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Supply chain management and its Importance

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Supply-chain-management-its-importance

Supply chain management forms the backbone of services and operations. Supply chain management yields a great competitive advantage in our businesses.

What is Supply Chain Management?

Supply Chain Management or SCM is responsible for the management of all the activities of parties involved, directly or indirectly, in fulfilling a customer request.

The supply chain includes not only manufactures and suppliers, but also transporters, warehouses, retailers, and even customers themselves.  

In a nutshell, Supply Chain Management focuses on managing the elements and activities under the supply chain and strives for an integrated approach.

Supply Chain Management Definition

Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, supply chain management integrates supply and demand management within and across companies – Council of Supply Chain Management Professionals (CSCMP)

Understanding SCM with example

We are all surrounded by millions of products and services around us. Have we ever wondered about the activities, which went behind making all those products and services available for us?

If not, let’s do that now…Let’s take a simple product like a soft drink.

Understanding-Supply-chain-management-with-Example


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Activity: Try listing down materials required to produce one bottle of a soft drink.

Your list will include a Bottlecap, a bottle, a label, some water and ingredients like sugar, preservatives, flavors, etc.

So, Altogether those materials should cost us somewhere around 40 Rs in total. Moreover, with bulk purchases, the cost should come further down.

But, when we visit the store we find the same bottle of soft drink is sold for Rs 100 in the market! Does that mean the soft drink manufacturers are making a profit of 60 Rs on every bottle they sell ??

The answer is NO! The Profit made by the manufacturers are much lower than what most of us would expect. Often we associate material costs equaling the product costs. However, we forget the fact that the material cost alone does not makeup to the product cost.

So Where Did The Profit On Our Soft Drink Go? Let’s Find Out.

Step-1 The process begins with empty bottles and caps being manufactured by the supplier. The bottles manufactured are then grouped and placed into Boxes. needs packaging before transporting therefore we need packing materials.

However, Packing materials alone won’t do. we need labor, machines, and other accessories.

Step-2 Once packing is done bottles are transported to soft drink manufacturing unit. so, we will need pallets, forklifts and forklift operator to carry the boxes around. In addition to it, we need laborers to load and unload the boxes to the truck, a truck, a truck driver, insurance, Fuel, etc.

Step-3 Once it reaches the soft drink manufacturing company, the labeling will be done on the bottles. Creating a label may require a designing team, printing press, and other raw materials.

Supply-chain-management-example
Manufacturing and Bottling plants

Step-4 Then comes the soft drink manufacturing part, where we need a processing equipment and the ingredients for the soft drink.

Don’t forget the other machines like labeling machine, bottling machine, etc which plays a major role in our process.

Do note that we incur a cost for Laborers, electricity, garbage disposal, and other operating items that go into the process.

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Tiresome process! Right? Hold on there is more to it.

Step-5 Later, the movement of finished goods to distribution centers happens as per the demand. This process needs forklifts, crates, pallets, laborers, truck, truck driver, fuel, insurance, and Lot more! Phew!

The distribution center needs employees, energy, security system, laborers, and other expenses to operate. Later when goods move from distribution center to retailers we incur similar expenses again!

The retailer needs staffs, energy, refrigeration systems, insurance, security, etc

The Process Doesn’t End Here!

Step-6 we need a proper mechanism to replace the damaged goods so let us talk about reverse logistics.

Our bottles also carries a customer care number on it. so we need a customer service team functioning efficiently for our customers!

Oh wait ! its month-end and our employees at soft drink manufacturing units and suppliers need their payment.

Let’s wait here for now! With this simple illustration, we understood how complicated and costly the processes are!

People machines, building, energy, fuel, Vehicles & materials requires a huge amount of money.

So, companies face challenges when they buy things, make things, move things, and sell things. Companies need to ensure they operate with sustainability in mind and the operations happen flawlessly.

Here comes the role of “supply chain management“. Supply chain managers ensure all the processes are happening according to the laid up plan and are operating in a cost-efficient manner.

So, now we know how important is the part played by the supply-chain management team!

Importance of Supply Chain Management

Supply chain management is important due to various reasons. Supply chain management enhances the value of the product from sourcing to consumption. Below I have listed down a few factors which show the importance of SCM…. give it a read!

Importance-of-supply-chain-management
Importance-of-supply-chain-management

Supply Chain Management Improves Customer Service

The customer is the king! Every business should aim for excellent customer experience. Supply chain management impacts customer service by making sure the right product assortment and quantity are delivered in a timely fashion along with an uptime after-sale customer support… Additionally, those products are made available in the location that customers expect at the right moment through various processes under supply chain management. Supply chain management also ensures that the customers receive quality products in required quantities through an efficient inbound logistic system.

Supply Chain Management Deals With Uncertain Situations

The business environment is dynamic and changes very fast. SCM helps in dealing with uncertain situations by proper planning and execution of Supply chain functions like Inventory management, Warehousing transportation, etc. Risk management is another important area where the supply chain involves itself.

Supply Chain Management Improves Financial Position

SCM helps in controlling and reducing supply chain costs. such reductions can result in a dramatic increase in firm profits. With proper management in place, SCM also decreases fixed assets used by the company and therefore makes the financial position of the company better.

Supply Chain Management Reduces Operating Cost

The supply chain incurs higher operating costs due to its huge operations. An efficient SCM helps in cutting down such unnecessary costs by optimizing the processes. SCM uses analytical tools to forecast and keep track of everything in advance. SCM follows a calculative approach to reduce any unnecessary costs within the systems.

Supply Chain Management Ensures Human Survival

Human survival depends on the supply chain to provide necessities. We learned it much better during the time of pandemic when cases of toilet papers running out were reported from many areas. our required essentials depend on an efficient supply chain mechanism. The supply chain also helps in the supply of medicines and healthcare. this leads to improve human care. Therefore we can very well claim that supply chains are vital for human survival.

Supply Chain Management Improves Human Life

This is more related to the aforesaid point. The supply chain leads to improvement in the standard of living.it also the foundation of economic growth as people can exchange goods and services. Creation of employment by the supply chain also improves life as people can afford to pay for goods and services

Three flows in Supply Chain management

A supply Chain is Dynamic and involves the constant flow of information, products and funds among different stages.

Supply chain management flow diagram
3 flows in SCM

Product Flow

Product flows in the form of raw materials from suppliers to manufacturers later these goods flow from manufacturer to customer in the form of finished goods. The same goods are then sent back if needs replacement or it needs to be scrapped.

Money Flow

The money flows every time a service is incurred and therefore keeps on circulating between suppliers, manufacturers, retailers & suppliers of the stakeholders. Money flow is one of the flows which we see in our supply chain

Information Flow

Information is vital to the existence of the supply chain at this time than ever. Digitization of supply chains are all focused on improving the information flow within the SCM operations. Information flows in the form of Order requests, customer service, reply to the queries, and much more. Information flow is another vital flow in the supply chains.

  E.g. Let’s consider a Customer visiting a Car Dealership. The dealer will provide the product, as well as pricing and availability information, to the customer ( This indicates Information flow). Once convinced to buy, the customer transfers funds to the dealer. ( This indicates Money Flow) After the customer confirms the dealer will convey the sales info to the manufacturer and place an additional order for replenishment. The manufacturer produces and transports the car to dealers Place. (This indicates Product flow) The Dealer transfer’s the funds to the Manufacturer. The manufacturer also updates pricing and other information’s on time to time basis. We can see a constant flow of information, products, and funds among different stages in this example.

Objectives of Supply Chain Management

So, we understood much about supply chains… now let us identify the objectives of supply chain management. I have tried to jot down a few of the objectives Let’s understand them one by one.

Minimize The Cost Of Materials And Material Movement

We might understand everything in a very linear format …That’s not our mistake !….We may understand a typical supply chain comprising one supplier, one manufacturer, and few retailers serving to the customers. But try to give it a second look. we will find that there are in-fact multiple suppliers, multiple manufacturing units, lots of intermediaries, and a wide customer base. The supply chain is no longer a supply chain it is a supply web which is interconnected to one another. In such a system wastage of cost and processes are much high. Though minimizing of cost and material moment is highly possible it is extremely tricky. Hence this forms the main objective of the supply chain management.

Minimize Inventory Investment

Money invested in inventory is a strategic investment. If the inventory stays longer within the systems then this shows the inefficiency of inventory management. Such inventories will in-turn lead to high inventory holding costs. Money once invested in inventory stays blocked in it Hence such investments should be optimized. If inventory is maintained less then we may miss out on customer demand fulfillment. Minimizing Inventory investment in highly tricky therefore this forms another objective of SCM.

Ensure Timely Delivery Of Materials

Every process under SCM depends on the time. Time is a crucial element just like anywhere else. Without timely delivery, the needs will not be met in a proper way leading to poor customer satisfaction and the demise of a business. With proper supply chain management at the place, we expect a timely delivery of goods and services.

Ensure Quality Of Materials Used In Manufacturing Or Services 

SCM ensures the quality of products and services involved in the flow. SCM personals ensure the quality of the right vendor relationships and other factors affecting the consumption. By controlling the quality of production inputs, supply chain managers are protecting the integrity of their company’s operations.

Conclusion

Supply Chains are everywhere around us next time, we see a product think about all the activities which went behind in making the product available for us. Every activity which comes under it is managed under supply chain management therefore, it’s not businesses which compete with its Supply Chains.

Supply chain management forms the backbone of services and operations. Supply chain management yields a great competitive advantage in our businesses.

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