Defining Supply Chain Management and Its Importance in Business OperationsBy Alex Ullrich Read Time: 7 min.
Supply chain management is the flow and management of goods and services from a point of origin to the customer. However, supply chain management has many different benefits and key elements businesses need to understand to be successful.
Supply chain management is a term often used in the e-commerce and retail industries. It is often brought up when discussing the success of a business and overall costs or profits. But what exactly does supply chain management mean?
In its most basic sense, the supply chain is the flow of goods, information and services in the commerce industry. Supply chain management is the understanding and organization of that flow. The supply chain is the engine that keeps commerce running, and managing it is vital to businesses of both the brick-and-mortar and online variety.
What else is there to know about supply chain management? How exactly does it tie into a business's overall success and profits, and how can it determine the way a business interacts with its customer base? Let's dive into some of the finer points surrounding supply chain management and discuss its importance to businesses big, small, and online.
What is Supply Chain Management?
Supply chain management (SCM) is the designing, planning, and monitoring of the supply chain. This often relies on understanding supply and demand in the market, utilizing international logistics, and using a global view to determine success, performance, and profits.
According to the International Journal of Scientific and Research Publications, modern adaptations to SCM have helped smooth out the supply chain. This has helped increase demand while simultaneously eliminating “arduous, labor-intensive, time-consuming and disorganized” processes. Now, more than ever, the supply chain is flourishing, and businesses are finding the most lucrative and the most valuable solutions for their supply chain needs.
How Does Supply Chain Management Benefit Businesses?
For business owners, the success of a supply chain is tantamount to their business's survival, maintaining a good relationship with their customers and the overall profits gained from the sale of a product or service. Without an effective supply chain, and without the knowledge of how to understand and manage the supply chain, a business may struggle to stay afloat.
Especially in the online realm, e-commerce businesses can benefit greatly from understanding the logistics and processes that go into their supply chain, as it can help them better determine profit margins and find areas for improvement and growth. Most importantly, the success of an e-commerce business's supply chain is vital to attracting, retaining and satisfying its customer base, as it may be the only direct contact the business has with their customers.
SCM can be broken down into three vital components: customer service and retention, reducing and controlling operational costs, and improving overall profits by stabilizing costs. Let's explore each component even further:
Improved Customer Service
Without a supply chain, businesses would not be able to provide their goods and services to their customer base. Managing that supply chain allows businesses to speed up processes, increase their product selection and much more.
With the many modern adaptations to SCM that exist, including improved methods of shipping materials across a continent or country, customers are able to access goods at a faster rate. Customers are left happy and satisfied as their products are delivered on time, within or exceeding their expectations.
Reducing and Controlling Operational Costs
Thorough SCM allows a business to understand every step of the process that goes into creating a product. This provides a clear view of how raw materials and resources are sourced, where and how the product is made, and how it is shipped, stored and delivered to the customer.
Understanding these processes means that businesses can gain insight into how much labor and cost goes into any specific item's production. The business can then make adjustments to how their supply chain functions for that product — whether it's finding a new shipping company, creating more ecologically-minded sources for raw materials or cutting back on production costs by eliminating specific steps in the process.
No matter the size of a business, big or small, managing inventory is essential to success and overall profits. Plus, proper inventory management can further help businesses by locating gaps in the supply chain, preventing theft or lost items and helping customers track the item until it reaches their door.
Improving Overall Profits Through Stabilizing Costs
Having inside information on how much cost goes into producing and delivering products from point of origin to consumer allows businesses to make more educated decisions concerning operational cost control. SCM insights can help businesses to understand how much each item will cost, every time it is made.
By understanding how overall costs are determined, a business can stabilize these costs and improve their profits by either increasing the cost of the item for the customer or by making cuts in other areas (where necessary) to improve their supply chain and profits. Overall, the business can financially benefit from managing and understanding the supply chain.
How Does Supply Chain Management Work?
Now that the benefits of SCM have been laid out, what are the processes that go into its production? Khairi Kleab notes that successful supply chain management relies on the ability to plan processes, purchase raw materials or goods, produce and manufacture goods, distribute those goods and satisfy and fulfill customer needs.
However, there is much more that goes into every step of the supply chain that supply chain managers and businesses must consider. SCM functions based on a few key processes, including the following:
- Moving a product between stages, on time and with a quality check along the way. Fast delivery for customers is essential in SCM.
- Communication and the sharing of information between different stages of the supply chain; from the collection of raw materials, until it reaches the customer's door. Just as the product must flow between stages, so should the information.
- Meeting delivery objectives along every step of the process so that both the business and customers know when a product will arrive.
- Checking in with customers to determine their satisfaction of the product or to ensure they received the product on time. Performing quality checks after the customer's needs have been met can help businesses make further adjustments to their supply chain.
- Inventory and financial management are also essential to SCM success, as the supply chain relies heavily on understanding costs and the flow of products between each stage. Additionally, value chain analysis can help businesses determine the processes that bring the most value to their overall profits and supply chain success.
- Logistics and integrated SCM programs are some of the more modern advancements to SCM that have helped this aspect of business flourish. Using data to collect information and study flows can help businesses better understand each step of the process.
Global Supply Chain Management
Throughout the history of the supply chain, there have been quite a few developments and advancements to the industry. The most influential change occurred in the late 1980s when businesses first started sourcing their materials through a global market to stay competitive and gain profits.
This shift resulted in the globalization movement seen today, where large, trans-national businesses are competing in a global market for resources and customers. Further adaptations, including the increased use of technology to track and manage profits, have evolved the industry at a rapid rate.
Global supply chain management (GSCM) is one large facet of the supply chain industry, but also requires further understanding of international laws, taxes and how to abide by trade regulations set by different countries and the United Nations.
The Importance of Logistics in Supply Chain Management
As the supply chain has grown to operate seamlessly on a near-universal scale, where even small businesses can access global supplies easily, one aspect of SCM stands out as vital for business operations: logistics.
Logistics is the coordinating and organizing of the detailed and complex SCM operations that involve people, multiple facilities, and supplies. It is essentially the activity of transporting goods to customers and transporting goods between each stage of the supply chain. It also is an essential aspect of inventory management, allowing companies to track their inventory along each stage of the process.
Prior to the globalization era, many companies operated and controlled their own logistics networks, but modern-day advancements have created an opportunity for businesses to outsource their logistics to a distribution network. This allows the employees within a company to focus on what they do best and allow the outsourced company to find the best solutions for the business. However, businesses should work closely with their logistics partner to ensure all aspects of the supply chain are considered when making operational decisions.
No matter what size of a business, high customer satisfaction and maximized profits can both be achieved when a business invests time and energy into understanding and refining its supply chain. SCM allows businesses to identify every step of the process, making cuts or adjustments where needed, and providing excellent customer service where it counts.