Supply chain management is the process of organizing and overseeing supply chain activities with the goal of achieving (or maintaining) a competitive advantage. The heart of a company’s operations, supply chain management deals with every process from the acquisition of raw materials through the final product. Here’s what you need to know about how supply chain management works, its benefits, challenges, and best practices for more effective supply chain management processes.
Definition of supply chain management
The aim of supply chain management is to operate all supply chain activities both effectively and efficiently, which can also help companies maintain leaner operations and increase the bottom line. It encompasses everything from product development to production and logistics. Rather than focusing on specific processes that take place within the four walls of an organization, supply chain management focuses on the supply chain as a whole, including both the flow of physical goods and information.
How supply chain management works
Supply chain management is a complex set of systems and processes, including strategic planning and implementation that ties everything together from raw-material sourcing to post-delivery customer service. Supply chain managers are tasked with managing suppliers and handling common issues that arise with suppliers, such as late deliveries from suppliers, negotiating and building relationships with suppliers and more. They’re also responsible for inventory optimization, including ensuring that inventory levels are sufficient to avoid backorders, while also ensuring that the company doesn’t maintain too much inventory on-hand (resulting in unnecessary storage costs).
In addition to supplier management and inventory optimization, supply chain management also addresses common issues such as:
- Inadequate purchasing management
- High materials costs
- Long lead times
- Building distribution networks
Benefits of supply chain management
When executed well, supply chain management provides numerous benefits to companies. Effective supply chain management helps to improve customer service, can reduce operating costs through inventory optimization, streamline fulfillment, improve resource management and more. Because more efficient product delivery means that invoicing — and subsequently payment — happens sooner, companies that implement good supply chain management practices also benefit from improved cash flow.
Supply chain management challenges
Supply chain management may offer myriad benefits, but supply chain management as a whole is easier said than done. Globalization makes the supply chain more complex and results in increased global competition. Companies must adapt readily to changing market demands, but good decision-making requires real-time visibility throughout the supply chain.
Good supply chain management depends on multiple organizations — suppliers, vendors, distributors, logistics providers and retailers — all functioning optimally and seamlessly for the best results. A single misstep in any cog of the supply chain has a domino effect, impacting every other facet of the chain, all the way to final product delivery. Outside factors, such as weather events causing logistics delays, can also impact supply chain performance, and those factors are often uncontrollable.
Supply chain management is also complicated by the need to comply with the differing regulatory requirements in the areas where a company operates. Cost control is another issue. Rising energy, fuel and freight costs, stricter regulations, increased labor costs, rising commodity prices and an increase in global customers are all variables that make keeping costs down a substantial challenge for supply chain managers. Many companies turn to outsourcing production to other countries for lower production costs, but this strategy comes with its own challenges — namely, quality and risk management concerns, which can have a long-term detrimental impact on revenue if not carefully managed.
Supply chain management best practices
Despite its complexity, there are several best practices companies can implement that help the supply chain operate like the well-oiled machine it’s intended to be:
- Implement technology for real-time data and complete supply chain visibility. You need to know what’s going on at all times, not only within your own organization but also with your suppliers, logistics providers and other partners.
- Focus on Tier II supplier management. Rather than focusing only on your direct suppliers; you also need to manage your product supply as your suppliers are sourcing from their suppliers. In other words, you should ensure that your suppliers’ suppliers have the demand information they need for effective capacity planning and raw materials purchasing.
- Address quality and compliance at every level. Again, one minor misstep at any stage in the supply chain process can throw the entire supply chain off track. Ensure regulatory compliance is met at every stage and every level, and implement robust quality assurance practices to exceed your company’s minimum quality standards.
- Always have a backup plan. Because some factors and variables are outside a supply chain manager’s control, there must always be a plan B to keep the supply chain flowing in the event of an unforeseen delay.
- Make risk management a priority. You can’t mitigate risks if you don’t know what they are, so you should identify and quantify risks periodically. Doing so enables you to better control any factors contributing to those risks.
- Hire the top supply chain management talent. Supply chain management requires good technology, processes and people. Hiring the best of the best in the supply chain management field is always a good investment.
- Leverage automation to improve efficiency and optimize human labor. Human capital is integral, but fully optimized human labor is the magic bullet for an efficient supply chain. Collaborative mobile robots, like 6 River Systems’ Chuck, and other automation technologies allow your human workers to do more in less time, making fewer errors along the way.
Supply chain management touches every facet of modern companies. Without sound supply chain management practices, companies ultimately end up disappointing customers and losing business to the competition. Companies that master the many complex components of supply chain management are poised to overtake the toughest competitors, emerging as leaders in their fields.