The primary purpose of the supply chain is to fulfill demand, drive customer value, improve responsiveness, facilitate financial success and build a good network. Most primary goals of efficient supply chain management should be – faster delivery, Higher efficiency, and an accelerated cash flow.
You cannot sell from an empty wagon, and the supply chain management system will ensure that you don’t. Supply chains form the base foundation, and without it, businesses can hardly survive. Contribute to your business growth by becoming a supply chain professional with a supply chain management certification. Before we look at the purpose of supply chain management, let us understand what it is.
Understanding Supply Chain Management
A supply chain includes every item, person, and activity needed for all purposes, from sourcing raw materials to reaching finished goods to customers. When customers place an order for an item, it must be delivered as per their desire. With many companies competing for the same set of consumers, it is critical to rising to their expectations. This is where SCM plays a significant role. To understand what a supply chain is, we must look at each component in detail.
Components Of Supply Chain Management
Planning
Nothing can happen without proper planning. Companies must plan at multiple stages. Firstly a company must plan what it wants to produce and sell. It is necessary to plan sources for raw materials, machinery, space, and technology. They must analyze the market for such items and whether it will earn them enough profits to justify forming a company. They must also plan for people who will operate these machines and make sure things move as planned.
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A supply chain also must be appropriately planned. This will include raw material sources, warehouses for storing goods, machinery for manufacturing, delivery mechanism, and a distribution network. The company cannot own everything. So, they must hand over many of these to service providers with whom this firm must strike a beneficial deal. Good planning will help to reach supply chain goals successfully.
Information
This is another critical component of supply chains. Without a proper flow of information, this can’t work correctly. Information about market demand must pass to the operations team so that they can plan for raw materials. Data about raw material availability must flow to those in the purchasing department. It will help them ensure an adequate supply to complete production as per requirement. Operations teams must inform production staff so that they will plan machinery availability to make the required goods.
Warehouse staff must continuously update information systems so that everyone can see stock availability. This will help the sales team inform customers about delivery. Purchasing officers can look at inventory levels and order goods. There must also be regular data flow from the market to know the latest trends and plan production accordingly. Supply chain officials must maintain a continuous flow of information to function efficiently.
Purchase
This is the primary purpose of supply chain management that will help to save hugely on costs and ensure that production continues without interruption. Companies can make finished goods only with raw materials. They must purchase these items carefully to ensure the manufacture of good quality products. Supply chain managers need to check raw materials from various sources to ensure they are of the desired quality. These persons must also periodically test these materials to ensure that good quality is being maintained continuously.
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It is not enough to buy suitable quality materials. They must also be available at economical prices. Even a slight price increase can make finished goods costly. This will cause a company to lose its competitive edge. It is essential to scout for new suppliers who can provide good quality raw materials at an economical price. A supply chain official must maintain good relationships with suppliers to make sure that they provide supplies without any break. They must also get advance information about any shortage or price increase.
Inventory
Optimum inventory maintenance is another goal of supply chain management. Performing this duty well can help save a lot of money. Excess inventory will not only add to dead investment but also take up valuable space in warehouses. Shortage of stocks can result in a break in production and unfulfilled orders. Companies can end losing customers. Officers in charge of inventory must keep themselves constantly updated about what materials are available in their stores. They must know the stock position of raw materials, finished goods, and other items like packing materials.
Those in charge of inventory must keep themselves abreast of market situations. They can get this information from the company’s sales team or distributors. Keeping updated with such data will help maintain optimum stocks that will help fulfill orders without interruption. Good coordination with the purchasing team will help know what items are expected so that space can be made available. This will help to ensure that there is no delay in arranging raw materials when they arrive at the warehouse.
Production
Production falls under a different set of people who ensure that they manufacture goods as per specification and quality standards. They also make sure that all necessary machines are kept ready to manufacture products without breakdowns. But SC managers must keep in constant touch with the production team to ensure that things are moving as scheduled. They must also inform those in charge of making goods about arrival and stocks of raw materials.
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An important purpose of supply chain management is to coordinate with factories and arrange to deliver goods to customers. A lot of production planning happens only with information received from the SCM operations team. Both teams must work in tandem so that the delivery of goods to customers is not affected. Once the operations team has received a sales plan, they will immediately start organizing various resources. When everything is ready, goods can be manufactured according to requirements.
Location
The location of a manufacturing plant is crucial for the smooth execution of orders. It must be located where all raw materials are locally available or can be reached swiftly at a low cost. Having a soft drink bottling plant where water is scarce is foolish. Transport of raw material itself will wipe away any profit the company plans to make. The purposes of supply chain management are to reduce costs to improve profitability. Constructing a plant at a favorable place is part of an SCM’s job.
It is not just the location of factories that must be considered. Customers are having increased demands about delivery time. It becomes necessary that every company has warehouses close to their customers so that goods can reach them quickly. Supply chain managers must look at having their godowns or distributors at such locations. A good location is an excellent way to enhance customer experience while saving costs too.
Transportation
One of the important goals of supply chain management is to ensure prompt delivery of goods to customers. This is very critical because buyers’ expectations concerning delivery have reached a different level recently. With so many e-commerce companies promising same-day or next-day delivery, this has become the new benchmark. SC managers must ensure the fastest delivery of items to a user. Having a suitable transportation mode will help to achieve this.
Supply chain officials need to collaborate with various agencies for arranging transportation of goods safely and quickly. There must be systems to know precisely when trucks will be available for picking goods from warehouses. Such information will help companies inform their customers about the delivery of goods. A good tracking system must be present for customers to know the status of their orders on a real-time basis. For overseas deliveries, shipping space must be booked well in advance to avoid delays.
Goods Return
From a time when many companies refused to accept the return of goods, things have moved to where sellers have clear return policies. Most online sellers offer to take returns without any questions asked within a certain number of days. No machine is perfect. So there can be manufacturing defects, and companies must quickly address such issues when customers raise them. There must be a proper method in place for how a material can be taken back and replaced without causing any difficulties to customers.
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This system must be designed to facilitate perfect documentation of returned goods, the reason for taking them back, and how much time has passed between taking goods back and replacing them. Among the main objectives of supply chain management is customer satisfaction and having a trouble-free return procedure is key to achieving this. Return methods for raw materials by a company to its suppliers should also be in place.
Not all companies work in similar ways. Working styles can differ between industries too. Delivery of products in an IT company will vary from that of a firm making footwear. Even in the same industry, every company has its uniqueness. When this is so, supply chains cannot be similar. This is why there are different models of supply chains. Anyone aspiring to become a supply chain manager must know what these models are and how they differ from each other.
Supply Chain Models
Companies generally use six models. They are divided into two based on what they focus on. Some models give priority to efficiency while others target responsiveness. Depending on which industry an organization operates in, it can choose a model that will suit its purpose. Modelling is essential to achieve the goal of supply chain management. Modelling answers many questions that will help this system work better.
Using the correct model helps in finding suitable suppliers. It also helps in identifying the right locations for setting up manufacturing plants. Accurate modelling can help in better shipping and transport management. Creating a perfect supply chain is also necessary for ensuring proper inventory management that will assist in reducing costs. Distribution of finished goods to customers will also be more efficient with the suitable model.
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Knowing that modeling a supply chain is so important, it is necessary to see each of these models in detail.
Continuous Flow Model
As the name suggests, this logistics procedure is suitable for companies where a continuous flow of products and information is required. This is best for companies that are already stabilized in a market. These firms have a customer base that hardly changes. They manufacture products in bulk and don’t have much fluctuation in quantities. Companies that make the same products and have stable supply and demand benefit from this type of supply chain.
Agile Model
This is suited for companies that make things on order only. Their demand can be erratic. This requires companies to have a good production capacity but must be economical even when making small batches. SCM goals in such an operation are to maintain low cost even when orders are low and gear up for high capacity when there is heavy demand.
Fast Chain Model
The fast chain model is most suited for companies that manufacture products that should reach markets quickly and have a very short life cycle. Garments and other fashion industries are ideal examples. They must swiftly take a product from concept to the market. Sales forecasting is crucial for this kind of industry because they must sell their goods before trends change. End-to-end efficiency is critical for reducing costs.
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Flexible Model
A flexible model fulfils the supply chain management goals of a company that has highly predictable demand levels. They can peak during some months of the year while there can be a lull at other times. This type of SCM is suitable for companies that can produce more during high-demand periods and can manage low production levels for a long duration. The salient features of this model are the capability to stock huge volumes of critical raw materials and respond swiftly to demands of high output levels.
Custom Configured Model
This is a combination of continuous flow and agile models. In this kind of production, different parts of an assembly line work in different ways. Automobile manufacture is an ideal example of this. Some systems like assembling gears in a transmission system can take much time, while attaching this system to the vehicle is an easy process. Here there will be two methods of supply chain at work.
Efficient Chain Model
In this model, the purpose of the supply chain model is to use a company’s manufacturing facility most efficiently and reduce costs as much as possible. It is ideal for those firms that make products that face stiff competition in the market. Customers of such products don’t find any difference between competing products except their price. Firms must focus on inventory management and order fulfilment in this model. Capturing a significant market share is the aim.
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Now that we have understood the different models let us see which models come under each category and their common features.
Efficiency Oriented Models
The Efficient Chain, Fast Chain, and Continuous Flow models come under the efficiency-oriented category. All these types give more priority to efficiency. They operate in markets that are filled with similar products. Their focus is on speedy delivery and low price. In such a model, it is ensured that there are always enough raw materials to continue production without a break. SC managers will make sure that bulk manufacturing is done to enable a cost reduction.
Companies using these models offer low-value products that are produced in high volumes. Following this type of production has many benefits. But there are certain disadvantages that must also be taken into account. Often there is no change in production methods or product features. Sometimes this can lead to over-stocking of raw materials and finished goods. These models don’t always result in low production costs.
Responsive Oriented Models
This category comprises Agile, Flexible, and Custom Configured models. Companies, where the goal of supply chain management is to enable making changes in their products, use these models. Those industries that require custom-made and trendy items often use these models. They focus on being responsive to making changes as per customer demand. Sectors that are not sure of their product specifications also use models of this category.
Some industries that produce different items for different clients follow these methods. They are able to change their end products quickly as per requirement. They are able to change raw materials and use the same machines to produce different items. A significant disadvantage of companies using this method is that if their predictions for product volumes are incorrect, they will suffer high stock levels. A lot of human intervention is also necessary when using this category of supply chain management.
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We have seen how extensive the supply chain is and its importance in a company’s functioning and success. It is also necessary to see what are the goals of supply chain management in order to fully understand its value for an organization.
Collaborative Efficiency
When you don’t have an effective system in place, managing the inventory, coordinating with logistics and suppliers can be a struggle. However, with a supply chain system in place, it is easier to coordinate with suppliers and buyers in the same channel. Inventory data can be shared to meet quicker replenishment of inventory according to customer demands. Goods can be delivered to the right place at the right time.
Higher Quality
The shared goal of all the individual supply chain components is to deliver the best value to the end customer. Retailers are closer to the customers and are the ones who get customer feedback. In a supply chain, this feedback can be shared with the manufacturers to address any problems and foster a win-win situation for all. Customers recognize the value, and making quality improvements is the prime goal for the supply chain.
Enable Financial Success
One of the most important goals of the supply chain is to pitch in towards the financial success of the organization. From cost efficiency to reduced inventory costs, minimal labor expenses, and decreased logistical costs, the supply chain has the power to push things forward. Apart from this, it also enables to improve sales, access new markets, and enhance differentiation. The supply chain acts as an engine to pull all major business units towards delivering value to the customers.
Stability
Now that we have taken care of lasting supply chain relationships, customer satisfaction, and financial success, the fourth major goal of the supply chain is to promote long-run stability. Collaborative planning and undertaking of all activities right from the inception to the delivery of the final products enable the business to thrive under any condition. The result is optimization and balance in meeting the needs of the customer.
Change Management
Last but not least, today’s market is rapidly changing given the volatile conditions. A flexible supply chain management system will help to leverage opportunities and weigh down potential threats by anticipating changes and adapting to them.
Supply chain management aids in the end-to-end process of the business and is indeed a backbone that supports major activities.
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Some of the best names in the business world attribute their success to robust supply chain management in their organizations. Be it Unilever, H&M, Starbucks, PepsiCo, Nestle, BMW, Nokia, or Walmart, their supply chain management has been a key to drive value, quality, and innovation.
A Deloitte report emphasizes the direct link between the supply chain and revenues. It states that 79% of companies with high-performing supply chains achieve above-average industry revenue growth. On the contrary, only 8% of businesses with weak supply chains report above-average growth. Hence, the supply chain is crucial to the strategy of any business, regardless of its size or nature.
Let’s delve further into why supply chain management matters
Lowers Operating Costs
The supply chain function in any organization has numerous operating expenses related to logistics, procurement, and production. Higher the operational cost, lower the efficiency. Not to forget that cost savings flow directly to the bottom line. A tight-knitted and well-designed supply chain network ensures that all these costs stay within the budgeted plan. By reducing operating costs, the supply chain can push profits upwards without increasing sales.
Seamless Flow of Information
With so many functions working together, communication and exchange of information can become overwhelming as well as confusing. The supply chain integrates all functions and aligns them on the same page. It eliminates all bottlenecks in communication within and among the organizations, third-party vendors/distributors, and customers.
Avoids Delay in Processes
Right from the procurement of raw materials to the production of goods to the delivery of finished products to customers, business is an amalgamation of processes. Any loophole or delay in one process can have a snowball effect on the subsequent processes. Such delays could reduce efficiency and productivity and even increase the operating cost. The supply chain ensures that everyone knows what they and others are doing. It keeps the product line running smoothly.
Improves Customer Service
The customer is the king, and no organization can afford their wrath. A dissatisfied customer is likely to talk more about his experiences with a company than a satisfied customer. Let’s say; you ordered a product from Amazon. The expected delivery promised to you is 4-5 days, but you receive the package after a week. Or, maybe Amazon accepted your order only to inform you later that the product is out of stock. Wouldn’t Amazon fall short of your expectations? However, if the supply chain management is in the right place, inventory can be managed optimally, and products can be delivered to customers faster.
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It is evident that there are so many goals of SCM that are beneficial for all companies. But achieving them is not easy by any measure. There are several colleges in India such as IIM Kozhikode amongst others that clearly define the different aspects of this field. SC managers use various software programs that assist them in completing their duties successfully. Let us see what they are and how they help in this process.
1. Shipping Alerts
Sending goods by road to nearby customers is one thing. But shipping them across oceans to another country and fulfilling delivery commitments is quite another story. There can be so many transportation methods used. Sometimes the cargo changes vessels at some ports. But an SC manager cannot remain unaware of their status. Companies that ship many items to multiple locations abroad will really be left wondering where these are.
But a shipping status alert software comes to their rescue. This tool informs users about where different items are on a real-time basis. One can also get alerts on their mobile phones about their movements. At any point in time, they can know exactly at which location these goods are and when they will reach their destination. This will greatly help in tracking shipments and also keeping their customers informed about their position.
2. Order Processing
There are many companies that supply materials to customers of different e-commerce sites. This can create a lot of confusion when processing orders. Missing any order can endanger their business as customers will start complaining. Manual order processing can take a long time, and this will delay the delivery of goods to customers. As the aim of supply chain management is to ensure quick delivery of products, there is a need to process orders very quickly and accurately.
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An order processing system is an ideal way to achieve this. Orders will be accurately entered and necessary documents processed. In addition to this, this software will also prepare reports that will help companies to know the purchase habits of different customers. Most of these types of programs can be integrated with inventory management systems which will help to manage stocks also easily. Being automatic eliminates human error.
3. Lean Inventory Tools
Having high stocks of slow-moving items can be costly. It is money that is not productive. Such materials also occupy space that is a precious commodity. Whether it is raw materials or manufactured goods, companies must aim to have only as much as needed. It is not easy to achieve this in companies where there are many products and continuous production happening. It is possible that some goods are there in the warehouse for a long time.
Using lean inventory tools helps companies maintain just enough materials needed to fulfill orders. These tools use demand forecasts, material planning, and other parameters to arrive at the optimum level of stocks. One can use these tools to plan production accordingly and ensure there is no money blocked in inventory. Such tools help in producing goods as per lean manufacturing principles.
4. Warehouse Management
Warehouse management can be one of the ideal supply chain goals examples because it is a job that needs a tremendous amount of skill and attention. This is especially true for companies with storage facilities in multiple locations. Products may be stored at various places for convenience. But when an order is received for items stored in different locations, it becomes difficult bundling these together and delivering them quickly. This may delay order execution and frustrate customers.
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Software for the management of warehouses assists SC managers in knowing the exact status of stocks and the position of every item. Such information is highly valuable when fulfilling orders with many items. There are advanced packages that have features like goods tracking. Route planning is also available in some of these applications. It will help in choosing the fastest route to a customer. These packages are excellent for enhancing the customer experience.
5. Specialized Freight Handling Tools
Companies manufacturing or selling perishable goods are always facing problems of items getting spoiled. If such items reach customers by any oversight, it can result in very disastrous consequences. Such firms can lose their reputation. They will also face a lot of legal issues that can set them back by a huge amount of money. It is not easy managing such shipments, especially if they are going to customers at a long distance.
There are special tools available for this purpose. Companies selling such goods can purchase these as stand-alone packages or can integrate them with existing software packages. These tools will help to track goods and ensuring that they are kept in proper storage conditions till they reach customers. Such tools help in fulfilling the purpose of supply chain management by reducing wastage and assuring customer satisfaction.
6. Sourcing Control Tools
Sourcing is a prime activity of supply chain management. It is here that there is maximum spending and thus more opportunities to save money. These sourcing and spending control tools help to find out how much is spent on each item that is used for production and delivery. Such tools also help in automating purchases and payments. As most of these automate the whole procurement process, there are fewer chances of errors and overspending.
Supply chain managers can also see all bids made by suppliers and choose the one that is most advantageous. These tools also offer analytical reports on purchases that will help in knowing spending and purchase patterns. SC officials can use these reports to improve their purchase process and save on raw material costs.
7. Vendor Management
Vendors form an important part of any supply chain management system. An important aim of logistics management is to reduce production costs. Raw materials form a major share of the cost of any product. If this can be reduced, it is possible to decrease product cost to a great extent. Vendor management tools are very helpful in purchasing raw materials at a low price. It helps in analyzing which supplier gives the company maximum benefits by way of low prices and close proximity that can reduce transport costs.
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Apart from this, such a tool will also help in analyzing how a supplier relates to the company. It will show past transactions with a particular supplier and what benefits the company gained from this relationship. Many of these packages also have the facilities to conduct price negotiations with multiple suppliers. This helps to make purchasing a centralized activity.
8. Demand Forecasting
Analytics is assisting businesses in a big way. An important benefit of using analytics is to predict events in the future more accurately. It can analyze a lot of data and provide valuable insights within a very short time. This will take many days when done manually. Demand forecasting tools use analytics to analyze past information to predict future demands for various products.
Knowing accurate future sales patterns will help in planning production. Machinery, people, and raw materials can be arranged depending on the demand for products. This will greatly avoid overstocking of products. These tools will also facilitate adequate stocking of products to meet sudden spikes in demand. Companies can exploit market conditions more beneficially with these applications.
9. Collaboration Portals
These portals offer a place for suppliers and buyers to communicate and negotiate. Such portals help to solve communication issues. There are no bottlenecks in requisition and order. Many other issues can be sorted out easily because communication will be on a real-time basis. Both parties need not wait for emails to go back and forth. Supplies can be procured without any delay.
All parties using this portal will have access to purchase history, production progress, product specifications, shipment details, etc. There can be mistakes when sending emails. Such an issue is avoided, and all details are visible clearly to all parties. Such collaboration portals allow full supply chain visibility that facilitates a company and its suppliers to always remain up-to-date with all details.
10. Transportation And Logistics
These tools are meant for making transportation easy and economical. Transport of goods from suppliers and to customers contributes majorly to the cost of a product. Such applications help in reducing transport costs. Companies can sell their products at a competitive rate and gain an edge over others. Such applications help to achieve the main aim of supply chain management which is a reduction of product price.
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The other advantage of transport applications is that they help to consolidate shipments and save time and space. It is easier to have less-than-load shipments with such programs. Companies can also know which transporter is more beneficial for different locations. That offers an excellent chance to save a lot of money.
Having seen tools that support companies to achieve the goals of the supply chain, it is time to see what modern trends are expected in this field. As technology advances, companies are using them in various beneficial ways. Companies can use these technologies to improve efficiency in the supply chain and add to their profitability.
Modern Trends In Supply Chain Management
Digital twins is a technology that can find much use in supply chain management. Until now, computer models and their physical replicas cannot be exactly similar. Physical products suffer wear and tear. The new digital twins technology can be used to engage with computer models as we do with physical items. Companies can find weaknesses in various products and correct them. This technology will also help in using warehouse space optimally with computer models.
Augmented intelligence is another development that can support supply chain management greatly. Already AI is being used for planning delivery routes, demand planning, product pick-up at warehouses, robotic delivery, etc. While AI will do repetitive work, augmented reality can combine human inputs with AI. People have experience, responsibility, common sense, etc., which are qualities that can be used to enhance AI capabilities.
IoT has been in use for a long time. Supply chain companies are experimenting by combining this technology with supply chain visibility software. This will result in providing real-time information on shipments. IoT devices on packages are allowing SC managers to track products all through their journey. IoT-enabled container management helps increase fuel efficiency and proactive maintenance.
A supply chain is all these and a lot more. If you want to get a grip, it is recommended to join supply chain management programs. There are also several online supply chain certificate programs that can be helpful to build a career in this field.
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