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Supply Chain Management (SCM): How It Works and Why It Is Important

Understanding Supply Chain Management

Management of the supply chain, which includes all processes that turn raw materials into completed items, controls the flow of both goods and services. To maximize consumer value and gain a competitive edge in the market, SCM involves streamlining a company's supply-side activities.

Supply Chain Management (SCM): How It Works and Why It Is Important

The Functions of Supply Chain Management (SCM)

Through supply chain management, suppliers seek to create and run supply networks that are efficient, cost-effective and practical. Supply chains encompass all aspects of production, product development, and the information systems necessary to coordinate respective processes.

SCM frequently seeks to centrally link or manage the production, shipping, and distribution of a product. By streamlining the supply chain, businesses may reduce wasteful spending and speed up the delivery of items to customers. This is accomplished by closely monitoring internal inventories, internal manufacture, internal distribution, internal sales, and the stockpiles of firm vendors.

The idea that practically all marketed items are the result of the efforts of several businesses connected by a supply chain is the basis of SCM. Despite the fact that supply chains have been for a while, most organizations have only lately realized the value they can provide to their operations with proper supply chain management.

5 Elements of SCM

The supply chain manager works to cut back on shortages and keep costs in check. In order to increase efficiency and lower the cost of an organization's supply chain, supply chain managers "oversee and manage the whole supply chain and logistic operations".

The bottom line of a business may be immediately impacted by gains in productivity and efficiency. Businesses avoid costly recalls and legal lawsuits and stay out of the limelight thanks to effective supply chain management.

Supply chain management coordinates the logistics of all areas of the supply chain, which consists of the following five components (SCM):

1. Planning

To get the greatest outcomes, SCM frequently begins with planning to match supply with the customer and industrial demands. Future customer expectations must be anticipated, and suitable action must be taken. This has to do with the raw materials needed for each production stage, the equipment's capabilities and limitations, and the manpower needed for the SCM process. The components of ERP systems are often used by large organizations to collect data and develop plans.

2. Sourcing

SCM processes that are effective heavily rely on solid supplier relationships. Sourcing is the practice of working with suppliers to get the raw materials needed for the manufacturing process. A firm may be able to plan and work with a supplier to receive things in advance. But the sourcing needs may vary depending on the industry. SCM sourcing often entails making certain that:

  • The prices paid are in line with what the market would reasonably expect.
  • The raw materials meet the specifications for creating the products.
  • The vendor may supply emergency supplies in the event of unavoidable tragedies.
  • The supplier has a history of delivering goods that are timely and of a high calibre.

Supply chain management is crucial for manufacturers of perishable goods. When purchasing products, businesses should take delivery times and a supplier's capacity to satisfy specifications into account.

3. Manufacturing

The supply chain management process is centred on the firm converting raw resources by using tools, labour, or other external elements to produce something new. This outcome is what the manufacturing process eventually intends to generate, even if it is not the final step in the supply chain management process.

The manufacturing process can be further divided into sub-processes like assembling, testing, inspection, or packaging. A business must be aware of waste and other controllable production-related concerns that might result in deviations from the original plans. For instance, if a company finds that it is using more raw materials than it had planned and procured, it must fix the issue or return to the SCM's beginning stages.

4. Delivering

After production and closing sales, a company must deliver its products to clients. The distribution procedure is commonly seen as a contributor to the brand's image because the customer has not yet interacted with the products. A company with efficient SCM procedures has strong delivery channels and logistical capabilities to ensure the prompt, safe, and inexpensive delivery of goods.

Having a backup plan or a variety of distribution routes is necessary for the event that one means of transportation is temporarily rendered dysfunctional. For example, the snow around distribution centres can affect a business's delivery process.

5. Returning

The process of supply chain management comes to a finish with customer returns and product support. This is worse when a customer returns a product because of any issue with the product's quality or functionality. However, the company must make sure that it is capable of receiving returned items and correctly allocating refunds for such returns. Reverse logistics is another name for this return process. Whether a corporation is conducting a product recall or a consumer is just unsatisfied with the items, the commercial transaction with the client needs to be handled professionally.

Many individuals consider consumer refunds to be a kind of client-business dialogue. However, a key element of customer returns is inter-company communication to identify defective goods, expired products, or non-conforming goods. If the primary reason for a customer return is not handled, supply chain management will fail as more and more returns will likely occur.

Supply Chains vs SCM

A supply chain is a network of people, companies, resources, activities, and technical breakthroughs used in the production and marketing of a product or service. A supply chain starts when raw materials are sent from a supplier to a manufacturer, and the finished product or service is delivered to the customer.

SCM oversees the whole lifecycle of a company's product or service, from conception to final sale. Effective SCM may increase revenues, reduce expenses, and have an impact on a company's bottom line since there are so many locations throughout the supply chain where efficiency may add value or lose value owing to greater costs.

Supply Chain Model Types

The implementation of supply chain management used by each company may be distinct because of its own goals, constraints, and benefits. The below models can be used by an organization to guide its supply chain management processes:

  • The Continuous Flow Model: It is one of the oldest supply chain techniques, which performs best in developed industries. The continuous flow model counts on a producer to constantly deliver the same good and on somewhat stable customer demand.
  • The Agile Model: This strategy is appropriate for those that fill client orders or deal with unforeseen demand. Because a company could have a specific demand at any given time and must be prepared to shift course accordingly, this strategy emphasizes adaptability.
  • The Fast Model: This model emphasizes a product's quick turnover because of its short life cycle. The fast chain model is used by a company to capitalize on a trend, produce things rapidly, and guarantee that the product is fully sold before the trend fades.
  • The Flexible Approach: Seasonality-affected businesses benefit from employing the flexible approach. Certain firms may have very high demand needs and very low volume availability at the busiest periods of the year. An adaptable supply chain management strategy makes it easy to ramp up or increase output.
  • The Efficient Model: Businesses that operate in industries where profit margins are exceedingly thin could strive to gain an advantage by streamlining their supply chain management processes. This model calls for efficient inventory management, order processing, and the best possible utilization of tools and machinery.

An Instance of SCM

After realizing the importance of SCM to its business, Walgreens Boots Alliance Inc. made the decision to redesign its supply chain by investing in technology to streamline the entire procedure. Since then, the company has been making improvements and investments in its supply chain management system continuously. Walgreens uses big data to improve its forecasting capabilities and better manage its sales and inventory processes.

It was done in 2019 when Colin Nelson joined the organization and became the first-ever Supply Chain Officer of the organization. The integration of SCM was completed successfully. Additionally, the company proposed that beginning in 2021, it would offer free two-hour, same-day delivery for 24,000 items in its stores. It was the dedication of the company to keep the consumers happy, along with the wide presence on several platforms.

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