What is Supply Chain Management?
To understand what is supply chain management, first understand its simple definition. A supply chain is the management of a network, which is used to deliver products and services, from the raw-material to the customers, through physical distribution, flow of information, and cash. A supply chain, in view of the above supply chain management definition, comprises a network of both processes and entities.
In View of Supply Chain Management Definition:
A supply chain doesn't have to be global, but the massive chains that interest us in this course -the ones that run through corporations, are decidedly global in scope. Figure below illustrates a very basic supply chain (one that is not necessarily global) with three entities--a producer with one supplier and one customer.
What is Supply Chain Management? Its Basics and Introduction:
Three “entities” that perform the processes can be business or governmental organizations or (at least in theory) individuals. They can also be departments or functional areas or individuals within a larger organization; there are internal as well as external supply chains. For the most part the model applies to corporations. Most work on supply chains, both theoretical and applied, involves a manufacturing firm in the middle (although service firms also have supply chains) with a supplier of materials or components on the upstream side and a customer on the downstream side. As per the supply chain management definition and speaking technically, a supply chain needs only those three entities to exist. But that isn't realistic for the types of global supply chains of interest in this course.
To understand what is supply chain management? we have simplified the concept in a figure. It might be made up of these organizations:
- A supplier, a provider of goods or services or a seller with whom the buyer does business, as opposed to a vendor, which is a generic term referring to all sellers in the marketplace. The supplier provides materials, energy, services, or components for use in producing a product or service. These could include items as diverse as sugar cane, fruit, industrial metals, roofing nails, electric wiring, fabric, computer chips, aircraft turbines, natural gas, electrical power, or transportation services.
- A producer that receives services, materials, supplies, energy, and components to use in creating finished products, such as dress shirts, packaged dinners, air-planes, electric power, legal counsel, or guided tours. (Note that supply chain management for services may be more abstract than those for manufacturing).
- A customer that receives shipments of finished products to deliver to its customers, who wear the shirts, eat the packaged dinners, fly the planes, or turn on the lights.
Introduction to Supply Chain Management Structures
An organization’s supply chain management or network can have many forms. It can be a simple chain structure with a single strand, as shown in Figure 1-1, a complex network, or any structure between those two extremes. No matter whether it is a product or service chain, or what types of entities are involved, companies require their supply chain to guarantee a steady flow of supply while at the same time striving to reduce their supply chain costs. They can improve operating efficiency by employing the right supply chain management structure.
Depending upon the type of industry, supply chain costs can be as high as 50% of a company’s revenues. According to research done by A. T. Kearney, a global consulting firm, inefficiencies in the supply chain can total 25% of a firm’s operating costs. When a company is faced with thin profit margins, like 3% to 4%, even a small improvement in efficiency can double profitability. Implementing the appropriate cost-centered structure and strategy is critical.
There are three main types of supply chain strategies: stable, reactive, and efficient reactive. The stable supply chain strategy is appropriate for chains:
- With a significant history of stability between demand and supply.
- That are focused on execution, efficiencies, and cost performance.
- That use simple connectivity technologies and have little need for real-time information.
What is Supply Chain Management? - Understanding Using an Example:
Consider, as a very simplified instance of this stripped-down supply chain model, a young street vendor who sells just a few light snacks. This is a familiar sight on warm summer days around the globe, whether it is fresh crepes in Paris, roasted chestnuts in New York, or small servings of spicy tapas in South America. In many ways, the food vendor on the street resembles small family businesses that exist in cities all across the world.
This simple street vendor represents one end of a supply chain. The supplier is probably a small wholesale food distributor that sells basic ingredients to many one- or two-person food kiosks. The worker is the “producer” who turns the raw ingredients into crepes, roasted nut mixes, or a variety of easy-to-cat tapas. The stand, operated by one or two owners, is the retailer that sells the finished delicacies to the customers or passes by who are cajoled into making a purchase.
Notice that even in this simplest of supply chains, the basic model needs amplification. For instance, there are more suppliers than one. While flour and nuts may be procured from the same supplier, water to warm the stainless steel food containers comes from the employee’s kitchen facet, and the supplier of that water may actually be a government entity rather than another business. Electricity is supplied to light this mini “manufacturing center.” Nearby is a food preparation area with refrigeration for storing the perishables needed plus shelves and drawers to hold various basic supplies, such as tongs and other utensils. There is also wood to build the stand and a white board and markers for making signs to advertise the day’s offerings. Somewhere in the chain, though they remain invisible in our model, are suppliers’ suppliers, who bring materials, components, or services to the food wholesaler and the utility companies.
What is Supply Chain Management? - in Manufacturing:
Discussions of supply chains typically put manufacturing at the center and suppliers of components to the immediate left. It may be that component suppliers are the most crucial consideration when designing and managing a supply chain management for manufactured products, but utilities and other services are not inconsequential contributors to the cost of operations.
In the case of our food vendor on the street, services most obviously include utilities, transportation, warehousing, carpentry, and cleanup, among others. Utilities, which are suppliers to all manufacturers, are crucial considerations when locating plants and warehouses. If water and electricity (or natural gas, or both) are not available at a proposed site, they cannot be readily made available.
Tier 1 suppliers have their own suppliers in Tier 2. The wholesale food distributor that supplies the daily ingredients and raw materials for the menu items has its material and service suppliers—and they have their suppliers, and so forth. The flour for the crepes, for instance, is not a raw material but a product with its own supply chain management that begins in a farmer’s wheat field and is processed in a plant, shipped to a wholesaler, and distributed to the corner store. No matter how far you travel toward the left, you will never run out of new tiers of suppliers.
Even a raw material extractor, such as a coal mine, has its own suppliers of extraction machinery and services. In fact, the coal mine may ship coal to a generating plant that supplies power to the manufacturer that produces a machine that is shipped to a distributor that sells mining equipment to the same mine that began the process; supply chains can double back on themselves. (A distributor is a business that does not manufacture its own products but purchases and resells these products.)
What is Supply Chain Management ?- In Services
Although the traditional supply chain management model was developed in manufacturing, the service industry, too, has supply chains. According to the A PICS Dictionary, 13th edition, a firm in the service industry is “in its narrowest sense, an organization that provides an intangible product such as medical or legal advice.” It may also be derived from supply chain management definition. In its broadest sense, service industries include “all organizations except farming, mining, and manufacturing. It includes retail trade; wholesale trade; transportation and utilities; finance, insurance, and real estate; construction; professional, personal, and social services; and local, state, and federal governments.”
Service-oriented supply chains also require sophisticated management. The supply chain of an electric utility. It receives products, services, and supplies of its own and dispenses its services into three distribution channels: home customers, commercial customers, and other utilities.
The flows in our street vendor example aren’t quite as simple as might be supposed, either. The “products” that move through the chain could include materials, supplies, and the components used in the production of the menu items. Information flows may be fairly rudimentary orders submitted by end users (caters) of the product, by the distributor (the person on the street with the cart) to the manufacturer (the person who assembles the ingredients), and by the manufacturer to the supplier (the source of the food). There will be recipes and shopping lists, discussions of potential demand, perhaps records of last year’s results. The flows of cash may be based upon information contained in cash register or credit card receipts.
Cash travels in several separate flows from the manufacturer to suppliers of products and services and, of course, to any lenders or investors for debt or dividend payments. There are also logistics concerns: transportation from one entity to the other - perhaps drawing upon the private fleet of a car or two - as well as the warehousing decisions. And, finally, the reverse supply chain management - you’ll read more about that later - exists to return any unacceptable menu items, to recycle the vegetable waste into a composter, to reuse utensils and other supplies after sterile cleansing, and to dispose responsibly of any packaging.
Many global businesses began in someone’s home office, garage, or basement with the glimmering of an idea for, let us say, a computer operating system or a new idea for consumer-to-consumer e-commerce. Perhaps the food vendor comes up with a new twist on the old recipe for crepes; a customer is impressed and asks if the vendor can make 50 crepes for a lunch-time birthday celebration at his nearby office; someone at the birthday lunch owns a neighbourhood restaurant...and before long the vendor has rented space in a small commercial kitchen facility to supply special made-to-order crepes for local businesses within a few blocks. It’s surprising how many challenges and opportunities can be anticipated and can be seen most easily in a very simple model.
Summing Up the Concept of Supply Chain Management
There are many variations on the basic supply chain management concepts and models presented so far. Here are some basic points to keep in mind as the discussion continues and grows more complex.
- A supply chain involves, directly or indirectly, everyone and everything required to extract materials, transform them into a product, and sell the product to a user.
- Supply chains include various entities, such as raw material extractors, service and component suppliers, a material product manufacturer or a producer of services, distributors, and end customers.
- Supply chain management structures vary based on demand history, business focus, and needs for connectivity, technology, and equipment.
- Supply chains can be viewed in terms of processes, such as the gathering and processing of marketing data, distribution and payment of invoices, processing and shipping of materials, scheduling, fulfilment of orders, and so forth. Such functions cut across entities.
- Supply chains include various flows as well as various entities. Materials and services flow from suppliers toward customers; payment flows from customers toward suppliers; information flows both ways. Supply chains also run in reverse, starting with the customer who sends back such items as components for replacement or repair, returned goods for re-manufacture, and obsolete goods for recycling or disposal. The reverse chain, like the forward chain, also comprises information flows and cash or credits.
Supply chain management expertise is so important in today’s business world that an annual survey is conducted to identify the 25 best supply chain leaders based on specific criteria. It’s a major accomplishment to be named to that list and an even higher compliment when a company manages to remain in that top echelon of supply chain performers for consecutive years. Check the online Resource Center for a link to those survey results and to see which companies are top-ranked for their supply chain management expertise.
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