Have you ever thought about where your clothes are made? Where did your Levi’s ever come from, or where your iOS device was put together? They likely came from far away, and this is all due to an efficient supply chain. Let’s take an American Eagle shirt you might have brought at your local mall. Where do you think it came from? It was likely made in a factory in Vietnam, shipped through Singapore in a big container, and then tricked to your local mall. Have you ever wondered why all of your zippers say YKK on them? That’s because Yoshida Kogyo Kabushiki headquarters in Japan likely manufactured it. Still, your zipper was likely manufactured in a factory in Georgia, USA, where the most extensive manufacturer is located. Your latest iOS device might have been assembled in this new factory of one of Apple’s suppliers located just outside Sao Paulo, Brazil.
What is Supply Chain Management?
What is a Supply Chain?
A supply chain is a network of materials, information, and services that often spans numerous businesses and is engaged in the production and delivery of a product or service to an end customer.
The supply chain integrates all parts of the business, from idea generation and concept to manufacturing and production to delivery to the client, in one seamless business.
Any company with a flow of material, products, information, or cash qualifies as having a supply chain. As you develop your business venture, you must recognize that each entity will perform a specific function within the supply chain. Companies develop supply chains to reduce costs and remain competitive in the business landscape.
What is Supply Chain Management?
The movement of goods and services, including all procedures that transform raw materials into finished products, is referred to as supply chain management. It entails actively simplifying a company’s supply-side operations in order to optimize customer value and obtain a competitive advantage in the market.
Supply Chain Management Statistics
Here are some additional statistics on supply chain management:
1. Nearly 70% of companies experienced supply chain disruptions in 2020 due to the COVID-19 pandemic, according to a survey by KPMG.
2. A survey by the Management Association found that 44% of companies reported an increase in supply chain complexity in 2020.
3. A survey by the Chartered Institute of Procurement and Supply found that 79% of companies experienced supply chain disruptions in 2020, with the most common causes being COVID-19 related (57%), followed by natural disasters (20%), and geopolitical risks (16%).
4. The use of digital technologies, such as automation and data analytics, can improve supply chain efficiency by up to 50%, according to a survey by the Council of Supply Chain Management Professionals.
5. A survey by DHL found that nearly 90% of companies are investing in technology to improve their supply chains, with the most common areas of investment being in automation (65%), digitalization (59%), and analytics (52%).
6. A survey by the management consulting firm McKinsey found that companies that prioritize supply chain excellence outperform their peers in terms of revenue growth and profitability.
7. According to a survey by the Association for Supply Chain Management, the top three priorities for supply chain professionals in 2021 are cost reduction (71%), risk management (63%), and customer service (62%).
How Does Supply Chain Management Work?
1. Customer Demand Forecast
This is where supply chain management starts. It all starts with the customer, and it is anticipated or forecasted what customers might buy. Organizations forecast this demand based on historical trends, looking at what different customers have done over time. It could be looking at macroeconomic trends or other factors influencing people’s willingness to buy.
In general, you are starting with the customer and demand. This forecast drives everything throughout the supply chain. That’s why it’s critical to have an accurate demand forecaster at least as close to accurate as possible because this will influence how the entire supply chain works.
2. Raw Materials
Once we know the overall customer demand, we have got to figure out about production and the raw materials we need to produce the demanded product. For instance, if you are selling an iPhone, thousands of different components or raw materials you need to buy to create an iPhone. From chips, glass screens, and software applications to wires.
Whatever your product is, you will have different raw materials and a recipe for making that product. Once we know what we need as raw materials, we must fulfill the purchasing and procurement needs for raw materials. Once you are done with that, you need to figure out at what point you need those raw materials to have them in time for the manufacturing runs that will support that demand forecast.
When we talk about the sourcing of raw materials, it could be raw materials which are individual components that go into a finished good, or it could also relate to sub-assemblies.
Sub-assemblies are things that are partially produced already that need to go into broader finished goods. For example, aerospace and defense companies aren’t just buying raw materials, they are buying pieces that have already been partially constructed that get put together into the finished product, like a rocket, ship, or airplane.
3. Production and Manufacturing
You’ve acquired or procured your raw materials, and now you need to get them to your factory to produce the demanded product. Before manufacturing, it’s essential to figure out how you will get those raw materials to your factories.
Sometimes, it could be logistics processes related to trucking or shipping through land or ports. Once you have the raw material, it becomes a matter of how you will produce what we need.
This is where you have to take a closer look at your inventory management and your inventory levels. Make sure you have the right inventory level at the right time and also see a little inventory in stock.
4. Warehouse Management
After producing the finished goods, you have to look to get them to your warehouse. It leaves the manufacturing assembly line and goes to the warehouse, where it will get stored until you ship it to the customer.
Sometimes, you may ship directly to your customers if it’s an urgent or late order. Suppose you are “to order” from a manufacturer, which means you’re not producing anything until you get the actual customer orders. In that case, you might ship your product directly from your manufacturing facility to your customer’s warehouse.
Regardless, you will have the same process of ensuring that you have logistics to get the product from your manufacturing facility to your warehouse or your customers. The logistics process of managing those finished goods in the warehouse is a vital part of the supply chain.
5. Distributor
For some organizations, the next step is a distributor. This means getting the product from your warehouse to the distributor and then to the end consumer. Distribution centers are more common for retailers and direct-to-consumer types of organizations.
Suppose you are a B2B organization that’s selling primarily to businesses. In that case, chances are you don’t have a distributor or a middleman wholesaler, but if you do, you are going from a warehouse to a distributor either way. The distributor then figures out how to get it to your customers.
6. Retail and Consumer
The final step is getting the product to your end consumer. This could either come through a retailer if you are a B2C organization, or you might be selling directly to the consumers.
Either way, you need to figure out how to take those customer orders, get them out of your warehouse or to the distribution centers and get them to your customers.
This completes the entire cycle of a supply chain throughout the whole customer demand through raw materials, production, and ultimately to your end customer.
Benefits of Supply Chain Management
1. Improved Market Knowledge
Through supply chain management, partners can share their market knowledge about:
- Transactional records
- Customer survey results
- Sales and service representative knowledge
- Information from distribution points
- Information from retailers
- Information about customer pool
2. The Three Vs
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Increased visibility
Ability to view important information throughout the supply chain no matter where in the supply chain the data is located. With better visibility, a supply chain manager can see the results of activities occurring in the chain.
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Increased velocity
The term indicates the relative speed of all transitions within a supply chain. Methods of increasing the velocity of transnational along the supply chain are:
1. Relying on more rapid modes of transportation.
2. Reducing the time in which inventory is not moving.
3. Eliminating activities that don’t add value.
4. Speeding up the flow of demand and cash as well as merchandise.
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Reducing Variability
Variability is the natural tendency of all business activities to fluctuate above and below average, such as:
1. Fluctuation around average time to completion.
2. An average number of defects.
3. Average daily sales.
4. Average production yields.
Variability decreases with good supply chain management, and it reduces variability both in demand and supply and decreases the need to keep safety stock high.
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Integrated Operations
Supply chain management boosts integrated operations by reducing everyone in the supply chain to form partnerships with suppliers and customers. Intranets, extranets, internet, bar codes, and RFID are the technologies used for integrated supply chain
1. Can collect sales data.
2. Used for forecasting and triggering operations.
3. Can track any product throughout the supply chain.
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Improved Management of Risk
1. Supply chain risk is based on decisions and activities that have outcomes that could negatively affect information or goods within a supply chain.
2. Risk management is identifying and analyzing the risk exposure and determining how to best handle those risks.
3. With supply chain management, the organization develops a risk management strategy that identifies, avoids, accepts, transfers, and mitigates the risk.
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Increased Sustainability
Supply chain management incorporates sustainability efforts such as the replacement of resources. Sustainable supply chain practices may include:
- Optimal plant locations
- Information technology network design
- Product or process design
- Logistics design
- Waste reduction method
- Sustainable building practices
10 Principles of Supply Chain Management
1. Customer Focus
Supply chain management starts with understanding your customers and why they buy your product or service. Any time customers buy your stuff, they solve a problem or fill a need.
Supply chain managers must grasp the customer’s problem or ensure that their organizations can solve it better, faster, and cheaper than competitors.
2. Systems Thinking
Supply chain management necessitates an understanding of the entire system, which includes people, processes, and technologies. These must collaborate in order for you to give your product or service.
An appreciation for the succession of cause and effect linkages that occur throughout a supply chain is required for systems thinking.
3. Bimodal Innovation
The business world is changing quickly, and supply chains must keep up by innovating. Supply chains need continuous processes and improvements or sustaining innovations to keep pace with competitors.
Process improvement methodologies like as Lean, Six Sigma, and the Theory of Constraints can assist with this task. However, continuous process improvement is needed because new technologies can disrupt industries. This effect is called disruptive innovation.
When a new solution to a customer’s problem develops and is accepted, it becomes the new dominant paradigm. In other words, if you manufacture buggy whips, you must figure out how to produce them better, faster, and cheaper than your competition.
Simultaneously, you must determine what the new dominant paradigm will be in order to know what you will create when a different technology replaces buggy whips.
4. Collaboration
Supply chain management cannot be accomplished in a vacuum. People must collaborate across organizational silos. They must collaborate with suppliers and customers from outside the organization.
A “me, me, me” mindset leads to transactional relationships in which people focus on short-term gains while ignoring long-term outcomes. An atmosphere in which people trust one another and collaborate for common accomplishment is far more advantageous for everyone than one in which everyone is concerned with their own success. Also, a collaborative environment makes working together much more fun.
5. Flexibility
Surprises happen because the supply chain needs to be flexible. Flexibility assesses how quickly your supply chain can adjust to changes such as an increase or decrease in sales or a disruption in supplies.
This flexibility is frequently manifested as additional capacity, numerous sources of supply, and alternative modes of delivery. Flexibility typically costs money, but it also has value.
Suppose that only two companies make widgets, and you need to buy 1000 widgets per month. You can get a better deal on widgets if you buy them all from the same supplier.
This will reduce the costs of your supply chain. However, you’d have an issue if that supplier suffered a flood, fire, or bankruptcy and was unable to produce widgets for an extended period of time. You might be able to save money on the widgets.
However, you will require assistance if something goes wrong with that source. Though you purchased some of your widgets from the second source, even if they were more expensive, you would be fine if the first supplier stopped producing widgets. In other words, having a second source allows us greater options.
6. Technology
The fast advancement of technology for moving physical goods and processing information has altered how the supply chain operates. We used to order stuff from catalogues, mail in checks, and wait for our packages to arrive.
Today, we order items on our phones, pay with credit cards, and anticipate real-time updates until our packages arrive at our door.
Understanding how technologies work and how to use them to produce value at each stage of the supply chain is required for supply chain management.
7. Global Perspective
Your firm is worldwide, regardless of the product or service you offer. As a supply chain manager, you must recognize how your business depends on international factors, supply inputs, and drive demand for outputs.
It would be best if you also thought globally about the competition. After all, your company’s true competitive threat could be a company on the other side of the world that you’ve never heard of.
8. Risk Management
There are many variables, and many things could go wrong. Even a tiny disturbance, like a delayed shipment, can lead to problems further down the supply chain, such as stockouts, shutdowns, and penalties.
The key to making supply chains run smoothly is stability, while risk management is the key to preventing or minimizing the expenses of dealing with shocks.
9. Visibility
You can’t manage what you can’t see. The supply chain makes visibility a priority. Knowing what’s happening in or close to real-time lets, you make better decisions faster.
Visibility is valuable because it allows you to make judgements based on facts rather than intuition or ambiguity. Better visibility into supply and demand allows you to optimize inventory across the supply chain.
10. Value Creation
Supply chain management is all about adding value and satisfying your customers’ needs in the right place, at the right time, and with the correct level of quality at the lowest possible cost. This is the essence of supply chain management. If I had to summarize the entire supply chain management process in one principle, it would be value creation.
