The logistics world has a language all its own (we even have a glossary to help you decode it!). Within the logistics lexicon, the phrases “supply chain” and “supply chain management” are two that get thrown around frequently, and, yet, many might struggle to explain them quickly and easily.
To shed some light on the topic, we’re going to answer the frequently asked questions we hear around these two buzzwords. When you finish this article, you’ll be able to explain exactly what these terms mean—and why they’re so vital to businesses today.
#1: What Is a Supply Chain, Exactly?
The early months of 2020 brought the term “supply chain” into daily conversations as people around the world struggled to stock up on the supplies they needed to combat the COVID-19 pandemic and work from home, including PPE, hand sanitizer, cleaning wipes, and, perhaps most critically, toilet paper.
As consumers were bemoaning the state of their empty grocery store shelves, they heard over and over that the heart of the problem lay in the “supply chain.” Translation: Something had gone wrong in what should be a smooth process that starts with raw materials and ends up with the final delivery of a finished product to the consumer.
That’s what the supply chain really is: all the pieces that are involved with the creation and distribution of a product from start to finish. When it comes to toilet paper, for example, it starts with the harvesting of the trees and encompasses all the activities that end in the arrival of neat, packaged rolls on a grocery store shelf.
The oversight of these supply chains is, naturally, called supply chain management.
#2: What Does Supply Chain Management Involve?
Let’s start with this definition from Investopedia:
Supply chain management is the management of the flow of goods and services and includes all processes that transform raw materials into final products. It involves the active streamlining of a business’s supply-side activities to maximize customer value and gain a competitive advantage in the marketplace.
In other words, supply chain management involves supervising all the links in the chain to improve efficiency, reduce waste, and position a company for success in selling their product.
Those who want to learn more about supply chain management and those with dreams of becoming supply chain managers might consider a professional certification in supply chain management or a bachelor’s degree in logistics and supply chain management.
#3: What Do Supply Chain Managers Focus On?
A supply chain manager’s job can be broken down into anywhere from five to nine parts (or more). The SCOR Model, created by the Supply Chain Council, is an industry-standard divides supply chain management into five areas of focus:
If you’ve heard that phrase, “More time in the planning means less time in the execution,” it certainly applies to supply chain management. During this phase, a supply chain manager, along with the executive team of a business, map out things like:
- How much customer demand can we expect? And how can we balance speedy fulfillment of orders without tying up too much cash flow in extra inventory?
- Where should our manufacturing facilities be located to optimize the inflow of raw materials and the outflow of finished products?
- Will we manufacture the entire product from start to finish, or will we purchase pre-fabricated components?
- Will we wait for orders before starting the manufacturing process? Or will we manufacture in advance and store finished products in our warehouse?
- And how will we sell our products: direct to consumer or through a third party?
- How will we distribute them to our customers?
- What kind of metrics will we establish to determine our success or identify places for improvement?
And that’s just the start. The planning phase is an all-encompassing one that needs to anticipate problems, challenges, and sticking points.
The second area of supply chain management revolves around the raw materials a business needs to produce its products. Supplier relationships and payment terms, frequency and quantity of supplies and pricing considerations are just a few of the items that a supply chain manager needs to consider. It’s a delicate balance to achieve the right flow of raw materials to keep pace with manufacturing, while avoiding a backlog that just sits around, waiting to be used.
Supply chain managers also have to focus their attention on the actual creation of their company’s products. How efficiently are finished products coming off the line? How consistent is the quality? How well is manufacturing keeping up with consumer demand? Everything that goes into the actual production of your goods falls into this category, which requires oversight to ensure customer satisfaction and cost control.
Once the products are finished, supply chain managers also need to figure out how they’re going to get where they need to go. Are they going directly to the consumer? Are they going to distribution centers, then sent out to retail locations, as needed? Everything involved with getting a finished product in front of a customer falls into this area of supply chain management.
Finally, returns also need to be accounted for. How will your company take back products that consumers don’t want or products that are defective? And, for those defective products, what can be done to prevent the defect in the future? A supply chain manager will have to coordinate all of these aspects, as well.
As we mentioned, many models break down the role of the supply chain manager into even more components. Additionally, if you dive deeper into the SCOR model, there are plenty more nuances to discover and understand. However, this five-part overview will give you an initial understanding of all the moving parts a supply chain manager deals with on a daily basis.
This overview has also given you an initial glimpse into why supply chain management is so important to businesses, but let’s take a deeper dive to explore some of the finer points.
#4: What Kind of Impact Can Supply Chain Management Make on a Business?
In short: a tremendous one. Without effective supply chain management, a company runs the risk of:
- Disappointing its customers with inconsistent delivery times or low-quality products.
- Struggling with cash flow because all its operating capital is tied up in raw materials or unsold inventory.
- Barely making a profit resulting from inefficiencies and waste.
And that’s just the start of the ripple effects that supply chain management can have on a business. Using the same five areas of focus we used above, let’s take a look at a couple of effects that supply chain managers can have on each one. (Keep in mind that supply chain management is a complex discipline, and every business is different, so this is by no means an exhaustive list!)
With strong skills in this area, a supply chain manager can:
- Increase the speed at which consumers receive and pay for goods to improve cash flow.
- Use a demand forecast to eliminate excess inventory, which ties up capital, and to prevent out-of-stock situations, which erode consumer trust.
- Optimize pricing models to keep the flow of inventory and revenue healthy.
- Estimate budgets accurately so the company has the resources and capital it needs to operate.
Supply chain managers can also create a significant impact in this area as they help to:
- Select suppliers who deliver a consistent flow of materials to keep manufacturing processes running smoothly.
- Source quality material at the right price to produce a solid product with healthy margins.
- Manage the logistics to acquire supplies at the right speed and price that keeps manufacturing moving while controlling costs.
Supply chain managers may also oversee manufacturing processes so they can:
- Identify inefficiencies that slow production and cost the company money.
- Allocate the right time and resources to meet customer orders, while eliminating wasteful downtime for employees.
- Analyze the manufacturing schedule to create a set of standards that everyone can rely on, such as 1 hour of manpower to make Widget A.
Once the products are created, the supply chain manager also plays an important role in getting them to the next step of the chain by:
- Overseeing relationships with carriers to ensure they’re offering rates that support your bottom line.
- Deciding whether to move items straight from a central warehouse direct to customers, as opposed to establishing a network of local distribution centers.
- Creating a consistent, reliable delivery experience for customers, whether the company is selling direct-to-consumer or to, for example, retail outlets.
Finally, supply chain managers also offer oversight over this final aspect of the supply chain by:
- Establishing procedures that offer customers a positive return experience, improving the possibility of future business.
- Improving the efficiency of the return process to protect the company’s margins.
As you may have noticed, there are a few themes that run throughout: minimizing cost, maximizing customer satisfaction, and eliminating waste. Through these—and many more actions—a supply chain manager can help a company increase its revenue and decrease its expenses, paving the way for the company’s long-term success.
#5: How Can I Learn More About Supply Chain Management?
We’ve got some resources right here on our website to get you started. Check out:
- 11 Ideas for Effective Supply Chain Management
- 7 Ways to Completely Ruin Your Supply Chain
- Emerging Supply Chain Technology: Internet of Things (IoT) Expands Tracking and Monitoring
Or, if you’re looking to grow your own career in supply chain management, don’t miss out on our run-down of:
- Supply Chain Management Certification Programs
- Bachelor’s Degrees in Logistics and Supply Chain Management
Finally, if you’re looking for some expert help to manage and optimize your supply chain, reach out for a complimentary consultation. We’d be happy to help you analyze your supply chain to benefit your company’s bottom line.