What Is Supply Chain Management?

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Heard a lot about supply chain? Read on to understand it and how managing it properly can make or break your business.

header image showing a supply chain

Supply chain management is the backbone that keeps the world economy moving. For every car, phone, and rubber chicken there exists a long history of workers, components, and shipping that all combine to form a supply chain. The effective management of a supply chain can be the difference between a decent company and a stellar one.

In this post, we’ll take a look at how supply chains are laid out, what traditional management methods look like, and what’s coming down the pipeline for supply chain management.

What is supply chain management (SCM)?

Supply chain management is a holistic term describing the different stages through which a product or service travels before finally reaching the end user. It involves activities, such as procurement and transportation; and processes, such as product life cycle management and customer service management.

At its core, is the attempt to make the creation of products or services more efficient. A restaurant provides a great example of how this all works. We all know the basics—someone buys food, cooks it, and sells it. The details are where supply chain management come into play.

First, let’s spell the whole process out. We want to sell an omelet.

  1. Farmer A produces eggs. Farmer B produces cheese and butter. Farmer C produces ham. This is not a vegan omelet, apparently.
  2. Farmers A and C then sell their eggs and ham to a larger company, Supplier A. Farmer B, meanwhile, only works with Supplier B.
  3. Suppliers A and B then make separate deliveries to the restaurant, where we receive the goods and store them in the appropriate places.
  4. We prep a bunch of food in the morning to make a ton of omelets.
  5. When an order comes in, we combine the ingredients and plate it.
  6. Plate served, money collected.

Just looking at the list you can start to see where the weak links in the chain might crop up. You can probably also see a few places where we could make things more efficient. Maybe we can get our dairy from the same supplier or combine some food before the order comes in, knowing how much we typically sell.

This is how supply chain management starts. You look at everything you’re doing and try to sort out the requirements from the excess. Then, you consolidate processes or switch suppliers or change layouts to accommodate a more efficient system.

There’s a balance to be struck in all this between finding the shortest route to completion and creating pinch points. If you end up relying on one supplier for all your produce, you’ll need new backup plans should that supplier run low or raise costs or go out of business.

Supply chain managers try to balance the whole end-to-end process without sacrificing quality or introducing new risks.

Real world supply chain success

Walmart is a classic supply chain management success story. In the 1980s, Walmart started cutting out the middlemen in its supply chain, working directly with its suppliers instead. It was then able to decentralize its distribution center operations to take advantage of its size and variety of suppliers.

Walmart started by focusing on the steps involved in the process and trying to trim those down to the bare minimum. It did this, in part, by implementing a vendor managed inventory (VMI) system. Using VMI, Walmart shares a huge amount of sales data with its vendors and suppliers and then makes them responsible for managing the inventory in the warehouse.

This has all sorts of benefits for Walmart and its vendors, but the biggest is that it cuts down on ‘out of stock’ situations. By 1989, Walmart had cut its distribution costs down to less than 2% of its total cost of goods sold.

Walmart decided to streamline by turning its system into a relationship with vendors and distributors. It’s a system that many high-end restaurants and coffee roasters are starting to use as well. Instead of relying on market prices and classic delivery timelines, companies are reaching out directly to producers and customizing deliveries, payments, and shipping.

While Walmart set the bar for 20th century distribution and supply chain management, it’s the 21st century now. Things are changing in supply chain management, and new names are rising to the top.

The future of supply chain management

Big data and crowd sourcing are the next major innovations in supply chain management. With RFID tagging and advanced tracking systems, we can now generate huge amounts of data about where and how products move.

Advances in analytics technology are cutting down the time required to generate actionable insight into operations – that is a very businessy sentence. Essentially, we’re now able to do in minutes what used to take days or weeks. We can look at products that are still in transit and make decisions based on their speed and location.

Transportation data can also be combined with customer data, generating new insights into how a supply chain should be organized in order to increase its overall efficiency. Over time, some companies are hoping these advances will lead to autonomous supply chains, which can analyze and adjust without any input from fumbling humans like you and me.

Other companies are turning to their own employees to find savings in the supply chain. Nestle and Unilever have instituted systems to generate ideas from within their own organizations, focused on reducing supply chain costs and increasing efficiency.

Conclusion

Managing a supply chain is a difficult task and it takes a team of people. These days, those folks are helped along by supply chain management and ERP software—systems that help individuals take in a global view. For more on the business of logistics and how technology is helping make the logistics business more streamlined, visit the Capterra logistics blog.

Looking for Logistics software? Check out Capterra's list of the best Logistics software solutions.

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About the Authors

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Pritam Tamang

Pritam is a Content Analyst at Capterra and Software Advice. He writes technology research reports centered around small business project management. His areas of interest are SaaS technologies, content marketing and agile/lean thinking.

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Andrew Marder

Andrew Marder is a former Capterra analyst.

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