Supply Chain Management: Comprehensive Guide and Strategies

Learn the importance of effective Supply Chain Management (SCM) in today’s business world. Know more about the various SCM concepts, strategies, tools, and techniques.

What is Supply Chain?

A supply chain is basically a network between a company and its suppliers that helps it to produce and distribute products. The more efficient the supply chain, the faster the product or service reaches the customer.

Here are a few definitions:

Definition: a set of three or more entities (organizations or individuals) directly involved in the upstream and downstream flows of products, services, finances and/or information from a source to a customer.

Source: Mentzer et al (2001) ‘Defining supply chain management’ Journal of Business Logistics 22 (2) 1 – 25

“Supply chain is a connected series of activities, which is concerned with planning, coordinating and controlling materials, parts and finished goods from supplier to customer. It is concerned with two distinct flows (material and information) through the organization.”

A supply chain is a platform for coordinating three types of flows: material, information, financial
A supply chain is a network of value adding cells with the following characteristics: supply, transformation, demand (Davis 1993).

Upstream and Downstream in Supply Chain

Using the metaphor of a river, upstream production refers to the various activities needed to source the materials required to create a product, whereas the downstream production process involves processing the materials collected during the upstream stage into a finished product.

Upstream is the supply network of company suppliers and their own suppliers. It includes suppliers who supply the various parts and raw materials required to put together or manufacture the product.

The upstream part however does not do anything with the material itself, such as processing the material.

Companies may make use of several suppliers, sub-contractors, vendors to supply raw materials, and also to produce noncore products (companies outsource a lot of work) and certain components.

The parts and raw materials that arrive at the factory are checked for quality and closely inspected to see if they use any hazardous materials.

In some industries, the companies are quite strict with their vendors; if they find them in violation of safety standards, they are likely to terminate their agreements.

Related: Useful Operations & Operations Management concepts

Downstream is how the final product gets distributed to the end-user. It shows how products are transported from the production facilities and distributed to the end-user. The downstream process includes elements such as distribution, wholesaling and retailing, and has direct contact with customers through the finished product. It also includes customer service.

The distribution network of big companies includes giant retailers such as Walmart, then they have their own distribution centers, specialty stores, and e-commerce websites. Some companies operate year-round consumer outlets and seasonal outlet stores at their own distribution centers.

Supply Chain of Beer

Supply Chain of Coffee

 

iPhone Supply Chain

 

Watch this video of Starbucks and its supply chain. Take a look at what materials are needed to be delivered at a Starbucks shop?

 

 

Global Supply Chain Network Design

When designing the supply chain network, firms need to address:

• Facility role: What role should each facility play? Which type of product should each facility produce?
• Facility location: Where should facilities be located?
• Capacity allocation: How much should be the capacity at each facility?
• Market and supply allocation: What markets are being targetted? Where are the supply sources

Key factors to consider in Supply Chain Network Design

• Strategic factors
• Technological factors
• Macroeconomic factors
• Tariffs and tax incentives
• Exchange-rate and demand risk
• Freight and fuel costs
• Political factors
• Infrastructure factors
• Competitive factors
• Positive externalities between firms
• Locating to split the market
• Customer response time and local presence
• Logistics and facility costs

Benefits of Globalization

Companies are able to enhance revenues by accessing the overseas market. Many global companies report significant sales growth from developing markets with profit margins that is comparable to developed market margins.

Companies get cost reduction opportunity through economies of scale, inexpensive shipments, low labor cost. Example: Contract manufacturers such as Foxconn and Flextronics have become giants with facilities in low-cost countries.

Companies are able to leverage Regional Trade Agreements such as: ASEAN, APEC, FTAA, ANZCERTA, NAFTA, TAFTA, CACM, APTA, MERCOSUR, EU, SADC, CEFTA, SAPTA

Risks

There are also risks associated with a Global Supply Chain Network: Natural disasters, Shortage of skilled resources, Geopolitical uncertainty, Terrorist infiltration of cargo, Volatility of fuel prices, Currency fluctuation, Port operations/custom delays, Customer/consumer preference shifts, Performance of supply chain partners, Logistics capacity/complexity, Forecasting/planning accuracy, Supplier planning/communication issues, Inflexible supply chain technology.

Offshoring Decision

Offshoring is the relocation of a business process from one country to another. Outsourcing is an agreement in which one company contracts-out a part of existing internal activity to another company.

When making a offshoring decision, companies have to make trade-offs between Benefits and Risks.

Risk Categories

Category: Disruptions
Risk Drivers: Natural disaster, war, terrorism. Labor disputes. Supplier bankruptcy

Category: Delays
Risk Drivers: High capacity utilization at supply source, Inflexibility of supply source, Poor quality or yield at supply source

Category: Systems risk
Risk Drivers: Information infrastructure breakdown, System integration or extent of systems being networked

Category: Forecast risk
Risk Drivers: Inaccurate forecasts due to long lead times, seasonality, product variety, short life cycles, small customer base. Information distortion

Category: Intellectual property risk
Risk Drivers: Vertical integration of supply chain, Global outsourcing and markets

Category: Procurement risk
Risk Drivers: Exchange-rate risk, Price of inputs, Fraction purchased from a single source, Industry-wide capacity utilization

Category: Receivables risk
Risk Drivers: Number of customers, Financial strength of customers

Category: Inventory risk
Risk Drivers: Rate of product obsolescence, Inventory holding cost, Product value, Demand and supply uncertainty

Category: Capacity risk
Risk Drivers: Cost of capacity, Capacity flexibility

Mitigation Strategies

Risk Mitigation Strategy: Increase capacity
Tailored Strategies: Focus on low-cost, decentralized capacity for predictable demand. Build centralized capacity for unpredictable demand. Increase decentralization as cost of capacity drops.

Risk Mitigation Strategy: Get redundant suppliers
Tailored Strategies: More redundant supply for high-volume products, less redundancy for low-volume products. Centralize redundancy for lowvolume products in a few flexible suppliers.

Risk Mitigation Strategy: Increase responsiveness
Tailored Strategies: Favor cost over responsiveness for commodity products. Favor responsiveness over cost for short–life cycle products.

Risk Mitigation Strategy: Increase inventory
Tailored Strategies: Decentralize inventory of predictable, lower value products. Centralize inventory of less predictable, higher value products.

Risk Mitigation Strategy: Increase flexibility
Tailored Strategies: Favor cost over flexibility for predictable, highvolume products. Favor flexibility for unpredictable, low-volume products. Centralize flexibility in a few locations if it is expensive.

Risk Mitigation Strategy: Pool or aggregate demand
Tailored Strategies: Increase aggregation as unpredictability grows.

Risk Mitigation Strategy: Increase source capability
Tailored Strategies: Prefer capability over cost for high-value, highrisk products. Favor cost over capability for low-value commodity products. Centralize high capability in flexible source if possible.

Key Points

There are greater risks in global Supply Chain than localized ones.

It is critical for global supply chains to be aware of the relevant risk factors and build in suitable mitigation strategies.

Every mitigation strategy comes at a price and may increase other risks.

Good network design can play a significant role in mitigating supply chain risk.

Global supply chains should generally use a combination of rigorously evaluated mitigation strategies along with financial strategies to hedge uncovered risks.

Flexibility

Examples of flexibility in supply chain:

New product flexibility: Ability to introduce new products into the market at a rapid rate e.g. Pharmaceuticals and electronics.

Volume flexibility: Ability to operate profitably at different levels of output e.g. steel.

Mix flexibility: Ability to produce a variety of products within a short period of time e.g. Zara.

Appropriate flexibility is an effective approach for a global supply chain to deal with a variety of risks and uncertainties. Whereas some flexibility is valuable, too much flexibility may not be worth the cost.

Strategies such as chaining and containment should be used to maximize the benefit from flexibility while keeping costs low.

Supply Chain Management

Big companies around the world are aware that in order to optimize business performance, they need to have a high-performing supply chain (that is aligned with its business strategy).

Supply chain management is a critical factor for most manufacturing companies. It allows companies to offer a product when the consumer wants to purchase, which helps them drive better sales and also promotes consumer loyalty. Efficient supply chain management is vital to get the right amount of product onto the shelves (in a cost-effective manner).

Supply chain management (SCM) involves the activities required to make a product and deliver it to the final customer, in a streamlined and cost-effective manner (Harland, 1996). The term was coined by Keith Oliver, a Booz Allen Hamilton executive in 1982.

SCM involves managing the upstream and downstream relationships with suppliers and customers to deliver improved customer value. Supply Chain Management spans all movement and storage of raw materials, work-in-process inventory, and finished goods from point-of-origin to point-of consumption.

Common Supply Chain Management Activities include Sourcing /Procurement, Conversion, Logistics Management, Coordination and Communication between Suppliers, Intermediaries, Third Party Service Providers and Customers

Definition: the systemic, strategic coordination of the traditional business functions and the tactics across these business functions within a particular company and across businesses within the supply chain for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole. Source: Mentzer et al (2001)

• Strategic SCM develops more intelligent ways to choose buy from sell to your business partners
• SCM can be used as a mechanism to gain competitive advantage
• For SCM to provide efficiencies it needs to move out of a ‘function’ and be seen as strategic

 

Supply chain control is essential to all businesses, no matter how big or small. Supply planning is the component of supply chain management involved with determining how to best fulfill the requirements created from the demand plan. The objective is to balance supply and demand in a manner that achieves the financial and service objectives of an organization.

Reconciling Supply to Demand

Planning and controlling of supply chain involves coordinating all the activities on the supply side and the demand side, including logistical activities.

The supply side

Purchasing and supply management deals with the operations interface with its supply markets. This is sometimes described as sourcing and procurement activities.

Purchasing managers provide a vital link between the operation itself and its suppliers. They must understand the requirements of all the processes within the operation and also the capabilities of the suppliers who could potentially provide products and services for the operation.

The Demand side

Physical distribution management may mean supplying immediate customers, while logistics is an extension that often refers to materials and information flow down through a distribution challenge to the retail store or consumer.

Logistics

The term third-party logistics indicates outsourcing to a specialist logistics company. Materials management is a more limited term and refers to the flow of materials and information only through the immediate supply chain.

A high-performing supply chain requires a robust set of planning processes. Big companies have invested heavily in supply chain-related information technology (IT) initiatives, for benefits such as enhanced inventory management and better collection efficiency.

Major SCM Decisions

In order to keep a supply chain effective, decisions need to be taken regarding various aspects of its functioning, products or services.

Decisions have to be taken related to:

• Location: Where to put sources of materials, production facilities and stocks.
• Production: What products to produce, where to produce them, allocation of suppliers to plants, plants to distribution centres, and distribution centres to customer markets.
• Inventory: How to deploy goods (raw materials, semi-finished or finished goods), which control policies to use (order quantities, reorder points, safety stock).
• Transportation: Carriers (air, truck, ship), lot sizes, and service decisions.

Various Decision Phases in Supply Chain Management

Successful supply chain management requires decisions to be taken regarding the flow of information, product, and funds and can be categorized under three decision phases.

The three decisions phases are:

1. Supply Chain Strategy (Analysis)
2. Supply Chain Planning (Planning)
3. Supply Chain Operations (Operations)

Supply Chain Structure and Coordination

Supply Chain Structure determines the location, capacity, connectivity and mission of the cells in the supply chain network. Supply Chain Coordination incorporates the information links and decision making hierarchy that determines the flow of materials and services throughout the supply chain.

Make or Buy? Reasons to Outsource

• Want to concentrate on core competencies – ”we can not do everything by ourselves”
• Attempt to improve efficiency – ”you have buy from where you get the lowest price”
• Attempt to improve flexibility – e.g. balancing external capacity much easier than internal
• Divide risk – e.g. when expanding capacity

Several variables have to be considered…

• current know-how
• forecasted demand of an item and own capacity situation
• cost, quality, delivery reliability and flexibility – who would be able and willing to supply certain product?
• external, internal and personal influencing factors – meaning/importance of independence, employment, company size
• company doesn’t want to / isn’t able to produce a certain product
• product can easily be bought from effective market

What are the Risks

Single and Multi-sourcing:

Pros and Cons of Single-Sourcing

Pros:

• Potentially better quality as supplier quality assurance possibilities
• Strong, durable relationships
• Greater dependency, encourages more commitment

Cons:

• More vulnerable to disruption if supply failure occurs
• Individual supplier more affected by volume fluctuations
• Pressure on prices if no alternative available

Pros and Cons of Multi-Sourcing

Pros:

• Purchaser can drive price by competitive tendering
• Can switch sources in case of supply failure
• Wide sources of knowledge and expertise to tap

Cons:

• Commitment difficult
• Less easy to develop supplier quality assurance
• Suppliers less likely to invest in new processes

Strategic Alliances in Supply Chain Management

Strategic alliance between manufacturer and suppliers increases effectiveness of the various stages in the supply chain.

Here are some advantages of Strategic Alliance:

• Each partner can concentrate on different stages of the supply
• Developing competences and learning form the partners
• Suitability and protection of resources is maintained
• Developing low cost models hence financial benefit.

Types of strategic alliances:

• Joint venture: In this type of alliance two or more firms create legally independent company to develop competitive advantage
• Equity Strategic Alliance: There is sharing of different percentages of the company.
• Non-equity Strategic Alliance: It is alliance on a contractual- relationship to share the unique resources.
• Global Strategic Alliances: It is formed between a company and foreign company.

Some of the Strategic alliance resources are: Products, Distribution channels, Manufacturing capability, Project funding, Capital equipment, Knowledge, Expertise or intellectual property

Supply Chain Visibility: Structural & Dynamic Visibility

Supply Chain visibility is the ability of a company to track its goods in transit and to have a clear view of its inventory. Real-time Supply Chain visibility is the complete, end-to-end view of a company’s logistics, inventory and warehouse management processes and people in real time.

Structural visibility is the view of a company’s operations at a point in time or over a certain period. For structural visibility, companies use traditional activities as network mapping, classic risk management, network assessments, and modeling.

• Network mapping helps track suppliers, manufacturing locations, and logistics routes.
• Risk assessment includes analysing geopolitical risks, environmental factors, and market stability.
• Modeling enables a company to simulate its supply chain operations, predict potential disruptions and model various scenarios, such as shifts in consumer demand or supply interruptions, and plan mitigation strategies accordingly.

Firms must have structural visibility. They must improve their ability to map and assess the supply chain network, improve risk management capability, make use of analytics to get end-to-end visibility.

They must integrate all its data sources (coming from various systems and platforms such as ERP and logistics platforms) to improve its analysis capabilities and to get better understanding of vulnerabilities.

They must work towards improving collaboration with the various stakeholders, especially suppliers, so that risks can be identified early and necessary actions can be taken.

Dynamic visibility enables companies to monitor and respond in real time. Dynamic visibility is typically generated with the help of a supply chain control tower and requires a company to have more mature capabilities.

• A control tower approach enables a company to monitor the movement of goods across its supply chain in real-time.
• Predictive analytics enables a business to foresee potential issues in its supply chain, such as delays due to customs or transportation bottlenecks.
• Some companies have started exploring autonomous execution for certain aspects of its supply chain. This could involve automatically rerouting shipments or adjusting production schedules without manual intervention, based on real-time data.

Firms should aim for more dynamic visibility. They must invest in better predictive visibility and have an efficient control tower to have better visibility, responsiveness and to maximize resiliency of the supply chain.

Companies must invest in advanced Predictive Analytics to improve its prediction capabilities (using machine learning) to predict risks.

Companies must establish a regular routine to carry out scenario planning and to assessing its supply chain based on changing market conditions as well as learnings from past supply chain related issues.

Enhanced visibility capabilities significantly impacts performance:

• Resilience: The ability to quickly adapt to supply chain disruptions helps maintain market presence even during volatile periods.

• Operational Efficiency: By leveraging both structural and dynamic visibility, a company is able to streamline its operations, reduce costs associated with disruptions and inefficiencies.

• Market Responsiveness: The combination of predictive and prescriptive capabilities enables a company to be more responsive to market demands.

Continued investment in these capabilities will help companies sustain its global competitiveness and growth.

 

Information Technology (IT) in Supply Chain Management (SCM)

Supply Chain Visibility

• How far can organisations see across their supply chain?
• Big issue due to outsourcing (and more outsourcing)
• Danger that retailers ‘lose control’ of their supply chain
• Implications for performance – and workers rights

IT is used in Supply Chain management to Address:

Distribution Network Configuration

Number, location and network missions of – Suppliers, Production facilities, Distribution centers, Warehouses, Cross-docks and Customers

Objectives of using IT in SCM

• Providing information availability and visibility
• Enabling a single point of contact for data
• Allowing decisions based on total supply chain information
• Enabling collaboration with partners

Existing IT Tools and Applications in SCM

• Electronic Data Interchange (EDI)
• Bar coding and Scanner
• Enterprise Resource Planning (ERP) Systems
• Warehouse Management Systems
• Transportation Management Systems
• Inventory Management Systems

Influence of internet-based technologies

Internet as sales & marketing channel:

• Consumers: more choices and more knowledgeable about products.
• Companies: can collect more information about consumers (e.g. demographic data, purchase frequency etc)

Internet based technologies:

• Sharing of timely demand and availability information within the supply chain
• Fast and cheap transactions (particularly order processing)
• E-Marketplaces: access to global base of suppliers and customers

Supply Chain Management (SCM) software

Supply chain software is a software program or module designed to control end-to-end business processes across the supply chain, perform demand planning and forecasting, and manage supplier relationships. Top Supply chain management (SCM) software include SAP, Oracle, JDA.

Intelligent visibility allows visibility and helps asses where vulnerability is. Visibility is a combination of structural and dynamic visibility supported by analytical techniques and artificial intelligence.

Companies must use Data analysis, technologies and AI in every part of the Supply Chain from production to payment, for optimizing inventory levels, improving coordination with trading partners, mitigating risk, and providing accountability.

This will enable the company to meet customers demand, reduce costs, data driven results, enable flexibility.

Logistics Management

Multimodal transport (also known as combined transport) is the transportation of goods, performed with at least two different means of transport (could be rail, sea or road, for example).

“‘International multimodal transport’ means the carriage of goods by at least two different modes of transport on the basis of a multimodal transport contract from a place in one country at which the goods are taken in charge by the multimodal transport operator to a place designated for delivery situated in a different country”, as per United Nations Convention on International Multimodal Transport of Goods.

Bullwhip Effect

The bullwhip effect is a phenomenon seen in supply chain where small changes in demand at the retail level eventually causes larger fluctuations in demand at the supplier level which leads to inefficiencies and inaccurate forecasting. Read more on the Bullwhip Effect.

Supply Chain Sustainability

A sustainable supply chain is one in which sustainable practices flow smoothly throughout the supply chain (supply network) to protect people and the environment.

The three pillars of sustainable development are people, planet and profits. By improving focus on supply chain sustainability, a business improves financial performance of the supply chain and attracts Customers who value sustainability.

Businesses are expected to undertake the following initiatives to improve sustainability:

• Measure environmental impact in business areas such as Information, Sourcing, Inventory, Transportation.
• Tie-up with suppliers who also share similar concerns.
• Improve energy and water efficiency by investing in efficient appliances.
• Adopt efficient inventory management.
• Partner with local suppliers to reduce transportation costs.