Supply chain management explained: methods in modern business
Supply chain management helps businesses streamline their operations and keep ahead of competitors. For modern businesses it’s now a critical part of delivering quality products at competitive prices.
Today, supply chain management is a discipline taught in universities and business schools. Large corporations can have entire divisions responsible for managing and optimising their supply chain.
Small and medium enterprises, however, typically have less expertise and resource available for optimising their supply chain performance. This guide, therefore, is intended as an aid to businesses looking to learn more about supply chain management – and take advantage of some of the more accessible supply chain management tools, techniques and technologies now available.
In this guide
What is supply chain management?
Supply chain management is how interconnected businesses and systems manage the flow of goods and services, from raw material to the end user. A supply chain can involve many different companies; supply chain management is how each company manages both its own internal performance, as well as the flow of materials to and from other firms.
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 might optimise 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
And much more.
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.
The 5 elements of supply chain management
There are many different frameworks for supply chain management. For the purposes of strategic decision-making one of the best is the Supply Chain Operations Reference model, or SCOR. This framework focuses on five areas of the supply chain: plan, source, make, deliver and return.
The planning phase sets the strategy for the supply chain, while the other four elements represent key requirements for executing it. Businesses need to be proficient in all five areas in order to be efficient and avoid bottlenecks.
It’s worth noting here that, in this guide, we’ll largely be looking at how businesses can optimise the first two areas – the supply side of the product life cycle. For manufacturers, that means focusing on pre-production, while for wholesalers and distributors it’s a focus on the processes before warehousing.
Of course this is something of a matter of perspective: 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. Meaning that one company’s supply-side performance is another firm’s delivery target.
With that said, let’s look at the elements of the SCOR model.
5 elements of supply chain management:
This element involves demand and supply planning and management. Some planning activities include:
- Balancing resources with requirements
- Determining communication along the entire chain
- Determining rules to measure and improve supply chain efficiency
This is an essential first step because it sets the course of action. Poor demand and supply planning can lead to the dreaded bullwhip effect, whereby each company or department’s tendency to overact to demand is amplified down the supply chain, causing inefficiencies that affect everyone.
For example a watchmaker anticipating Christmas demand might plan for slightly more sales to avoid running out of stock. They place a larger order than needed with their battery supplier, who in turn orders more steel and lithium than they need, for similar reasons. By the time these orders arrive with the mining firm responsible for extracting the raw materials the demand has been so amplified that supply has doubled compared to the original increase in demand for watches.
Naturally a firm that can control the bullwhip effect in their own supply chain will better manage their supply quantities and costs than their competitors. Accurate supply chain planning is therefore critical – with digital supply chain management tools playing a key role.
5 elements of supply chain management:
Sourcing involves processes that procure goods and services to meet planned or actual demand. Activities can include:
- Purchasing and receipting goods
- Developing a sourcing infrastructure
- Deciding how to manage inventory, the supplier network, supplier agreements, supplier payments and supplier performance
Poor sourcing can lead to higher materials costs, delays in production or delivery, and shortages of raw materials, components or products.
5 elements of supply chain management:
This element involves transforming goods to a finished state to meet planned or actual demand.
This step is a focus area for manufacturers. Activities can include:
- Production activities
- Developing packaging
- Managing production equipment, facilities and transportation
5 elements of supply chain management:
This involves delivering finished goods and services to meet planned or actual demand.
This step is where distributors and wholesalers come in. Activities include:
- Order management
- Transportation management
- Distribution management
- Managing importing and exporting requirements
5 elements of supply chain management:
This final element of the supply chain is associated with returning or receiving returned products, either from customers or suppliers.
Return activities can include:
- Post-delivery customer support
- Managing returned inventory
- Keeping compliant with regulatory requirements
79% of companies with high-performing supply chains have greater than average revenue growth within their sector.
6 reasons supply chain management is important for business
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.
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.
Lower holding costs
Retailers, distributors and wholesalers depend on supply chains to deliver products quickly to minimise the cost of holding inventory in their warehouses. This is especially true for products that have a short shelf life, such as fresh food, or products that become obsolete quickly, such as laptops or mobile phones.
2. Improves efficiency
Wastage — whether it’s wasted time, effort or raw materials — is the bane of operational efficiency. A good supply chain management strategy takes into account wastage and minimises it by focusing on value-adding activities.
3. Increases profits
Strong and efficient supply chains tend to generate more revenue and greater profits. Lower costs enable more competitive pricing, more profit margin, and allow for activities such as marketing.
4. 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.
5. Improves flow of information
An efficient supply chain 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. Plus, real-time information keeps all players responsive so they can act quickly to changes.
6. 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. Supply chain transparency is also becoming increasingly important to consumers.
7 types of supply chain management
Managing supply chains is a complex task. Large companies can dedicate an entire team working on optimising their supply chain – but what are small and growing businesses to do?
Business managers in SMEs often have to multi-task and include supply chain management in their roles by managing supplier and buyer relationships themselves.
On the bright side, smaller businesses have less complex supply chains. They can react to change much faster than large corporations – and can pick and choose the supply chain management approach that works best for them.
Here are seven common supply chain management models. Understanding the differences in each model can help you determine which method suits your business best.
Efficiency-focused supply chain models
These types of supply chain models 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.
Continuous flow model
The continuous flow model 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.
Just in Time manufacturing is particularly suited to the continuous flow model.
Fast chain model
This model 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.
Efficient chain model
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.
In industries where customer demand is unpredictable, businesses opt for a responsive model.
The agile model
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.
The custom-configured model
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.
The flexible model
The flexible model 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.
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.
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.
Two types of supply chain risks
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 metrics
Identifying and managing supply chain risk is crucial to a business’ longevity. Companies should use real-time supply chain management software, and include supply chain risk management in their planning process.
A simple way to manage supply chain risk is to set external and internal metrics. These introduce visibility and accountability to areas of known risk in your business.
Here are some metrics you can report on via your supply chain management software.
Measuring your suppliers’ performance
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
Measuring your own performance
Chances are, you’re somebody’s supplier. Here are some essential supply chain management metrics to help you identify inefficiencies, leverage your strengths, and set goals that will boost your own performance.
- Days sales of inventory
- Annual stock turns
- Back order value
- Inventory to sales ratio
- Inventory carrying rate
- On-time delivery
- Units sold
- Units per transaction
- Customer backorder rate
- Cash to cash cycle time
- On-time assembly
- Cost of wastage
- Direct material usage variance
- Throughput yield
- Machine downtime rate
- Customer order cycle time
- Fill rate
- Rate of return
- DIFOT rate
- Spend under management
- Vendor payment processing cycle time
- Supply chain expense as a percentage of total revenue
- Managed spend per procurement employee
What is supply chain management software?
Supply chain management software is any platform that manages the flow of materials and information across the supply chain network. Businesses use supply chain management software to organise production, inventory, sourcing, transportation, demand planning and more.
Types of supply chain management software
There are a range of supply chain management software solutions to suit businesses of various sizes.
Large companies will typically use Enterprise Resource Planning (ERP) solutions as they use one platform to encompass many areas of a business — demand planning, procurement, production, shipment, inventory management and more. ERP solutions have many features and supply chain management is usually an additional module that is available for purchase. Popular ERP vendors include Microsoft, Oracle, SAGE, SAP and Access ERP.
Smaller and growing businesses often find ERP solutions and all their features overwhelming and costly. Instead, they might opt for cloud-based supply chain management software that can integrate with other solutions in the cloud app ecosystem. Cloud supply chain management software typically has the flexibility and scalability that allows businesses to stay nimble and competitive.
Depending on which supply chain management software you choose, you might also have access to industry-specific tools such as specialised freight handling.
For example, a distributor of fresh meat products needs to be able to verify their products were transported at temperatures below 4˚C – and to track the locations of their goods in the event of a recall. Specialised freight operators provide these services, and can integrate with inventory management and supply chain management solutions.
How supply chain management software improves business
Supply chain management software improves forecasting so you can prevent overproduction (or underproduction) and reduce losses. Most software will allow you to set minimum stock levels. This allows you to keep track of which components are running low and place an order promptly so you stay on top of production.
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Supply chain management software will allow you to put your customer first. Features such as multiple delivery addresses, sell price tiers and discounts make it easier to offer value and stay competitive. Sales teams can confidently close deals when they know what’s in stock, what’s on its way, and delivery lead times. Better inventory management also allows you to boost sales.
The right supply chain management software also helps you coordinate your manufacturing processes, identify bottlenecks, and maximise resources so that assemblies run seamlessly. This reduces production time while maintaining quality, and helps you deliver goods to customers on time. All this allows you to keep your customers satisfied and stay ahead of competition.
Customers benefit the most from supply chain management software — they receive great quality goods at competitive prices. Supply chain management software encourages communication with your customers so they can always stay updated on their shipments. This leads to higher retention rates so your satisfied customers make repeat purchases in future.
Supply chain management software allows you to automate processes like reordering raw materials and components, so you can reduce time spent on administrative tasks and focus on growing the business instead.
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