the right time. The tremendous amount of planning, coordination and collaboration this entails falls under the umbrella of supply chain management. It’s a practice that involves leadership, R&D, operations, finance, marketing, sales and logistics, and it’s essential to customer satisfaction and ultimately the success of any business.
What Is Supply Chain Management (SCM)?
Supply chain management (SCM) refers to all the activities required to turn raw materials into finished goods or services and the work required to distribute and deliver those products or services to partners and, ultimately, customers.
SCM applies to the planning stage as well as the transfer and management of information and capital that happens across the supply chain. This discipline consists of five main components: planning, sourcing, manufacturing, delivery and returns.
Companies with the most efficient supply chains embrace an integrated approach to SCM. They don’t treat components, like planning, manufacturing and delivery, as separate business functions. Rather, they think about all the ways processes are interconnected.
And it’s not just processes that are linked. Increasingly, top supply chain professionals are looking beyond their own borders, working in sync and staying in constant communication with the upstream and downstream partners that provide critical elements for a product or act as important sales channels. These top performers want to understand each and every link in the value chain so they can reduce costs, increase speed and gain the flexibility to respond quickly to disruptions.
The idea behind SCM is that the supply chain can add value to a business, even give it a competitive advantage. This is in contrast to the historical view of seeing this network as a cost center.
What Is a Supply Chain?
A supply chain is a coordinated network of people, businesses, resources and technologies that play roles in producing, transporting, selling or delivering a good or service. Put another way, a supply chain is a group of organizations that are connected by a shared goal. Their individual roles might involve moving a product or service downstream — toward the retailer/end customer — or upstream — toward the initial supplier.
Every company has a supply chain, and that includes services-based businesses. For example, a software provider must first determine what product it should develop next based on user demand, then it might “source” open-source code to start building that application. From there, it needs to assess the quality of the application, fix any bugs or security shortfalls, develop a marketing plan and put in place sales and distribution channels. The vendor may also consider what other systems the app should integrate with and partner with those software providers to build those connectors.
Essentially, a supply chain network covers all the steps that go into turning subcomponents and materials into a finished item that customers want. SCM is all about managing that network and finding ways to improve it.
What Is the Extended Supply Chain?
An extended supply chain includes not only the individuals, organizations and resources a company works with directly but also more distant links. That bucket could include your suppliers’ suppliers, like a mining company that provides a critical rare metal, as well as your customers’ customers. For a manufacturer that sells to distributors, for example, the chain includes the shoppers who ultimately purchase the items the manufacturer produces.
Partners that supply components or raw materials and don’t sell directly to your business are often called “Tier 2” and “Tier 3” suppliers.
Companies are making more of an effort to understand and monitor their extended supply chains. Many apparel retailers, for example, have historically known little about the fabric mills that provide the material for the clothing they sell. However, in recent years, information sharing among all stakeholders in this network has been shown to offer major advantages. A business that has visibility into its extended supply chain can often spot delays or disruptions before they affect customers and may even establish a direct line of communication with the supplier. That relationship allows it to gather more information and develop a resolution.
Why Is Supply Chain Management Important?
Supply chain management has increasingly become a top priority as business leaders realize how critical an efficient, resilient supply chain is to their bottom lines. Supply chains are among a company’s largest expenses, so it makes sense to evaluate and optimize all of the processes involved in getting a product or service to the end customer. Over time, that fosters loyalty and distinguishes a company from its competitors.
Advanced companies understand that a well-executed supply chain reduces waste by keeping supply aligned with demand. When all parties are in sync — from suppliers to manufacturers to retailers to planners — they can avoid overstock or out-of-stock situations that generate unnecessary costs or frustrate customers and lead to lost sales.
How Supply Chain Management Works
SCM requires establishing relationships between all the entities that form a supply chain for a discrete product or service. Most items are not sourced, designed and built by a single company; rather, a number of businesses work together to produce and distribute a finished good or service.
To better understand what goes into SCM, it helps to separate the physical flow from the information flow.
Companies that sell products must figure out the best way to receive materials, parts or finished goods and then move them on to the next stage in the chain. The physical flow of goods begins with a supplier sourcing raw materials, which then move on to a manufacturer, distributor, retailer and finally the end customer; of course, certain supply chains may skip or consolidate some of these steps.
At each step, physical items must be transported to the next destination and are often stored for some period of time, which requires planning and coordination.
As goods or services progress through the supply chain, all stakeholders need visibility into detailed status information. The supplier relies on purchase orders from manufacturers to plan production runs and allocate inventory. A distributor needs to know the product types and quantities included in upcoming shipments, as well as expected arrival dates.
Keeping a supply chain running smoothly requires a constant flow of data between all organizations involved, including updates about delays, shortages and other changes. Supply chain management software plays a central role in tracking and sharing all of this information.
6 Benefits of SCM
An effective SCM strategy has a host of benefits that make it more than worth the investment in employees, training and technology. Top benefits of SCM include:
- Cost savings: An overarching goal of SCM is greater efficiency, which translates to cost savings. A company that can accurately predict demand won’t overspend on inventory. That improves cash flow — less money is tied up in products sitting in a warehouse, and companies realize lower production, shipping and inventory carrying costs. By adopting more efficient processes, businesses can also boost productivity and reduce labor costs.
- Better customer experience: SCM minimizes situations where a company runs out of a popular product. That keeps customers happy and may entice them to buy from you in the future versus a competitor. As they optimize their supply chains, organizations may also find ways to ship products faster and for less money, potentially passing along savings. Finally, greater transparency allows customers to track the status of their orders at any time.
- Fewer quality issues: Improving the quality of goods and services is one of the primary goals of SCM. A company might come up with a better quality assurance (QA) procedure or notice that a certain supplier or courier has a much higher rate of damaged shipments, then work with the partner to correct that. Customers will obviously appreciate noticeable quality improvements, and service teams appreciate getting back the time and money once spent resolving quality-related issues. Effective SCM minimizes the product recalls and lawsuits that cause lasting damage to your brand’s reputation.
- A stronger, more resilient supply chain: Companies that nail SCM have visibility into their entire value chains and can share information with all stakeholders. CFOs can quantify the financial impact of a supplier facing a shortage of a key component or a retailer seeing sales for a certain product drop off. The key is that the business has advance notice so it can react quickly and avoid a dip in revenue or uptick in missed orders to customers while keeping partners informed. This ability to quickly shift gears puts those with clear SCM strategies in a much better position should a natural disaster, disease outbreak, economic instability or a similar event affect the supply chain.
- Greater sustainability: A supply chain that optimizes purchasing and manufacturing will produce less waste. An accurate demand plan helps purchasers buy only what they need, which means less inventory to dispose of. Master supply chain sustainability and you’ll manufacture and ship fewer unnecessary items. That lowers a business’s environmental footprint, which is increasingly important to customers — 81% of global consumers answering a Nielsen sustainability survey said it’s very or extremely important that corporations reduce their impact on the environment.
- Create a competitive advantage: The ultimate goal of SCM efforts is to give companies a clear competitive advantage. The benefits discussed above can separate an organization from its competitors, whether through lower prices, an exceptional customer experience, a more resilient supply chain — or all the above. And once a business secures a position at or near the top, it will gain market share and watch the bottom line grow.
5 Components of SCM
SCM encompasses a wide range of activities that generally fall into one of five buckets: planning, sourcing, manufacturing, delivery and returns. Let’s take a more detailed look at each component:
- Planning: SCM starts with planning. A company must first determine the quantity of supplies or products it needs, typically by using supply chain and inventory management software that helps build accurate forecasts and provides detailed analytics. As part of this process, SCM must figure out the labor, capital and partners it will need to meet expected demand.
- Sourcing: This is when a business identifies the suppliers, manufacturers and distributors that can provide the goods or services it needs based on its plan. In an effort to build supply chain resilience, a manufacturer might have multiple suppliers for an important component, in case one supplier shuts down or has reduced capacity. That adds redundancy but may come at the cost of more complexity. Managing redundant relationships falls into this part of SCM, as well.
- Manufacturing: Even for companies that outsource manufacturing or buy fully or partially finished products, this is a key step. The company must acquire finished goods or all the parts and materials it needs to produce goods based on its demand plan, inspect them for quality, then package items for direct shipment or distribution.
- Delivery: Delivery is the final step in the forward supply chain and entails getting goods or services to customers, whether another business or consumers. The company must organize and prioritize orders to ensure it can meet promised delivery timelines and avoid downstream issues, like high-demand SKUs going out of stock. This component includes invoicing and collecting payments from customers, as well.
- Returns: The product lifecycle doesn’t always end when the end user receives an item. Sometimes products are sent back, whether due to customer dissatisfaction, defects, excess inventory or a warranty claim. The item then moves through the reverse supply chain until it reaches the company responsible for issuing a refund or replacement. That company then either scraps the item, repairs it or returns it to available inventory.
A recent trend is the “returnless refund,” where an online seller determines that it will cost more to take an item back than it can recoup and chooses to simply issue a refund and tell the customer to keep the product.
8 Key SCM Processes
Because SCM covers everything from raw-material sourcing to final delivery and returns, it includes a number of different processes.
- Purchasing: Before a business can manufacture or sell anything, it needs to purchase materials or goods. That’s where purchasing, or procurement, comes in. Based on its demand plan, a company sends purchase orders to its suppliers and ensures they can meet quantity and timeliness requirements.
- Manufacturing: If your organization is in the business of making things, that process is obviously a fundamental piece of SCM. Manufacturers must plan production runs and ensure they have the necessary capacity to meet demand. They must also track goods-in-progress and finished goods.
- Inventory management: A company must keep a close eye on the status of all components and items as it receives, uses and ships them out. It needs to know the details on and location of every piece of inventory coming into and going out of its facility. Inventory management focuses on optimizing stock levels to increase inventory turns and reduce holding costs.
- Order management: Companies — in particular, retailers — may receive orders through many channels and need a way to organize them. Order management involves sorting and prioritizing orders and routing them to the appropriate fulfillment locations, like a regional warehouse or retail outlet. An order management system also tracks orders as they’re fulfilled and shipped to customers.
- Warehouse management: Although similar to inventory management, warehouse management focuses on the movement of goods in the warehouse and related workflows. For example, directing workers as they put away incoming products and fulfill customer orders —picking, packing, shipping — can increase efficiency.
- Customer service: Businesses must keep customers informed as their orders move through the supply chain. Communication starts with letting customers know whether you can fulfill their requests, then giving them a way to track orders in real time. A high-performing supply chain demands frequent and consistent communication with your partners and clients.
- Reverse logistics: Customers send back, on average, 30% of online purchases, with a return rate as high as 50% for some apparel brands, say experts. Companies must figure out efficient ways to process returned products. A supply chain partner, such as a retailer or distributor, or the end customer could initiate this process. SCM teams should have a clear policy around when returns are allowed and rules detailing when to return goods to inventory, repair them or destroy them.
- Supply chain performance tracking: Leaders must establish supply chain KPIs and other metrics to understand if their organizations are meeting operational performance standards. These metrics should be monitored in real time and reviewed frequently lest issues fly under the radar. Companies may measure productivity, costs, fill rate, on-time delivery rate and customer satisfaction.
There are many examples of businesses enjoying lower costs, greater efficiency and ultimately a competitive advantage as a result of focusing on SCM. Let’s walk through a few examples.
Beginning in 2010, retail giant Walmart shifted to source products directly from suppliers instead of relying on distributors. It first focused on produce and by 2013 was buying about 80% of the fruits and vegetables it sold straight from growers, compared with 20% before. This initiative lowered procurement costs by as much as 15% and also helped the company get products faster and avoid out-of-stocks.
As part of its strategy, Walmart set up several strategically located “merchandising points” where suppliers delivered goods that were then distributed to regional warehouses. It also negotiated lower prices with certain strategic suppliers by signing long-term contracts and making large purchases. Walmart passed on those lower prices to customers, and as such a big customer, gained some input over the design and quality of goods it purchased.
Electric carmaker Tesla has a vertically integrated supply chain, meaning it doesn’t depend on outside partners to the extent most car manufacturers do. Tesla makes many components, including batteries, itself and owns its own dealerships and service centers. This gives it much greater control over the processes involved in manufacturing, selling and maintaining vehicles.
Tesla relies on automation and robotics to lower the costs of its U.S.-based supply chain. Because the business handles most aspects of sourcing and manufacturing in-house, it can add automation wherever it believes it will add value. Tesla can also tweak processes or make changes to its vehicles more quickly than competitors.
Apparel company Zara adopted a SCM strategy targeting improved sustainability. The brand has shifted to using organic cotton and other materials with smaller environmental footprints. The company also has a fleet of vehicles that run on biodiesel to transport products to warehouses and stores.
Zara manufactures much of the clothing it sells, and it sought to reduce waste from manufacturing. So, it implemented technology that helps it measure and cut fabrics for a certain piece of clothing in a way that wastes the least possible amount of fabric. The Spanish retailer has also launched a clothing recycling program. By 2025, Zara has pledged to produce zero waste that ends up in landfills and to rely on renewable sources for 80% of the energy used by its stores, distribution centers and offices.
Today, supply chain management software plays a central role in the planning, design and administration of processes that power multinational supply chains. These solutions can help with all five components of SCM — planning, sourcing, manufacturing, delivery and returns — and automate many of the tasks involved at each step.
Businesses often use SCM modules from their ERP software provider to handle these tasks. Common modules include demand planning, procurement, manufacturing, inventory management, order management and warehouse management (WMS). Each is dedicated to a specific step in the supply chain. For example, a procurement module can keep a list of approved suppliers and automatically submit purchase orders when inventory reaches a certain threshold. With a WMS module, warehouse associates can pull up orders on handheld devices and see the most efficient pick paths for items in one or multiple orders.
The advantage of using modules from your ERP vendor is a unified view of supply chain data along with other key information from across your business, like that related to financials, customers and human resources, on a single platform. By using these modules, companies can also avoid the integration challenges that often come with linking third-party systems to an ERP.
However, some companies may still opt for an SCM software suite and should make sure they understand how it integrates with their core business systems.
History of SCM
Booz Allen Hamilton Consultant Keith Oliver came up with the term “supply chain management,” first using it in 1982. The next year, a German company launched one of the first SCM projects, but it would be another decade at least before this practice earned the attention of most business leaders.
In the mid-to-late ’90s, many companies started taking a closer look at their supply chains and devising ways to reduce costs and optimize operations. They began to integrate previously siloed supply chain functions, like planning, manufacturing and delivery, and explore ways to share information with other businesses in their networks.
SCM became more crucial and widely practiced in the following decades as far-flung, global supply chains became the standard. These value chains introduced additional risks and complications and could run smoothly only with strategic planning and coordination between a growing number of partners.
Now, leading organizations are exploring emerging technologies as they look for new ways to further optimize their supply chains.
One key when considering new techs is ensuring it can communicate with your ERP system and/or SCM software. The last thing any company needs is one more data silo.
Let’s look at three interesting areas for investment.
Internet of Things (IoT) devices are starting to gain traction among enterprises and some smaller businesses. These connected devices include sensors, scanners and cameras that can collect useful information and send it back to the ERP. For instance, a manufacturer might put trackers on its trucks so it can monitor the status of outbound orders in real time. A sensor on a piece of warehouse automation equipment could monitor its status and alert a manager to request preventative maintenance when it’s not performing at normal levels. Advanced use of barcodes, whether linear or matrix, and RFID tags aid in inventory management.
Blockchain is another buzzworthy technology in the supply chain world. While still more concept than reality for most companies, blockchain technology could keep trustworthy, detailed records of goods and services as they move through the supply chain. A blockchain network stores information in records that are automatically updated, cannot be altered and can be viewed by all stakeholders. Such an audit trail increases transparency among the various entities that play a role in sourcing, making and delivering a product or service.
Cloud-based applications also support and enable SCM objectives. Software-as-a-service (SaaS) systems, in particular, help smaller businesses take advantage of cutting-edge functionality as they receive regular updates from the vendor and eliminate the need to build out additional infrastructure as needs grow. IoT, blockchain and cloud technology will only grow in importance as supply chains become more data-driven and interconnected.
Technology is only part of the story when it comes to advanced supply chain management. When a global pandemic disrupted networks in 2020, many companies suddenly discovered the vulnerabilities of their global supply chains.
As a result, many firms set out to take a closer look at these vast networks. As part of that initiative, there has been a renewed focus on the digital supply chain, which focuses on near-real-time visibility of supplier performance and customer needs, as well as concerted effort to map out the extended supply chain. The thought is that, by understanding each link and keeping constant visibility, a company can both establish better backup plans and stronger lines of communication and then move quickly to adapt in the face of a crisis or change in market conditions.
The pandemic also led many to consider the benefits of localizing certain pieces of their supply chains. Although sourcing or manufacturing in North America may cost more, it can give organizations the flexibility and responsiveness they seek. While outsourcing has been the trend du jour for the past 30 years, some believe that’s changing. However, business leaders will have to perform thorough evaluations that account for the steep capital costs of moving to determine whether onshoring should be part of their SCM strategies.
As the Zara example above alludes to, sustainability is another movement influencing SCM. Some shoppers have become increasingly concerned about the environmental impact of the products they buy and are seeking out companies that make a concerted effort to be green. This goes hand-in-hand with the rise of circular supply chains that strive to reuse and recycle used items, rather than dispose of them, as is common in the linear supply chain. The advantages of a circular supply chain extend beyond consumer appeal, though: Refurbishing existing products can be less expensive than producing new ones, especially if parts can be reused or turned into raw materials for future goods. One other benefit of this model is it helps businesses comply with expanding regulations around emissions and waste.
Another SCM trend of note that bridges the process and technology realms is automation. Automation in warehouses and factories is nothing new, but there has been a rise in the amount and sophistication level of automation. Robots that can handle more complex tasks and autonomous vehicles that transport goods have growing footprints in many facilities. The labor savings automation generates could make it more feasible for U.S. companies to move their supply chains closer to home.
Parcel carriers and retailers are even experimenting with self-driving vehicles and drones that can deliver orders right to customers’ doorsteps.
Executives who realize that supply chain management is inextricably linked to the profitability and long-term success of their companies are looking for new processes, people and technology that enable them to produce better goods and services and get them to customers faster and for less money. As organizations across industries focus on enhancing the customer experience, they will realize that SCM can also make a difference there. A high-performing, cost-effective and resilient supply chain really can be the competitive differentiator every business seeks.