Supply Chain Management (SCM) is the business process of managing the complex interaction of products, materials, equipment, labor, and cash as they flow through the supply chain and fulfill customer demand.
A supply chain is a network that includes vendors of raw materials, plants that transform those materials into useful products, and distribution centers to get those products to customers.
A supply chain is a network of supplier, manufacturing, assembly, distribution, and logistics facilities that perform the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these products to customers. Supply chains arise in both manufacturing and service organizations. SCM is a systems approach to managing the entire flow of information, materials, and services from raw materials suppliers through factories and warehouses to the end customer.
If your company makes a product from parts purchased from suppliers, and those products are sold to customers, then you have a supply chain. Some supply chains are simple, while others are rather complicated. The complexity of the supply chain will vary with the size of the business and the intricacy and numbers of items that are manufactured.
Elements of the Supply Chain:
The customer starts the chain of events when they decide to purchase a product that has been offered for sale by a company. The customer contacts the sales department of the company, which enters the sales order for a specific quantity to be delivered on a specific date. If the product has to be manufactured, the sales order will include a requirement that needs to be fulfilled by the production facility.
The requirement triggered by the customer's sales order will be combined with other orders. The planning department will create a production plan to produce the products to fulfill the customer's orders. To manufacture the products the company will then have to purchase the raw materials needed.
The purchasing department receives a list of raw materials and services required by the production department to complete the customer's orders. The purchasing department sends purchase orders to selected suppliers to deliver the necessary raw materials to the manufacturing site on the required date.
The raw materials are received from the suppliers, checked for quality and accuracy and moved into the warehouse. The supplier will then send an invoice to the company for the items they delivered. The raw materials are stored until they are required by the production department.
Based on a production plan, the raw materials are moved inventory to the production area. The finished products ordered by the customer are manufactured using the raw materials purchased from suppliers. After the items have been completed and tested, they are stored back in the warehouse prior to delivery to the customer.
When the finished product arrives in the warehouse, the shipping department determines the most efficient method to ship the products so that they are delivered on or before the date specified by the customer. When the goods are received by the customer, the company will send an invoice for the delivered products.
To ensure that the supply chain is operating as efficient as possible and generating the highest level of customer satisfaction at the lowest cost, companies have adopted Supply Chain Management processes and associated technology. Supply Chain Management has three levels of activities that different parts of the company will focus on: strategic; tactical; and operational.
At this level, company management will be looking to high level strategic decisions concerning the whole organization, such as the size and location of manufacturing sites, partnerships with suppliers, products to be manufactured and sales markets.
Tactical decisions focus on adopting measures that will produce cost benefits such as using industry best practices, developing a purchasing strategy with favored suppliers, working with logistics companies to develop cost effect transportation and developing warehouse strategies to reduce the cost of storing inventory.
Decisions at this level are made each day in businesses that affect how the products move along the supply chain. Operational decisions involve making schedule changes to production, purchasing agreements with suppliers, taking orders from customers and moving products in the warehouse.
Improved staff and task productivity
Automate various SCM tasks - from plan-to-produce, source-to-settle and order-to-cash processes - and improve business processes, leading to increased productivity benefits. Typical productivity improvements include savings in sourcing, supplier management, production planning and analysis, production management, production staff, change order processing and management, quality control and analysis, sales order entry and processing, promotions management, fulfillment, and transportation and logistics.
Increased inventory turns/reduced days in inventory (inventory and inventory carry cost)
More accurately forecast and source the amount of inventory needed, leading to an increase in inventory turns and reduction in days in inventory. This leads to a one time inventory reduction and ongoing carry cost reduction on the saved inventory.
Reduced days sales outstanding (days in accounts receivable reduction)
Reduce accounts receivable collections with better visibility into the AR process, aging and extension of credit, helping to reduce days sales outstanding.
Reduced inventory scrap
Reduce scrap write-downs with better quality control and planning/forecasting.
Improved Net Fixed Asset (NFA) utilization, avoiding NFA additions
More effectively utilize current NFA such as plants and equipment, and potentially avoid planned investments to handle growth.
Reduced cost of goods sold (COGS)
COGS sold with various improvements such as more effective sourcing of raw materials, tracking of work-in-process, reductions in production quality, issues and planning, increases in production efficiency and reduction in production overhead.
Improved strategic sourcing
Strategically source direct and indirect materials and better manage vendors, leading to material cost savings.
Improved purchase order, invoice and payment productivity
Automate purchase order forms and processing, improving the process and productivity of contract and vendor managers, purchasing agents, employees and managers on purchase order requests and approvals.
Reduced maverick spending
Manage purchase order requests and approvals more effectively to help reduce maverick spending, while increasing strategic sourcing and resultant discounts.
Improved production exception handling
Better plan and manage production, helping to reduce exceptions and the associated resolution costs.
Reduced accounts receivable, bad debt write-downs and disputes
Better manage accounts receivables to eliminate extending credit in error, recognize collection issues sooner and managing them more effectively, and reducing disputes and related costs.
Reduced transportation duties and taxes and increase rebates and incentives
Optimize production and shipping to reduce transportation duties and taxes, and increase rebates and incentives.
Reduced transportation error costs
Reduce transportation errors, eliminating error-related costs to resend or reroute shipments.
Improved customer retention and increase customer loyalty
Improve customer satisfaction via improvements like streamlining and reducing errors in the invoicing process, eliminating backorders, reducing errors, improving quality, reducing time to receipt.
Consolidated current SCM solutions
Avoid current spending on systems, support and maintenance contracts, application development and integration, systems administration and support via consolidation to a newer consolidated platform.