What is the Supply Chain Management (SCM)

Supply Chain Management — A supply chain is a network of organizations for procuring raw materials and transforming them into finished products, It links Suppliers, Manufacturers, Retail Outlets and Customers through consumption.


Supply Chain Management systems helps managing relations with suppliers by a constant exchange of information.

Aim of supply chain: To get Right amount of products in Least amount of time at lowest cost

The best companies around the world are discovering a powerful new source of competitive advantage. It’s called supply-chain management and it encompasses all of those integrated activities that bring product to market and create satisfied customers.  The Supply Chain Management Program integrates topics from manufacturing operations, purchasing, transportation, and physical distribution into a unified program. Successful supply chain management, then, coordinates and integrates all of these activities into a seamless process.

Simply stated, “The supply chain encompasses all of those activities which associated with moving goods from the raw-materials stage through to the end user.”

What is the importance of Supply Chain Management?

In the ancient Greek fable about the tortoise and the hare, the speedy and overconfident rabbit fell asleep on the job, while the “slow and steady” turtle won the race. That may have been true in Aesop’s time, but in today’s demanding business environment, “slow and steady” won’t get you out of the starting gate, let alone win any races.

Managers these days recognize that getting products to customers faster than the competition will improve a company’s competitive position. To remain competitive, companies must seek new solutions to important Supply Chain Management issues such as modal analysis, supply chain management, load planning,route planning and distribution network design. Companies must face corporate challenges that impact Supply Chain Management such as reengineering globalization and outsourcing. Why is it so important for companies to get products to their customers quickly?


Faster product availability is key to increasing sales, says R. Michael Donovan of Natick, Mass, a management consultant specializing in manufacturing and information systems.

“There’s a substantial profit advantage for the extra time that you are in the market and your competitor is not,” he says. “If you can be there first, you are likely to get more orders and more market share.” The ability to deliver a product faster also can make or break a sale. “If two alternative [products] appear to be equal and one is immediately available and the other will be available in a week, which would you choose? Clearly,” Supply Chain Management has an important role to play in moving goods more quickly to their destination. ”


Supply Chain Management Today

If we take the view that Supply Chain Management is what Supply Chain Management people do, then in 1997 Supply Chain Management has a firm hand on all aspects of physical distribution and materials management. Seventy-five percent or more of respondents included the following activities as part of their company’s Supply Chain Management department functions:

  • Inventory management
  • Transportation service procurement
  • Materials handling
  • Inbound transportation
  • Transportation operations management
  • Warehousing management

Moreover, the Supply Chain Management department is expected to increase its range of responsibilities, most often in line with the thinking that sees the order fulfilment process as one                       coordinated set of activities. Thus the functions most often cited as planning to formally include in the Supply Chain Management department are:

  • Customer service performance monitoring
  • Order processing/customer service
  • Supply Chain Management budget forecasting

On the other hand, there are certain functions which some of us might feel logically belong to Supply Chain Management which companies feel are the proper domain of other departments. Most difficult to bring under the umbrella of Supply Chain Management are:

  • Third party invoice payment/audit
  • Sales forecasting
  • Master production planning

Globalization, highly competitive markets, and the rapid pace of technological change are now driving the development of supply chains where multiple companies work together, each company focusing on the activities that it does best. Mining companies focus on mining, timber Companies focus on logging and making lumber, and manufacturing companies focus on different types of manufacturing from making component parts to doing final assembly. This way people in each company can keep up with rapid rates of change and keep learning the new skills needed to compete in their particular business.

Where companies once routinely ran their own warehouses or operated their own fleet of trucks, they now have to consider whether those operations are really a core competency or whether it is more cost effective to outsource those operations to other companies that make logistics the center of their business. To achieve high levels of operating efficiency and to keep up with continuing changes in technology, companies need to focus on their core competencies. It requires this kind of focus to stay competitive.

Ford’s Supply Chains

The participants in a supply chain are continuously making decisions that affect how they manage the five supply chain drivers. Each organization tries to maximize its performance in dealing with these drivers through a combination of outsourcing, partnering, and in-house expertise. In the fast-moving markets of our present economy a company usually will focus on what it considers to be its core competencies in supply chain management and outsource the rest. This was not always the case though. In the slower moving mass markets of the industrial age it was common for successful companies to attempt to own much of their supply chain. That was known as vertical integration. The aim of vertical integration was to gain maximum efficiency through economies of scale.

In the first half of the 1900s Ford Motor Company owned much of what it needed to feed its car factories. It owned and operated iron mines that extracted iron ore, steel mills that turned the ore into steel products, plants that made component car parts, and assembly plants that turned out finished cars.

In addition, they owned farms where they grew flax to make into linen car tops and forests that they logged and sawmills where they cut the timber into lumber for making wooden car parts. Ford’s famous River Rouge Plant was a monument to vertical integration—iron ore went in at one end and cars came out at the other end. Henry Ford in his 1926 autobiography, Today and Tomorrow, boasted that his company could take in iron ore from the mine and put out a car 81 hours later (Ford, Henry, 1926, Today and tomorrow , Portland, OR: Productivity Press, Inc.).

This was a profitable way of doing business in the more predictable, one-size-fits-all industrial economy that existed in the early 1900s. Ford and other businesses churned out mass amounts of basic products. But as the markets grew and customers became more particular about the kind of products they wanted, this model began to break down. It could not be responsive enough or produce the variety of products that were being demanded.

For instance, when Henry Ford was asked about the number of different colors a customer could request, he said, “they can have any color they want as long as it’s black.” In the 1920s Ford’s market share was over 50 percent but by the 1940s it had fallen to below 20 percent.

 Focusing on efficiency at the expense of being responsive to customer desires was no longer a successful business model.


Objectives of Supply Chain Management

The fundamental objective is to “add value”.

Supply Chain Management becomes a tool to help accomplish corporate strategic


>reducing working capital,

> taking assets off the balance sheet,

> Accelerating cash-to-cash cycles,

> increasing inventory turns, and so on.


Where the Supply Chain Creates Value

 It is identified five areas in which supply chain management can have a direct effect on corporate value. They are:

Profitable growth:

Supply chain management contributes to profitable growth by allowing assembly of “perfect orders,” supporting after-sales service, and getting involved in new product development. According to a research, inefficiencies in the supply chain can waste up to 25 percent of a company’s operating costs. With profit margins of only 3 to 4 percent, the consultants point out, even a 5-percent reduction in supply-chain waste can double a company’s profitability.

 Working-capital reductions:

Increasing inventory turns, managing receivables and payables, minimizing days of supply in inventory, and accelerating the cash-to-cash cycle all are affected by supply chain execution. Thompson cites the case of a consumer products company that took 20 minutes to make a product and five and a half months to collect payment for it. “If you can cut the cash cycle down, there are millions of dollars there,” he says.

 Fixed-capital efficiency:

 This refers to network optimization–for instance, assuring that the company has the right number of warehouses in the right places, or outsourcing functions where it makes more economic sense.

Global tax minimization:

 “There’s a ton of money here,” Thompson says, if companies look at assets and sales locations, transfer pricing, customs duties, and taxes.

 Cost minimization:

 This largely focuses on day-to-day operations, but it also may involve making strategic choices about such issues as outsourcing and process design.

A study by the management consulting firm of A.T. Kearney has come at the supply chain payback from another angle–the costs of not paying careful attention to the supply chain process. The Kearney consultants found that supply-chain inefficiencies could waste as much as 25 percent of a company’s operating costs. Thus, assuming even a relatively low profit margin of 3 to 4 percent, a 5-percent reduction in supply-chain waste could double a company’s profitability.

Factors in supply chain managment

Companies in any supply chain must make decisions individually and collectively regarding their actions in five areas:






  • Production—

What products does the market want? How much of which products should be produced and by when? This activity includes the creation of master production schedules that take into account plant capacities, workload balancing, quality control, and equipment maintenance.



  • Inventory—

Inventory is spread throughout the supply chain and includes everything from raw material to work in process to finished goods that are held by the manufacturers, distributors, and retailers in a supply chain. Again, managers must decide where they want to position themselves in the trade-off between responsiveness and efficiency. Holding large amounts of inventory allows a company or an entire supply chain to be very responsive to fluctuations in customer demand. However, the creation and storage of inventory is a cost and to achieve high levels of efficiency, the cost of inventory should be kept as low as possible.There are three basic decisions to make regarding the creation and holding of inventory:

  1. Cycle Inventory—

This is the amount of inventory needed to satisfy demand for the product in the period between purchases of the product. Companies tend to produce and to purchase in large lots in order to gain the advantages that economies of scale can bring. However, with large lots also comes increased carrying costs. Carrying costs come from the cost to store, handle, and insure the inventory. Managers face the trade-off between the reduced cost of ordering and better prices offered by purchasing product in large lots and the increased carrying cost of the cycle inventory that comes with purchasing in large lots.

  1. Safety Inventory—

Inventory that is held as a buffer against uncertainty.If demand forecasting could be done with perfect accuracy, then the only inventory that would be needed would be cycle inventory. But since every forecast has some degree of uncertainty in it, we cover that uncertainty to a greater or lesser degree by holding additional inventory in case demand is suddenly greater than anticipated. The trade-off here is to weigh the costs of carrying extra inventory against the costs of losing sales due to insufficient inventory.

  1. Seasonal Inventory—

This is inventory that is built up in anticipation of predictable increases in demand that occur at certain times of the year. For example, it is predictable that demand for anti-freeze will increase in the winter. If a company that makes anti-freeze has a fixed production rate that is expensive to change, then it will try to manufacture product at a steady rate all year long and build up inventory during periods of low demand to cover for periods of high demand that will exceed its production rate. The alternative to building up seasonal inventory is to invest in flexible manufacturing facilities that can quickly change their rate of production of different products to respond to increases in demand. In this case, the trade-off is between the cost of carrying seasonal inventory and the cost of having more flexible production capabilities. Location

  • Location—

Where should facilities for production and inventory storage be located? Where are the most cost efficient locations for production and for storage of inventory? Should existing facilities be used or new ones built? Once these decisions are made they determine the possible paths available for product to flow through for delivery to the final consumer.


  • Transportation—

This refers to the movement of everything from raw material to finished goods between different facilities in a supply chain. In transportation the trade-off between responsiveness and efficiency is manifested in the choice of transport mode.

Fast modes of transport such as airplanes are very responsive but also more costly. Slower modes such as ship and rail are very cost efficient but not as responsive.

Since transportation costs can be as much as a third of the operating cost of a supply chain, decisions made here are very important. There are six basic modes of transport that a company can choose from:


  1. Ship which is very cost efficient but also the slowest mode of transport. It is limited to use between locations that are situated next to navigable waterways and facilities such as harbors and canals.


  1. Rail which is also very cost efficient but can be slow. This mode is also restricted to use between locations that are served by rail lines.


  1. Pipelines can be very efficient but are restricted to commodities that are liquids or gases such as water, oil, and natural gas.



  1. Trucks are a relatively quick and very flexible mode of transport. Trucks can go almost anywhere. The cost of this mode is prone to fluctuations though, as the cost of fuel fluctuates and the condition of roads varies.


  1. Airplanes are a very fast mode of transport and are very responsive. This is also the most expensive mode and it is somewhat limited by the availability of appropriate airport facilities.



  1. Electronic Transport is the fastest mode of transport and it is very flexible and cost efficient. However, it can only be used for movement of certain types of products such as electric energy, data, and products composed of data such as music, pictures, and text.


These different modes of transportation and the location of the facilities in a supply chain, managers need to design routes and networks for moving products. A route is the path through which products move and networks are composed of the collection of the paths and facilities connected by those paths. As a general rule, the higher the value of a product (such as electronic components or pharmaceuticals), the more its transport network should emphasize responsiveness and the lower the value of a product (such as bulk commodities like grain or lumber), the more its network should emphasize efficiency.

  • Information—

Timely and accurate information holds the promise of better coordination and better decision making. With good information, people can make effective decisions about what to produce and how much, about where to locate inventory and how best to transport it.


The sum of these decisions will define the capabilities and effectiveness of a company’s supply chain. The things a company can do and the ways that it can compete in its markets are all very much dependent on the effectiveness of its supply chain.


–If a company’s strategy is to serve a mass market and compete on the basis of price, it had better have a supply chain that is optimized for low cost.


— If a company’s strategy is to serve a market segment and compete on the basis of customer service and convenience, it had better have a supply chain optimized for responsiveness.


Supply Chain Management Tomorrow

The future for Supply Chain Management looks very bright. This year, as well as last

Year, two major trends are benefiting Supply Chain Management operations. These are

  • Customer service focus
  • Information technology

Successful organizations must be excellent in both of these areas, so the importance of

Supply Chain Management and the tools available to do the job right will continue to



Supply-Chain Principles

If supply-chain management has become top management’s new “religion,” then it needs a doctrine. Andersen Consulting has stepped forward to provide the needed guidance, espousing what it calls the “Seven Principles” of supply-chain management. When consistently and comprehensively followed, the consulting firm says, these seven principles bring a host of competitive advantages.


The seven principles as articulated by Andersen Consulting are as follows:


  1. Segment customers based on service needs. Companies traditionally have grouped customers by industry, product, or trade channel and then provided the same level of service to everyone within a segment. Effective supply-chain management, by contrast, groups customers by distinct service needs–regardless of industry–and then tailors services to those particular segments.
  2. Customise the Supply Chain Management network. In designing their Supply

Chain Management network, companies need to focus intensely on the service

Requirements and profitability of the customer segments identified. The conventional

Approach of creating a “monolithic” Supply Chain Management network runs counter to

Successful supply-chain management.


  1. Listen to signals of market demand and plan accordingly. Sales and operations

Planning must span the entire chain to detect early warning signals of changing demand in ordering patterns, customer promotions, and so forth. This demand-intensive approach leads to more consistent forecasts and optimal resource allocation.


  1. Differentiate product closer to the customer. Companies today no longer can afford to stockpile inventory to compensate for possible forecasting errors. Instead, they need to postpone product differentiation in the manufacturing process closer to actual consumer demand.


  1. Strategically manage the sources of supply. By working closely with their key

Suppliers to reduce the overall costs of owning materials and services, supply-chain

Management leaders enhance margins both for themselves and their suppliers. Beating

Multiple suppliers over the head for the lowest price is out, Andersen advises. “Gain

Sharing “is in.


  1. Develop a supply-chain-wide technology strategy. As one of the cornerstones of successful supply-chain management, information technology must support multiple levels of decision making. It also should afford a clear view of the flow of products, services, and information.


  1. Adopt channel-spanning performance measures. Excellent supply-chain measurement systems do more than just monitor internal functions. They adopt measures that apply to every link in the supply chain. Importantly, these measurement systems embrace both service and financial metrics, such as each account’s true profitability.

The principles are not easy to implement, the Andersen consultants say, because they run counter to ingrained functionally oriented thinking about how companies organize , operate , and serve customers. The organizations that do persevere and build a successful

Supply chain have proved convincingly that you can please customers and enjoy growth by doing so.


Do it right first time makes you think about the Toyota principles, Kaizen and other strategies that have been deployed to improve manufacturing processes and enable production lot sizes of one unit.

Japanese companies have been forerunners to implement quality check procedures directly into the manufacturing and assembly process. The objective was to finish each single process step without defects thereby ensuring that following processes are not disturbed. What have they done to achieve this? Toyota pioneered the Total Quality Methods and provided every single employee with the responsibility for his process. If an error occurred he had the power to stop the production or assembly line, even if many fellow workers would be impacted. This responsibility sharpened the Operators sense for quality. Quality was measured at every single process step and depicted in process charts. Quality deviations could be spotted easily. Mistakes were allowed, but only once. Any occurrence was investigated to the root and actions have been taken to rectify the mistake such that it does not happen again. Teams have been put in place to continuously develop ideas for improvement. Performance feedback was given instantly to show the workers what they have achieved.

Why the intense, widespread interest in this emerging management technique? The answer is simple: Companies increasingly recognize the tremendous payoff potential in successful supply-chain management.


 They read about Wal-Mart’s leveraging of the chain to achieve a dominant position in the retail marketplace. They hear of companies like Dell Computer reconfiguring the supply chain to respond almost immediately to customized orders. They’re intrigued by the bold measures taken by M&M Mars to virtually eliminate standing inventory from the pipeline. The supply-chain payoff can come in many forms. It might be a reduction in transaction costs through eliminating unnecessary steps in moving product to market. It could be enhanced customer service that comes from closer co-ordination among sources and vendors upstream–and carriers, distributors, and customers downstream. Or maybe it’s the improved market share that flows from better customer service or lower costs. In any case, successful supply-chain management brings compelling bottom-line benefits. All you have to do is look at supply-chain leaders like Xerox, IBM, Chrysler, Nabisco, Procter & Gamble, and Becton-Dickinson, says David M. Bovet, a vice president of Mercer Management Consulting. “There is definitely a strong correlation between companies that are paying attention to the integrated supply chain and business success, “Bovet observes. The research and consulting firm of Pittiglio Rabin Todd & McGrath (PRTM) has attempted to quantify this correlation.

Through its comprehensive Integrated Supply Chain Benchmarking Study, PRTM found that best-practice SCM companies enjoyed a 45-percent total supply-chain cost advantage over their median competitors. Specifically, their supply-chain costs as a percentage of revenues were anywhere from 3 to 7 percent less than the median, depending on the industry.

Types of firms /organizations Supply Chain Management can be applied

Supply Chain Management could by implemented to all firms (manufacturing firms retailers, services, etc.) and public organizations that satisfy the following criteria:

  • Minimum Number of employees: 20 (at least 4 in management positions).
  • Strong management commitment to new ways of working and innovation.

Characteristics of firms/ organizations and service providers

The most important characteristic of firms that could apply SMC is the will to accept innovations and new methods of working. Of course there should be a physical movement of goods. From raw material to the final consumer, firms should also have an adequate managerial and organizational depth to capitalize the benefits that SCM brings to a business. Service providers should have a profound experience in organizing the supply chain using a sound methodology in applying organizational change. Service providers should also have to adapt into their solutions SCM software systems in order to facilitate the installation of the system into the organizational structure of a firm.



Software Types

Though some companies are content with data-capture and communication systems, other companies rely heavily on the third category of supply chain technology—business software.

 Computer software makes it possible to manage thousands of transactions and make intelligent decisions required to match distribution flow to demand. Software developers have devised a host of solutions to handle specific supply chain tasks.

For instance, there are warehouse management systems (WMS), which oversee the use of labour and equipment in a distribution center. This type of software first emerged at the United States in the mid-1970s, as an alternative to the construction of mechanized and automated warehouses. Today, it’s become the cornerstone of many supply chain initiatives.

 Another type of software commonly used in SCM is transportation management software (TMS). This application co-ordinates inbound shipments, manages delivery requirements, and selects carriers. Another popular solution–advance planning and scheduling (APS) software–allows manufacturers and retailers to gauge inbound and outbound inventory demand.