What is supply chain management (SCM)?

Supply chain management is handling the flow of how your product is made
and all the processes that transform the raw material into the finished product.
It’s a critical function within manufacturing and retail because its efficiency
impacts the success of other integral parts of the business:
● Customer service: A well-orchestrated supply chain means your
customer gets the order exactly as they expected on-time, every time.
They also expect accessible support should they need it after the
purchase, which your supply chain management can influence.
● Operating costs: The supply chain must be timed in a way that supports
the demand level for the product to avoid overstocking and inventory
costs. It’s also where you manage supply costs like raw materials and
transportation.
● Financial management: As you speed up the product flow to your
customers, you speed up your cash flow into the business. If you can get
your product to the customer in 10 days instead of 30, you can invoice
them 20 days sooner. Visibility into your supply chain can highlight where
you can reduce costs and wait times, and increase profit margins.

6 components of SCM
Planning​—Enterprises need to plan and manage all resources required to meet
customer demand for their product or service. They also need to design their
supply chain and then determine which metrics to use in order to ensure the
supply chain is efficient, effective, delivers value to customers, and meets
enterprise goals.
Sourcing​—Companies must choose suppliers to provide the goods and services
needed to create their product. After suppliers are under contract, supply chain
managers use a variety of processes to monitor and manage supplier
relationships. Key processes include ordering, receiving, managing inventory, and
authorizing supplier payments.
Making​—Supply chain managers coordinate the activities required to accept raw
materials, manufacture the product, test for quality, package for shipping, and
schedule for delivery. Most enterprises measure quality, production output, and
worker productivity to ensure the enterprise creates products that meet quality
standards.
Delivering​—Often called logistics, this involves coordinating customer orders,
scheduling delivery, dispatching loads, invoicing customers, and receiving
payments. It relies on a fleet of vehicles to ship product to customers. Many
organizations outsource large parts of the delivery process to specialist
organizations, particularly if the product requires special handling or is to be
delivered to a consumer’s home.
Returning​—The supplier needs a responsive and flexible network to take back
defective, excess, or unwanted products. If the produce is defective it needs to
be reworked or scrapped. If the product is simply unwanted or excess it needs to
be returned to the warehouse for sale.
Enabling​—To operate efficiently, the supply chain requires a number of support
processes to monitor information throughout the supply chain and assure
compliance with all regulations. Enabling processes include finance, HR, IT,
facilities, portfolio management, product design, sales, and quality assurance.

Supply chain management examples

Walmart and Procter & Gamble began to work together in the late 1980s and are
the classic example of supply chain collaboration. Before these two companies
began working to connect their supply chains, retailers and manufacturers shared
little information. After Walmart and P&G demonstrated that shared information
reduced cost, other retailers became more willing to consider the possibility. In the
early 1990s Walmart formalized its Retail Link system and cajoled (some would
say strong armed) other retailers to connect.

Over time, the Walmart POS system was able to aggregate sales of individual
P&G products at each store. When the POS indicated that inventory for a
particular product had fallen to a predetermined threshold, the Walmart
distribution center was notified to ship additional product to the store. As inventory
in the Walmart distribution center fell to its threshold, the P&G distribution center
was automatically alerted to ship additional products.

Today, this continuous flow of information helps P&G to determine when to

manufacture and ship products to Walmart. By avoiding manufacturing too much
inventory and by automating the billing and payment process, both firms enjoy low
costs.

Why is supply chain management important?

● Identifying potential problems before they occur​. When a customer
orders more product than the manufacturer can deliver, the traditional
response has been to short the order. This leaves the buyer feeling
unimportant and convinced the manufacturer’s service is poor.
Manufacturers who anticipate the shortage before the buyer is disappointed
may be able to offer a substitute product or other incentive to keep the
buyer happy.
● Optimizing price dynamically.​ Seasonal products, particularly fashion
products, have a limited shelf life. Any that don’t sell by the end of the
season are scrapped or sold at deep discounts to empty the warehouse.
Airlines, hotels, and other companies with a limited, but perishable product,
adjust prices dynamically to meet demand. While this is more difficult with
clothing and other products where the supply can vary widely, similar
forecasting techniques can improve margins.
● Improving the allocation of available to promise inventory.​ Today’s
tools dynamically allocate resources and schedule work based on the sales
forecast, actual orders, and promised delivery of raw materials.
Manufacturers are able to confirm a product delivery date when the order is
placed, significantly reducing incorrectly filled orders.

How should the supply chain be measured and monitored?

Supply chains rely on a variety of metrics. Common metrics include:

● Perfect orders – the percentage of orders that are error free

● Cash to cash cycle time – the number of days between paying for raw
materials and getting paid for the final product
● Order cycle time – The time from order receipt to product delivery
● Fill rate – The percentage of orders that are delivered as ordered on the first
shipment.
Technology for better supply chain management

Internet of Things (IoT)

IoT is the fusion of physical objects such as software, sensors, and electronic items with Internet and
machine-enabled data collection and transfer. It allows for real-time communication, making it
possible to initiate physical systems without human intervention and giving rise to smart cities.

Big data and advanced analytics

With the Internet of Things comes a huge amount of data, and the way your business reads and
analyzes that information is important. In manufacturing, the availability of data from product
development, production and testing can add new dimensions to the way you manufacture goods,
offering better innovation, marketing, and decision-making.

Robotics and automation

Robots are already used extensively in the manufacturing world — mechanical arms on assembly
lines for example. Industry 4.0 could see the contribution of robots massively increasing. Considering
the possibility of building “smart factories” where robots take ownership of manufacturing and bring
goods to customers with limited human input, due to computing and communication systems linked
with physical systems.

Simulations, 3D printing, and augmented reality

Already commonplace today, goods can be virtually modeled and tested, saving time and reducing
the materials, efforts, and money spent. Through 3D printing, we can see the creation of customized,
complex, and lightweight designs at remarkable speeds, while augmented reality offers a future
where employees can be trained on the job far more effectively than with paper or monitors.

What Is Operations Management?

Operations management is the administration of business practices to create the

highest level of efficiency possible within an organization. It is concerned with
converting materials and labor into goods and services as efficiently as possible to
maximize the profit of an organization. Operations management teams attempt to
balance costs with revenue to achieve the highest net operating profit possible.
Specific Responsibilities/Functions of Operations
Management
● Finance

Operation management’s responsibility is to make sure that the company’s resources are used

in the right manner to generate goods that satisfy its customers.

● Strategy

Operations managers also help in the development of plans or tactics that could lead to the
maximization of resources and production of products that gives the company a competitive
edge over its competitors.

● Product Design

It is the operations manager’s responsibility to come up with product design that not only

caters to the needs of customers but follows the market trend.

● Forecasting

Operation management also predicts the performance of products or services in the future. In

other words, he critically analyses what customers’ demand for certain products would be in

the future.

XYZ Analysis 
As discussed in our post on the importance of ABC analysis in inventory 
management, ABC analysis can be very beneficial as a simple way to prioritize your 
workload and help reduce the hours spent ordering and managing inventory. 
However, there are limitations of the model. For starters, ABC classification is 
arguably over-simplistic due to the categories being static (unless regularly reviewed 
to allow items to move between groupings) and the evaluation criteria being 
one-dimensional. 

To help overcome these issues, you can apply XYZ analysis. 

XYZ analysis is a framework to classify products based on their variability of 

demand. 

X items: regular demand 

Y items: strong variability in demand 

Z items: very irregular and difficult to predict demand 

This means that you can segment items based on their forecastability – the 
likelihood that their demand will vary from their forecast. 

Adding another level of insights to your inventory classification model allows you to 
make more informed ordering and stocking decisions. For example, it makes sense 
to treat AX items (that are valuable and have a constant demand) differently than AZ 
items (with erratic demand). If demand is steady and easy to predict (X items), your 
safety stock levels can be much lower than products where demand is much more 
volatile (Z items).