What is Supply Chain Management?
Methods, Processes, & Systems
This supply chain management guide is for those looking to learn more about managing a supply chain and the various supply chain management methods, techniques, and systems that empower supply chain success.
What is supply chain management?
Supply chain management (SCM) is the planning and control of a business’s flow of goods, services, and information. It aims to minimise costs and meet the needs of consumers with increased efficiency. Supply chain management oversees all the processes involved in getting a product or service to customers, including procurement, production, inventory control, and logistics.
A supply chain can involve many different companies. Supply chain management is how each company manages its internal performance and the flow of materials to and from other businesses. It can be summarised as the managing of a system that enables interconnected businesses and systems to create and distribute a product or service.
Supply chain definition
A supply chain is an integrated logistics system that connects operations and services to convert raw materials and components into finished goods and then deliver those goods to the end consumer.
While that may be the succinct supply chain definition, the reality is that supply chains are complex systems that involve thousands of interconnected processes and technologies.
A supply chain can include:
- Procurement of service providers
- Purchasing of raw materials and goods
- An integrated workforce
- Software tools and other technology systems
- Inventory control
- Demand forecasting
- Customer service
- Warehousing and operations
- Shipping and transportation
You can begin to see why effective supply chain management is so important for business success. And in today’s world of high customer expectations and rapid technological advancement, it’s now more crucial than ever to get it right.
Supply chain management trends for 2023
The S&P Global 2022 Supply Chain Survey Report queried 903 supply chain professionals from around the world about the key concerns, priorities, trends, and capabilities they’re seeing in supply chain management.
Key supply chain management insights for 2023 include:
- Although best-practice strategies and processes are often in place, effective implementation is frequently limited by a lack of technology platforms and data insights.
- Insufficient systems and a lack of supply chain visibility badly impacts supply chain resilience.
- Businesses need to prioritise investing in greater visibility, real-time external data, transport and logistics management tools, and better platforms for gathering data.
- Companies should focus on improving supply risk management, inventory management, supplier management, transport, and logistics to improve cost optimisation.
In addition to these supply chain management trends, automation and robotics continue to gather momentum as frequent disruptions implicate a greater need for robust and efficient operations.
According to a study by ABI Research, by 2025 there will be over 4 million commercial robots in use across more than 50,000 warehouses – up from just 4,000 warehouses utilising robotics in 2018. The lowered barrier to entry and increased interest in AI are suspected catalysts for this rapid rise in global adoption.
Why is supply chain management important?
Supply chain management helps businesses streamline their operations and keep ahead of competitors. It’s a critical part of delivering quality products at competitive prices and driving repeat sales. It also enables businesses to remain stable when the bullwhip effect is in full force.
Supply chain management and the bullwhip effect
The bullwhip effect is a phenomenon that’s frequently associated with supply chain management. In simple terms, it refers to the way that small shifts in consumer demand at the retail level can cause increasingly large demand shifts at the wholesale and manufacturing levels.
Supply chain management helps businesses improve their ability to react to the challenges presented by the bullwhip effect by mitigating risk and accurately forecasting demand requirements.
8 benefits of supply chain management
79% of companies with high-performing supply chains have greater than average revenue growth within their sector.
The 8 major benefits of supply chain management are:
- Reduced operational costs
- Reduced manufacturing costs
- Reduced inventory carrying costs
- Improved operational efficiency
- Increased revenue and profits
- Improved inventory management efficiency
- Greater financial visibility and data insights
- Improved customer satisfaction
1. Reduces operational costs
Effective supply chain management spots costly processes that don’t contribute value to the final product. This allows a business to minimise or remove these processes, lowering operating costs.
2. Lower production costs
Manufacturers depend on efficient supply chains to deliver raw materials to assembly plants at the best possible price, and in a timely manner so as to avoid shortages that slow or halt production. Reduced manufacturing costs are a central goal of supply chain management.
3. Lower holding costs
Inventory in your warehouse comes with a cost. Retailers, distributors and wholesalers require an optimised supply chain to minimise the cost of holding inventory in their warehouses.
This is why supply chain management is especially important for businesses with products that have a short shelf life – such as fresh food – or that become obsolete quickly, such as laptops and mobile phones.
4. Improves efficiency
Wastage – whether it’s wasted time, effort or raw materials – corrupts operational efficiency. A good supply chain management strategy puts a plan in place to identify wasteful activities and reduce it by focusing on optimising processes and technology.
5. Increases profits
Strong and efficient supply chains generate more revenue and greater profits. Lower costs enable more competitive pricing, more profit margin, and allow for activities such as marketing.
6. Improves product and material flow
The less time it takes for products to reach an end user, the more efficient the product flow. Efficient product flows see less lag between demand and supply – making accurate forecasting easier – and bullwhip effects less pronounced.
7. Improves flow of information
An efficient supply chain management strategy allows information to be shared along the whole supply chain. This removes bottlenecks and gives businesses a view of the entire supply chain so they can make informed decisions. Real-time analytics make this process faster and more accurate.
8. Boosts customer satisfaction
Happy customers have what they want when they want it, at the best price. An optimised supply chain can boost customer satisfaction and loyalty, encouraging more sales in future. Faster fulfilment and more accurate delivery estimates help businesses establish a positive reputation among consumers.
The role of a supply chain manager
The discipline of supply chain management touches on a range of activities spanning procurement, inventory management, product lifecycle management, transportation management, order management, and more.
A supply chain manager can optimise supply chain performance by:
- Managing and enforcing service level agreements with suppliers
- Managing products to allow more cost-effective purchasing
- Managing inventory to reduce waste and warehouse costs
- Creating cost-effective transport policies and contracts
Before we get into the specific details it’s worth looking at how some of the most common frameworks for supply chain management break the practice down into action areas.
How does supply chain management work?
In the middle of a supply chain, any given company will be at once a supplier to other firms, while also having suppliers of their own. One company’s supply-side performance is another firm’s delivery target.
Supply chain management works to optimise supply chain visibility and efficiency by strengthening the integration between each link in the supply chain and improving the internal processes that impact it.
If that sounds complicated, don’t worry; we’ll break it all down for you until it makes perfect sense. First, let’s look at some of the core supply chain management processes.
5 stages of the supply chain management process
The Supply Chain Operations Reference model, or SCOR, is a helpful supply chain management framework that focuses on five stages of the SCM process.
The 5 stages of supply chain management process:
The planning phase sets the strategy for the supply chain, while the other four elements represent key requirements for executing it. Your business needs to be proficient in all five areas to be efficient and avoid bottlenecks.
Planning is the supply chain management process that determines how you’re going to use your resources to meet demand while operating at a minimal cost. It involves setting rules for measuring and improving efficiency.
In supply and demand planning, the first goal is to accurately predict what resources you’ll need to meet future customer demand. Then you must allocate budget and implement systems and processes to match your forecasted requirements.
Careful supply planning also helps control the bullwhip effect, which allows businesses to manage their supply quantities and costs more efficiently than their competitors.
Once the supply chain is in motion, you’ll need to track your supply chain management efficiency with key supply chain metrics.
Sourcing refers to the supply chain management processes utilised to procure goods and services. Poor sourcing can lead to higher materials costs, delays in production or delivery, and shortages of raw materials, components or products.
The sourcing process can include:
- Purchasing and receipting goods
- Developing a sourcing infrastructure
- Managing suppliers
- Negotiating supplier agreements
- Tracking supplier payments
- Tracking supplier performance
The main goal of sourcing is to continually seek the best arrangements to ensure a reliable and cost-effective supply chain. That’s why monitoring supplier performance and pricing are key functions of the sourcing process.
Making refers to the production or manufacturing of finished goods from raw materials and components. Supply chain management oversees the productivity and costs of various systems used to produce sellable products.
Production management and lean manufacturing are common supply chain management strategies for ensuring goods are manufactured efficiently and on time.
The deliver stage covers the transportation of goods along the supply chain. It begins with the movement of raw materials through to manufacturing, inventory management, fulfilment, and shipping.
Supply chain management processes that aid delivering include:
- Order management
- Transportation management
- Distribution management
- Freight forwarding
This final stage of the supply chain management process is managing returns – both from your customers and with your suppliers. This process is also sometimes called reverse logistics.
Post-delivery customer support and managing returned inventory enable businesses to improve customer service levels, meet regulatory requirements, and ensure customer returns are managed promptly and effectively.
Supply chain methods: 7 types of supply chain management
Here are seven common types of supply chain management methods. Understanding the differences in each model can help you determine which method suits your business best.
Efficiency-focused supply chain methods
These types of supply chain methods work well in highly competitive industries where demand is predictable, products are similar, and customers value low cost. Examples of such industries include chemicals, paper manufacturing, and the manufacturing of other commodity goods.
1. Continuous flow method
The continuous flow method is one of the most traditional supply chain approaches. It’s ideal for manufacturers who make the same goods repeatedly with little variation, such as commodity goods.
In the continuous flow model optimisation comes from high levels of supply chain cooperation and avoiding irregularities in demand.
2. Fast chain method
This method is flexible and is great for manufacturers that make trendy products with short life cycles, and for businesses who change products frequently and need to sell them quickly.
Businesses should focus on promoting new products, which relies on three elements: short time from idea to market, accurate forecast levels, and end-to-end efficiency to ensure products are affordable.
3. Efficient chain method
The efficient supply chain model is great for businesses in very competitive markets and where end-to-end efficiency is the goal. Commodity businesses use this model because production is based on expected sales and competition is based on price.
With this model, businesses focus on maximising efficiency to reduce costs, rely on accurate forecasting to ensure product availability, and prioritise perfect order fulfilment.
Responsiveness-focused supply chain methods
In industries where customer demand is unpredictable, businesses should opt for a responsive supply chain method.
4. The agile method
The agile model is a method of supply chain management that is ideal for businesses that manufacture specialty order items. Manufacturers work on a make-to-order basis, only making an item after receiving a customer’s order.
To be agile, businesses must have the ability for excess production capacity and design manufacturing processes and products that can be done in the smallest possible batches.
5. The custom-configured method
The custom-configured model focuses on providing custom configurations especially during assembly and production. It is ideal for businesses, such as car manufacturers, who have products with multiple configurations — product configurations are usually done at assembly, where different product parts are assembled according to the customer’s specifications.
This model is a hybrid of the continuous flow and agile models. Processes before product configuration are managed under the continuous flow model, while product configuration and the downstream processes follow the agile supply chain model.
6. The flexible method
The flexible method is best suited for businesses that face high demand peaks and long periods of low workload. This model is highly adaptable to reconfigure internal manufacturing processes and enables businesses to meet specific customer needs or solve problems.
Businesses need to focus on having extra capacity of critical resources, quick responses, strong technical ability in processes and engineering, and a flexible process flow that’s quickly reconfigurable.
7. SCOR method
The SCOR model was developed by the Supply Chain Council in collaboration with 70 leading manufacturing companies. The aim of this model is to standardise processes and create a quantifiable way of tracking results. This includes assessing processes and goals, quantifying performance, and comparing company performance to benchmark data.
Supply chain techniques
There are specialised supply chain techniques for managing and optimising different types of supply chains. These techniques can help inform the angle of your supply chain management strategy.
Green supply chain management
Green supply chain management is a supply chain technique that focuses on solving environmental challenges and developing more sustainable processes for managing the flow of goods. Sustainability in the supply chain can help to reduce the emissions, pollutants use, and energy consumption required to operate efficiently.
Global supply chain management
Global supply chain management supports the transit of goods and services through international supply chain networks. This technique aims to maximise profit and minimise waste by extending the range of opportunities available for businesses to encompass the entire world.
Strategic supply chain management
Strategic supply chain management aims the boost efficiency and productivity in the supply chain. It involves monitoring, analysing, and acting on data to product high-quality, in-demand goods at a minimal cost and maximum profitability. This can mean assessing the product portfolio, customer demand, resources, spend, and stock control processes for bottlenecks.
What is supply chain risk management?
Supply chain risk management is the process whereby businesses identify, assess and mitigate risks in their end-to-end supply chain. Unexpected disruptions and supply chain vulnerabilities can have serious consequences for businesses, both financially and reputationally.
Supply chain risk management can be as simple as a brewer making sure they have an alternative hops supply in case one region’s crop fails – or as complex as a full audit of vulnerabilities by a global corporation.
Mature businesses need to document supply chain risks and develop strategies to mitigate them in a risk management plan. There are two types of supply chain risks: external risks and internal risks.
External supply chain risks
External risks are those outside of your control, making them harder to predict and requiring more resource to mitigate. Some examples of external supply chain risks include:
- Demand risks. This is caused by unpredictable or miscalculated customer demand
- Supply risks. Supply risks occur when raw materials or components your business relies on aren’t delivered on time or at all, causing disruption to your processes
- Environmental risks. Social-economic, political, governmental, or environmental issues such as new legislation, fires, earthquakes and even pandemics.
- Business risks. Unexpected changes in one of your supply chain partner’s business, such as a sale or bankruptcy.
Internal supply chain risks
Internal risks are more within your control, making them easier to identify and manage using supply chain risk assessment software. Some types of internal supply chain risks include:
- Manufacturing risks. The possibility of your key components or processes being disrupted, hindering your production schedule
- Planning and control risks. Failure to accurately assess, plan and forecast
- Mitigation and contingency risks. Failure to have a contingency plan for supply chain disruptions – for instance an alternative product that can be put through a production line if another run is delayed
- Business risks. Unexpected changes in your business, such as changes in key personnel or management, and poor reporting
Supply chain management systems
There are a range of supply chain management systems to suit businesses of various sizes. Most of these can be categorised as either ERP or single-vendor systems.
Supply chain management ERP system
Large companies will typically use Enterprise Resource Planning (ERP) systems. ERP vendors offer one platform to encompass many areas of a business – demand planning, procurement, production, shipment, inventory management and more.
Popular ERP vendors include Microsoft, Oracle, SAGE, SAP and Access ERP.
Supply chain management software
For small and growing businesses, ERP systems can be overwhelming – and costly. The alternative is cloud-based supply chain management software that integrates with other solutions in the cloud app ecosystem.
By implementing supply chain management software and integrating it with your tech stack, you can enjoy the flexibility and scalability that allows businesses to stay nimble and competitive on a tight budget.
What does supply chain management software do?
Supply chain management software is any platform that manages the flow of materials and information across the supply chain network.
The purpose of supply chain management software is to improve efficiencies throughout the supply chain with automation. It achieves this by improving the accuracy of the myriad tasks that power a supply chain.
Supply chain management software features
Businesses use supply chain management software to organise production, inventory, sourcing, transportation, demand planning, purchasing, and more.
10 important supply chain management software features:
- Purchase order management
- Inventory management
- Warehouse management
- Supplier management
- Real-time reporting and analytics
- Demand forecasting
- Order management
- Production management
- Shipping and logistics management
- Integration with finance and customer systems
Because supply chain management touches on a variety of roles, processes, and systems, there is an equally diverse portfolio of software to go with it. In the next section, we’ll cover some of the most useful types of supply chain management software.
Types of supply chain management software
The popularity of supply chain management continues to surge as the need for automated systems and real-time data grows. Revenue from supply chain management software almost tripled from 2008 to 2019, according to data from Statista.
Supply chain inventory management software
Inventory management software optimises stock control, improves forecasting, and reduces inventory carrying costs. Inventory systems can track stock levels, supplier information, and customer orders in a central location for greater supply chain visibility.
This type of supply chain management software will frequently function as the central source of information within a product business. You can also optimise inventory accounting by integrating inventory management software with cloud accounting software.
- Inventory management systems explained
- The 19 best inventory management software features to look for
Supply chain order management software
Supply chain order management software enables you to put your customer first by optimising the sales and fulfilment process to increase customer satisfaction. Multiple delivery addresses, sell price tiers and discounts make it easier to offer value and stay competitive.
Order management software also encourages communication with your customers so they can always stay updated on their shipments. This leads to higher retention rates and repeat purchases.
Supply chain purchase order software
Purchasing management software allows you to automate processes like reordering raw materials and components to reduce time spent on administrative tasks and focus on growing the business instead.
Manufacturing supply chain management software
Manufacturing supply chain management software helps you coordinate your production processes, identify bottlenecks, and maximise resources so that assemblies run seamlessly. Cloud manufacturing reduces production time while maintaining quality, and helps you deliver goods to customers on time.
Supply chain metrics
Identifying and managing supply chain risk is crucial to longevity. Businesses need to use real-time supply chain management software and incorporate supply chain risk management into their planning process.
A simple way to manage supply chain risk is to set external and internal supply chain metrics.
Tracking supply chain KPIs increases visibility and accountability to areas of known risk in your business. Let’s look at some of the most useful ones.
Supplier performance metrics
Supplier underperformance impacts your processes – at worst, it can result in production delays, stockouts and customer dissatisfaction.
Here are some metrics that keep tabs on how your suppliers are performing:
- Average lead time by supplier
- Overdue order rate
- DIFOT (Delivery In Full, On Time) rate
- Rate of supplier returns
Inventory management supply chain metrics
Inventory management metrics help you monitor and improve your inventory optimisation processes. Some useful inventory metrics include:
- Days sales of inventory
- Annual stock turns
- Back order value
- Inventory to sales ratio
- Inventory carrying rate
Supply chain order management metrics
These metrics can help you track order management performance in the supply chain:
- On-time delivery
- Units sold
- Units per transaction
- Customer backorder rate
- Cash to cash cycle time
Manufacturing supply chain metrics
If you’re a manufacturer, use these manufacturing supply chain metrics to measure production efficiency and performance:
- On-time assembly
- Cost of wastage
- Direct material usage variance
- Throughput yield
- Machine downtime rate
Purchase order management metrics
Finally, here are some purchase order management metrics to help you track how well you are procuring and buying goods:
- DIFOT rate
- Spend under management
- Vendor payment processing cycle time
- Supply chain expense as a percentage of total revenue
- Managed spend per procurement employee