What is supply chain management?
Supply chain management (SCM) is the end-to-end process of producing a good or service, from the sourcing of raw materials all the way to the delivery of the final product to the customer. With today’s global supply chains, this is a complex process.
According to Gartner, “supply chain management integrates, synchronizes and orchestrates all physical, financial and information flows that organizations and their value chain partners need to fulfill demand for their goods and services.”
Supply chain management spans many functional areas, including sourcing, manufacturing, inventory management, demand and supply planning, customer service and transportation, and requires collaboration among many different people and roles within an organization and among partner organizations.
Why is supply chain management important?
The goal of supply chain management is to ensure the successful delivery of the right goods and services to the customer at the right place and the right time. Beyond meeting this fundamental goal, companies gain many additional benefits from effective supply chain management practices. These include:
- Improving product quality
- Increasing operational efficiency
- Cutting excess costs
- Growing revenue and improving profit margins
- Increasing customer satisfaction
Recognizing the vital importance of supply chains to the success of their businesses, many companies have added a Chief Supply Chain Officer (CSCO) to their C-suite. This is a highly strategic role that focuses on the supply chain as a key enabler of the company’s growth. Among other responsibilities, the CSCO leads the entire cross-functional supply chain management team, makes supply chain strategy decisions, implements strategic technology solutions to bridge siloed systems, mitigates disruptions and improves supply chain processes.
For companies that lack mature and efficient supply chain management capabilities, the impact on the health of the business can be significant. Product delays, shortages, cost overruns, quality control issues, reputational damage, and lost revenue and market share – all of these challenges can result from a poorly managed supply chain.
The impact of supply chain management is not limited to the performance of individual businesses. While supply chain professionals have historically focused on increasing efficiency, reducing risk and containing costs, many leading companies now also view their supply chain management practices through the lens of corporate social responsibility (CSR). People depend on supply chains to deliver food and medicines, power their homes and businesses, protect them from the negative impacts of climate change and drive economic growth. Recognizing this, supply chain leaders are increasingly including the mitigation of environmental, social and government (ESG) risks into their ongoing supply chain transformation efforts. By adopting supply chain management best practices and technology, supply chain managers can optimize their supply chains to help achieve these goals and make an impact that goes beyond the bottom line.
What are some of the key challenges in supply chain management?
There are a variety of challenges that supply chain management professionals must overcome to get their products successfully to their customers. Some of the top challenges include:
Supply chain complexity
Today’s global supply chains are more complex than ever before. For example, a typical manufacturing company in the automotive or aerospace industries depends on a network of hundreds or even thousands of suppliers to provide the many components that are required to build the finished product. Adding to the complexity, in many cases these suppliers are scattered all over the globe. With so many moving parts, the odds of some level of disruption are high.
As the COVID-19 pandemic made clear, major global events can exert massive, sustained pressure on supply chains, resulting in delays, shortages, price increases and other types of economic disruption on a large scale. Changing regulatory and trade environments, geopolitical unrest, labor shortages and soaring inflation are just a few of the many factors that can make supply chain management even more challenging.
Many companies continue to employ traditional supply chain management techniques, which are largely manual and rely on disconnected legacy tools. This fragmented approach creates functional silos in which each internal group is focused on optimizing just a single aspect of the supply chain. Within this operating environment, supply chain management professionals can experience a variety of operational challenges, including lack of visibility, poor response times, inflexible technology and conflicting priorities.
In their own words: Lessons from supply chain planners
What are the components of supply chain management?
The key components of the typical supply chain management process are:
The process of forecasting future demand for products or services as accurately as possible and using that forecast to fine-tune company output to best meet the needs of customers.
The process of choosing the suppliers that will provide the raw materials and services needed to manufacture the product. Supply chain managers work closely with suppliers to order these materials and components, manage inventory and monitor delivery.
Supply chain planning
The forward-looking process of coordinating assets to optimize the delivery of goods, services and information from supplier to customer, balancing supply and demand. All aspects of supply chain management require plans, including demand, production, inventory, and supply management. Supply chain planning enables the company to capitalize on revenue opportunities in a timely manner and at the lowest possible cost.
The process by which raw materials are turned into finished products that can be distributed to customers. Manufacturing includes all the labor, technology, machinery and any other components required to achieve this.
The process of coordinating and monitoring the physical movement of goods from one location to another throughout the supply chain. Transportation management includes the movement of raw materials to manufacturing facilities as well as the delivery of the finished product to customers.
The set of processes that allows customers to return products that are defective or unwanted and provide the capabilities companies need to receive returned products and assign refunds accordingly.
What tools are available to help with supply chain management?
The growing array of highly sophisticated tools and software solutions available to supply chain professionals across the different functional areas within supply chain management are evolving rapidly.
Organizations that are committed to transforming and optimizing their supply chain management capabilities are increasingly investing in comprehensive end-to-end supply chain management software solutions that encompass supply chain planning and execution. These solutions have been purpose built to meet the specific needs of supply chain professionals along each link in the supply chain, foster multienterprise collaboration and increase visibility from end to end.
Today’s leading supply chain management solutions typically include individual applications designed to automate and improve the efficiency of tasks required for inventory management, demand planning, supply planning, manufacturing, transportation, returns and other management functions. Along with automating many functions, these applications give supply chain managers much greater real-time visibility and insight into what is happening in all the other functional areas, allowing them to continuously update, optimize and realign in their own area in response to new data.
Organizations that choose to adopt these solutions realize numerous benefits, including increased end-to-end visibility, improved decision-making, reduction in manual errors, improved collaboration with suppliers, better risk management, more granular control and enhanced security.
Despite the availability of purpose-built solutions, many organizations still use generic software tools for supply chain management. Spreadsheet programs like Microsoft Excel are top of the list for these organizations, since they are readily available, and most supply chain professionals know how to use them. But these programs have many limitations. They depend on manual data entry, which increases the likelihood of errors, and they also contribute to functional silos in the organization, making effective collaboration across the different areas extremely difficult. In addition, supply chain professionals who rely on spreadsheets are not able to take advantage of the many new emerging technologies and capabilities that are transforming supply chain management.
What are some key trends in supply chain management?
As supply chain complexity continues to grow at an exponential rate, several new and emerging advancements in technology have the potential to help supply chain managers overcome some of the biggest challenges they face across all areas of supply chain strategy and execution. Companies that invest in the right emerging technologies will grow faster, improve profitability and gain a significant competitive advantage in the market.
Artificial intelligence and machine learning
Supply chain management vendors are increasingly incorporating artificial intelligence and machine learning capabilities into their solutions. AI and machine learning can find patterns in massive amounts of data and can use them to predict lead times or yields in a way that far exceeds the capacity of humans. For example, AI‑driven techniques like demand sensing find new insights by bringing in signals like weather, social media or even commodity prices to update the short‑term forecast. By augmenting human intelligence with greater levels of automation, AI makes it possible for supply chain professionals to apply their experience to pressing and complex problems that cannot be predicted or automated.
Internet of Things (IoT)
The Internet of Things (IoT) is another technology growth area that is revolutionizing various aspects of the supply chain planning process. IoT is defined as a system of internet-connected devices linking physical and digital worlds. Given the importance of real-time data in supply chain management, many companies are using IoT sensors to gather data at various points in the supply chain to make more informed business decisions. For example, IoT sensors on trucks could be used to provide real-time data about inventory movement and take corrective action to prevent stockouts.
Supply chain digital twin
Many supply chain technology solutions enable their customers to create a “digital twin” of their supply chain. This virtual model of the real-world supply chain provides supply chain planners and other professionals with a valuable tool for modeling scenarios, testing assumptions and making important decisions that will help lower costs, improve service levels and optimize other aspects of supply chain management.