What many don't realize is that a significant percentage of their total costs are tied up with the supply chain, especially for those businesses that outsource manufacturing. These include:
- Overhead costs associated with managing suppliers
- Cost of resolving quality management issues
- High inventory levels in case of under supply
- Logistics costs
- Lost sales from late deliveries
- Supply chain inflexibility and long lead times
Conversely, businesses that organize, streamline and manage their supply chains benefit from lower direct and indirect costs. This leads to increased revenue and answers the question, "What is supply chain management and why it is important?"
Supply Chain Management Definition
The term supply chain management (SCM) covers all the activities associated with managing an organization's procurement with the goal of:
- Reducing costs
- Improving efficiency
- Satisfying demand
Because there are costs associated with achieving these goals, it's essential that organizations devise and implement supply chain plans or strategies which determine service levels and long- and short-term procurement goals. These goals should link and be compatible with a business's corporate strategies.
Once such a strategy is in place, it's possible to make rational and informed decisions regarding how raw materials should be procured and finished goods delivered to customers. This includes guidelines on who the business sources from, the appropriate product quality standards and how goods are delivered. A SCM strategy helps supply chain managers determine the appropriate action to take when things go wrong, such as what to do when a supplier delivers late or how to deal with quality issues.
Important Aspects of SCM Strategy
While each organization has its own unique supply chain strategy, there are several common elements that need to be considered. These include:
The supply chain network structure:
This considers physical structures, such as manufacturing facilities, warehousing, outlets, and customer locations, as well as logistics and the organizational philosophy as to where and how each are structured and handled.
Legal and ethical standards:
The identification of legal standards related to procurement along with appropriate ethical standards to ensure the organization complies with its corporate responsibility and environmental pledges.
Supply chain software and technology:
Adoption of systems to monitor stocks, such as using barcoding or IoT devices for tracking locations and movements. Additionally, software solutions that offer supply chain visibility and the degree of software integration with other corporate systems.
Because the supply chain doesn't operate in a vacuum, decisions and strategies should align with the corporate philosophy and be presented in the same financial language.
The strategy should determine who the company does business with and require certain systems to be used by suppliers to manage product quality and deliveries.
Typical SCM Key Performance Indices
Key performance indices (KPIs) are crucial elements of a successful SCM strategy. They identify required performance standards and allow supply chain managers to measure performance and identify areas needing attention. Additionally, they are useful for measuring performance improvements. Common KPIs include:
- Cash to cycle time: The time between paying for raw materials and receiving payment for goods delivered, which is an important factor in determining working capital requirements.
- Perfect order rate: The number of orders delivered without errors, which is a crucial metric for organizations striving for perfection and often broken down further by function.
- Inventory turnover: The time it takes to sell the total inventory in dollars, which is another factor that affects working capital.
- GMROI: The gross margin return on investment, measuring the amount of gross profit earned on the cost of inventory used, which is a metric commonly used in retail.
Why Is SCM Important?
SCM performance has a direct effect on the organization's overall performance. From a cost control perspective, it's estimated that companies with extended global supply chains have between 80% and 90% of their costs tied up in their supply chains. Also, the increased complexity of modern supply chains caused by global sourcing, omni channel distribution and widespread markets mean SCM is essential.
Customers have become more demanding and expect retailers to have stock of what they want or will move on, causing a lost sale. If they order items online, they expect prompt, on-time delivery and easy return processes for unwanted purchases. Many manufacturers are dependent on just-in-time (JIT) manufacturing strategies that require delivery of components not only on time but also not before time, and in exactly the required quantity.
Omni channel retailers have to figure out the best way to combine the sometimes conflicting demands of brick-and-mortar stores and online retailing. Businesses need flexible and adaptable supply chains that are able to respond quickly to capitalize on opportunities offered by rapidly changing consumer practices.
SCM Software Solutions
SCM software needs to satisfy three basic requirements. Firstly, it must have the computing capability to successfully manage transactions in complex supply chains. Secondly, it needs a high degree of transparency so that the supply chain department can monitor what is happening and be able to proactively identify and attend to non-conforming suppliers. Added to that is the ability to track orders throughout the system from sales through to procurement and delivery. Finally, supply chain management solutions need advanced analytics for measuring and managing performance.
Many organizations appreciate the benefits of integrated ERP solutions that encompass all aspects of the business. Integrated solutions simplify processes and provide one view of transactions throughout. Cloud-based solutions offer increased computing capacity, scalability and world-wide internet access.
Leveraging Data with Advanced Supply Chain Analytics
Most supply chain solutions incorporate business analytics features that measure past performance. These can be broadly termed diagnostic analytics. Some take the next step of determining future trends by using predictive analytics to tap into the organization's data. These powerful tools help supply chain managers keep abreast of important economic indicators, such as shipping costs, currency variations and other inflationary factors.
But the most powerful analytics are those that tap into the wealth of information provided by organizational data, diagnostic analytics and prescriptive analytics to determine optimal supply chain management decisions. This exciting field has various names, such as artificial intelligence, machine learning, supply chain modeling and prescriptive analytics. It differs from other forms of analytics in that it models the organization and then uses organizational and external data to determine the best supply chain decisions. Examples include using prescriptive analytics to minimize supply chain disruption, determining optimal procurement strategies and identifying the most cost-effective distribution structures.
Benefits of a Coherent Supply Chain Strategy Supported by Prescriptive Analytics
Supply chain management is much more than simply managing suppliers on an ad hoc basis and as and when necessary. It's more about determining appropriate supply chain strategies and taking data-driven steps to implement those strategies. It's about looking beyond the performance of individual suppliers and using advanced analytics to establish the best ways to manage supply chain risk.
Through using advanced analytics, supply chain managers can reduce supply chain costs while simultaneously improving supply chain performance. They can develop coherent strategies and make data-driven decisions to improve supply chain performance and, in doing so, improve organizational profitability. This is why effective supply chain management is a crucially important aspect of operational performance.