Supply Chain Management – The First Link

To make sure we are all agreed on the definition of Supply Chain Management (SCM), Wikipedia defines Supply Chain Management as: “the management of a network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers (Harland, 1996). Supply Chain Management spans all movement and storage of raw materials, work-in-process inventory, and finished goods from point of origin to point of consumption (supply chain).”

Another definition is provided by the APICS Dictionary when it defines SCM as “the design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand, and measuring performance globally.”

Supply Chain

Let’s look at an example. We have two companies, one company that sells widgets to the public in a retail outlet which we will call Retail. The other company supplies the widget, let’s call that company Supplier.

Retail needs to make sure that it has enough product on the shelf to sell. To save money and to ensure that they don’t get stuck with product they can’t sell, Retail does not want to have too much inventory on hand. On the other hand, if Retail runs out of product, their customers could go somewhere else to purchase it. Supplier needs Retail to be happy and purchase product from them. Supplier could have a normal non-managed relationship with Retail and hope for the best or Supplier could try to work out a managed relationship with Retail (Supply Chain Management). If Supplier and Retail can both work together on a system that maximizes the best interest of both of them, they both win.

To manage the movement of product from Supplier to Retail, they will set up a system where Retail can easily order product on short notice from Supplier. Supplier will know the inventory level of product at Retail so that Supplier can ensure it has enough inventory on hand to fill Retail’s order for more product. Now they could just call back and forth informing each other of their inventory on hand and when they think they will need more, or they could have a software/web system that links Supplier to Retail (a chain) so both can see in real time how things are going.

 

Instead of judgement calls, using business intelligence in their software system, patterns and trends can be seen so that both businesses can make better decisions. At certain inventory levels, orders can be place automatically. Because of the integrated system between Supplier and Retail, Supplier will have reduced administrative cost in servicing Retail, which will allow Supplier to pass the savings on to Retail which will only make the long term relationship between Supplier and Retail even stronger (stronger chain).

 

Bottom line:  Product is available when the customer comes in to purchase it, Retail does not need to carry excessive inventory, Supplier who has a close relationship with Retail can maximize its sales to Retail and does not worry that Retail will switch to another Supplier to get product because of the win/win relationship they have both built. Stay tuned for the next issue where I will discuss Supply Chain Management: The Next Link.

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