Supply chain management (SCM) is the coordination of the flow of goods, services, information, and cash as they move along the supply chain, from the supply of materials to the production of components, the creation of finished products, and distribution in the commercial network.
This process includes generating and accepting orders, providing feedback, and ensuring the timely delivery of goods and services.
With the help of Supply chain management, companies strive to improve customer service and the accuracy of forecasts, to reduce the volume of goods kept in stock and the time for placing new products on the market. Reference: “Product deployment and tasks in production processes”, https://mpmu.org/product-deployment-and-tasks-in-production-processes/
In its simplest form, supply chain management enables organizations to provide goods and services in a timely manner and where they are needed, in appropriate quantities, and at an affordable price.
In order to effectively manage this process, the relationship between the supplier and the customer must be forecasted, stocks must be controlled, there must be an accurate picture of demand and constant feedback must be provided on what is happening to each of the listed units.
Supply chain elements
Location. It is important to know where the production facilities, storage, and sales centers are. This determines the route of the goods.
The organization must decide which products it will produce and in which plants, which suppliers will supply these plants, which plants will send their products to which distribution center, etc. Revenues, costs, and the level of support that will be provided to customers depend on making the right decisions.
Each unit of the supply chain must keep in stock a certain amount of materials, spare parts, components, etc., as a reserve for unexpected and unforeseen situations. A factory assembling complex machines cannot be stopped because the shipment of some small components has not arrived. However, the warehouse also costs money, so it must store reasonable quantities.
How do materials, components, and products move from one unit of the supply chain to another? The choice of the best option for transportation is related to the cost of storage. For example, transportation by plane is fast and reliable. Transportation by train or sea is cheaper and preferred for bulky cargo, but is slower. So if you choose sea or rail. transport, you also need to take care of more storage space.
Supply chain management
Once you have made your decision on all elements of the supply chain, the management process also has three main directions:
- Routing of products or movement of goods from supplier to consumer.
- Information flow – generation and transmission of orders, as well as monitoring their implementation.
- Financial flow – credit terms, payments and terms for them, consignment, etc.
Effective management for each of these areas is related to information storage, control, and data analysis. Supply Chain Management software combines different technologies to provide a complete information picture of the supply chain.
Main categories of Supply Chain Management (SCM)
Supply chain management applications can be divided into 2 main categories: planning and operational.
The former helps to determine the most cost-effective way to deliver materials and the optimal quantities of goods to be stored in certain parts of the chain. If an organization has successfully implemented such an application, it can implement the so-called “Just-in-time delivery”.
Operational applications monitor financial data, the flow of goods, orders, and deliveries of materials. Supply Chain Management is something so large that implementation is difficult to plan accurately.
Each link in the chain is connected to another – in the same way, the implementation of the SCM process can proceed. Each subsequent part of the chain contributes to its overall efficiency.
When the whole process is covered, when information, goods, and finances move “just in time”, the benefits are huge. In this case, the whole is greater than the sum of the elements.
Among the well-known suppliers of SCM products are SAP, Oracle, EXE Technologies, i2, Manugistics.
According to AMR Research, the revenues from sales and implementation of Supply chain management software in 2003. will be worth $ 18.6 billion and the popularity of this type of system will grow, thanks to the useful features for users.
Nature of supply chain management
The supply chain consists of all organizations that are interconnected in the provision of certain goods and services to the end customer – from those who extract raw materials to those who are engaged in wholesale and retail trade, including companies engaged in transportation, storage, information processing and manipulation of materials, financial institutions and other intermediaries, facilitating the movement not only of material but also of financial and information flows. In this system of organizations two levels can be distinguished:
- the exchange relations between the participants
- the production system in which the resources are used and developed.
Exchange relations coordinate and direct the activities in the production system, where resources are used, combined, and transformed into production. Reference: “Emergence and development of Industrial and Production management”, https://mstsnl.net/emergence-and-development-of-industrial-and-production-management/
Because resources are interconnected, coordination between participants is needed not only to realize savings but also to create innovative change.
Organizations rarely have only conflicting interests that place their relationships in a competitive context.
Therefore, the complexity of the relationship between them is to find the right balance between competition and cooperation by applying an approach that connects the members of the chain and creates conditions for each of them to focus on increasing value for the end customer (in the sense of the difference between the benefit of the product and the cost of acquiring it) and the reduction of the time and cost of its creation. Reference: “Definition and tasks of production management”, https://stc-montreal.org/definition-and-tasks-of-production-management/
Based on modern scientific advances in the theory and practice of SCM, it can be concluded that Supply Chain Management is a process-oriented approach to efficient and effective management of material, information, and financial flows, as well as knowledge, flows in the supply chain based on management. the relationships between its members in order to increase value for consumers.
The supply chain starts with the customer and goes through several successive stages, including distribution, production of finished goods, and supply of materials and components.
Main types of flows in the chain
There are four main types of flows in this chain: material, information, financial and knowledge flows. Information flows (as well as knowledge flows) flow in both directions: orders and transactions move to the source of delivery, and order status data moves to the customer.
Within each organization, activities are carried out that transform the various types of resources received by it. From the point of view of the supply chain, the activities must be linked through coordination between the participants in it, which is made possible by building cooperative relationships.
This coordination is reflected in the application of a number of integration mechanisms such as the exchange of stock information, forecasts and planned promotions, the exchange of knowledge and experience in the management or development of new products, joint planning based on common objectives, and building a system of comparable measuring the results of the activity, compiling inter-organizational teams for certain products or business processes, increasing the technological capabilities for information exchange through the introduction of comparable information systems between the main members of the chain, etc.
The objectives of supply chain management are basically two:
Formulation and implementation of strategies based on attracting and retaining the end customer, as his decision to make a purchase (or request a service), stimulate the implementation of activities throughout the chain.
Effective chain management
The adoption of a systems approach in Supply Chain Management opens up many opportunities for analysis and improvement.
For example, with regard to innovative products for which rapid market access must be provided, the analysis of the whole chain makes it possible to identify those bottlenecks which prevent the product from moving quickly to the market.
Similarly, the cost analysis for the whole supply chain can reveal the sources of their reduction in relation to products whose price is an important criterion for the purchase by the end customer.
Influence of supply chain management on competitiveness
Supply chain management is seen as a strategic tool for developing a lasting competitive advantage by balancing the skills, expertise, and capabilities of the organizations that make up the chain.
This integrated approach mainly leads to lower inventory levels in the customer chain without compromising service. Increased competitiveness reflects the significant customer benefits that Supply Chain Management creates by solving the following four tasks: reducing losses, reducing delivery time, meeting specific needs, reducing unit costs. Reference: “Trends and features of modern management”, https://www.policymatters.net/trends-and-features-of-modern-management/
Reduction of losses
Loss reduction is achieved by minimizing duplication of activities, harmonizing operations and systems, and improving quality. Examples of duplicate activities are quality control, or demand forecasting, which could be performed by organizations that occupy critical positions in the distribution process and best understand the ordering model of end customers.
Harmonization seeks to achieve comparability of operations and systems between companies, such as the use of the same type of handling equipment to facilitate the handling of standard loads throughout the chain or the sharing of a single tracking system for actual sales so that all use the common database for the purposes of their planning.
Harmonized systems eliminate unnecessary activities and improve the delivery of products to end customers. In terms of quality, quality improvement systems significantly reduce the costs associated with poor quality and support the rapid response to customer requirements.
Reducing delivery time
Reducing delivery times contributes to lower inventory levels throughout the system, as well as troubleshooting at any point in the chain. Faster execution of the customer’s order means smooth information and material flows, which allows all participants to meet the needs of their customers in a short time while reducing the level of stocks.
Satisfying customer needs
Satisfaction of the specific needs of the clients regarding the size of the order, assortment, manipulations with the order, etc. means achieving a high degree of individualization at low customer costs and high profitability for all actors in the chain.
Cost reduction must be balanced with the level of service provided. The principles of Supply Chain Management achieve this goal because they focus management attention on eliminating activities that add unnecessary costs, such as maintaining high inventories, duplicating handling procedures, making unconsolidated deliveries, uncoordinated promotions, and price discounts.
Intensive information exchange between organizations opens up opportunities for better planning of operations and makes it possible to significantly reduce the costs of storage, transportation, administration, and restructuring of production.
When SCM limits losses, shortens delivery times, meets specific needs, and minimizes costs, those benefits are passed on to customers. The main task of all members of the chain is to monitor whether the end customer really receives these benefits and to assess the factors that could hinder their absorption.