Definition: Supply Chain Management (SCM) is a mechanism which ensures systematic procurement of raw material and distribution of final products to the end buyers. It integrates the efforts of major logistic parties, i.e., suppliers, producers, warehouses, agents, distributors, retailers and transport companies to derive overall consumer satisfaction.
Digitalization and m-commerce have exposed the companies to a virtual world where there is a need for fusing advanced logistics with business operations.
Content: Limited Liability Company (LLC)
- Components
- Characteristics
- Factors
- Process
- Importance
- Challenges
- Example
Components of Supply Chain Management
A supply chain does not only comprises of the intermediaries but it is a complete system behind the functioning of any business.
Given below are the different elements which defines the supply chain management:
trategic Planning: A supply chain is devised over a strategic decision like whether to self-manage the logistics or take the services of a logistics company.
Sourcing: Depending upon the factors such as raw material requirement, financial capacity, discounts, shortest distance, transportation cost, etc; the company alliances with suppliers.
Customer Demand: The consumer requirement is another essential element which frames the company’s logistics to serve the customers in the best possible way.
Inventory Management: The demand shapes the level of stock to be maintained by the business units. An inaccurate demand forecasting may hinder the production as well as the supply of goods or services.
Production: Without manufacturing, there cannot be any circulation of finished goods. Thus, the production plays a significant role in logistics planning.
Warehousing: Whether it is a raw material or the finished products, there is a need for storage which is taken care of under the supply chain management.
Transportation: Another crucial component is to determine the means of transportation suitable for sending the goods to the desired destination in the shortest possible time with safety.
Return of Goods: When providing the return facility in case of damaged or unsatisfactory products is inevitable for any business, the supply chain takes care of the related process in adherence to the company’s return policies.
Characteristics of Supply Chain Management
Right from raw material procurement, to its warehousing, to its conversion into finished goods, to the final product distribution and return facility, supply chain regulates it all.
The following features of SCM would help us understand the system in a better way:
- Innovation: The whole supply chain is based upon technology and there is always a scope for innovation and up-gradation.
- Customization: The company can tailor its supply chain to make it convenient for its vendors, distributors, retailers and customers.
- Flexibility: The logistics are ever-changing and can be set according to the market, situations, economic and political environment, etc.
- Sustainability: The companies ensure that they adopt a green supply chain to not only conserve the natural resources but also to ensure eco-friendly business practices.
- Quick Response or Delivery: Supply chain management aims to achieve the shortest delivery time which can also be seen as its core function.
- Proactive Approach: The company’s logistics should be robust enough to analyze the forthcoming events like a disaster, economic downturn or disruption. It helps the business to mould its supply chain to deal with such adversities.
- Unification: The supply chain aligns all the business activities including raw material procurement, production, warehousing, distribution, sales, marketing, etc.
- Strong Network: The whole supply chain can be run smoothly if there persists an effective internal and external business communication.
- Legal Compliance: When every organization pertain in a legal environment, the supply chain entities also have to abide by the regulations set up by the local, state and central governments.
Factors Affecting Supply Chain Management
To deeply understand a supply chain and its formation, we must go through the various determinants behind the supply chain management:
Business Environment: The company’s microeconomic conditions may affect its production, whereas the macroeconomic factors may impact the distribution process.
Information Technology: As the new techniques emerge, the companies have to modify their logistics accordingly, to stay in the competition.
Globalization: In the era of e-commerce, the enterprises extensively operate at a global level. Thus, the companies need to systematically set up multiple Stock Keeping Units (SKUs) and warehouses internationally.
Consumer Demand: Every aspect of a supply chain revolves around the customers’ need and expectations, making it essential for the companies to estimate these demands accurately.
Third-Party Logistics: The capabilities, terms and conditions of the third party handling the company’s supply chain is another crucial factor in SCM.
Communication: The ability to seek information and creating a robust network for uninterrupted business communication internally and externally strengthens the company’s logistics.
Competition: If a competitor is winning the market with a flawless supply chain then the company needs to plan its logistics accordingly to retain customers.
Government Regulations: The legal boundaries defined by the government plays a crucial part in determining the supply chain of any organization.
Supply Chain Management Process
When we say supply chain, many will take it as product distribution, but it is a detailed process including five major steps as discussed below:
- Plan: This is the base step where strategies are formulated in regards to logistics facilitating the fulfilment of consumer demand.
- Source: The company then finalizes the vendors providing the raw material and various related services essential for the production and distribution of goods or services.
- Make: All the manufacturing activities take place in this stage. Other than production, it includes product designing, packaging, labelling, testing and dispatching.
- Deliver: This is a crucial stage where the company takes care of its logistics. It involves establishing networks, receiving orders, warehousing, product pick-up and delivery and accept payments.
- Return: The logistics management process doesn’t end with product delivery. The customers are provided with the return, exchange and refund facility in case damaged or inappropriate products are sent.
Importance of Supply Chain Management
In the traditional business setup, less importance was given to building consumer experience. However, in today’s dynamic business scenario, every business activity needs to be well-organized to retain customers.
Let us unfold the multiple benefits of supply chain management:
- Handles Demand and Supply: The supply chain management emphasizes on serving the consumer demands through the flawless distribution of products or services.
- Cuts Down Operating Cost: With a keen analysis and decisions of the raw material procurement, plant operations and product distribution, the overall cost can be subsided.
- Enhances Consumer Experience: It ensures the timely delivery of the products at the appropriate location, along with maintaining the desired quality, return policy and aftersale services.
- Maximizes Profit: When the company has a strong supply chain, it can deliver excellence, thus diminishing its cost and leveraging the profits.
- Brings Efficiency: The business process, product quality, delivery standards and customer experience can be embellished through a robust supply chain.
- Develops Value Chain: When every business partner whether the suppliers, distributors or agents are handpicked, the supply chain turns into a value chain promising perfection each time.
- Limits Fixed Asset Usage: A well-planned logistics optimizes the business process such that the raw material is available on time and finished goods are immediately dispatched to the sellers’ destination. Thus, the need for multiple warehouses, production units and delivery vehicles have reduced tremendously.
Challenges of Supply Chain Management
In many companies, a specialized team is formed to handle logistic functions. This itself states that SCM is not that simple.
The various obstacles in the way of handling the corporate logistics are as follows:
- Omnichannel Retailing: The consumer’s buying behaviour adopted an omnichannel retailing trend, which is highly complex to be incorporated into a supply chain.
- Technological Advancement: The technological up-gradation in a supply chain is all about transforming the complete system which is quite expensive.
- Unfavourable Macroeconomic Conditions: Many a time, the company needs to take supply chain decision in regards to adverse macroeconomic factors such as inflation, economic slowdown, GDP, etc.
- Customization: Matching with the conditions and requirements of each vendor, distributor, stockist, agent or customer becomes a tedious task.
- Unexpected Delay in Delivery: Sometimes, the technical issues and physical distribution hurdles result in late delivery of the products or services.
- Lack of Infrastructure: In the countries like India where the rural regions fall short of adequate infrastructure, delivering goods or services seems to be challenging.
- Inaccurate Demand Estimation: When the company is involved in the extensive distribution of goods or services, it is difficult to accurately forecast the quantity demanded at each location.
Example
One of the most effective supply chains is that of The Coca-Cola Company.
The brand serves in 200+ countries, only because of its blockchain system. The company has more than 250 bottling plants in different locations worldwide.
The Atlanta unit of the company provides the concentrate (made out of a super-secret recipe) to all the bottling plants spread across the world. The rest of the process takes place individually in these plants using the other specified ingredients available in the local markets.
The brand has adopted the blockchain technology in alliance with SAP, it can now efficiently serve around 160000 orders a day.