What Is Supply Chain Management?
Since the introduction of computer into the workplace there has been an expectation that the manager could push a button and the computer would magically churn out results that humans used to painfully labour over. Well now that is a virtual reality though no system is ever that perfect "MIT's definition is integrated supply chain mangement is a process-orientated, integrated approach to procuring, producing, and delivering products and services to customers. ISCM has a broad scope that includes sub-suppliers, suppliers, internal operations, trade customers, retail customers, and end users. It covers the management of material, information, and funds flows."
A supply chain is the process of moving goods from the customer order through the raw materials stage, supply, production, through a network of facilities and distribution options to customers."
All organizations have supply chains of varying degrees, depending upon the size of the organization and the type of product manufactured. These networks obtain supplies and components, change these materials into finished products and then distribute them to the customer.
Managing the chain of events in this process is what is known as supply chain management. Effective management must take into account coordinating all the different pieces of this chain as quickly as possible without losing any of the quality or customer satisfaction, while still keeping costs down.
The first step is obtaining a customer order, followed by production, storage and distribution of products and supplies to the customer site. Customer satisfaction is paramount. Included in this supply chain process are customer orders, order processing, inventory, scheduling, transportation, storage, and customer service. A necessity in coordinating all these activities is the information service network.
In addition, key to the success of a supply chain is the speed in which these activities can be accomplished and the realization that customer needs and customer satisfaction are the very reasons for the network. Reduced inventories, lower operating costs, product availability and customer satisfaction are all benefits which grow out of effective supply chain management.
The decisions associated with supply chain management cover both the long-term and short-term. Strategic decisions deal with corporate policies, and look at overall design and supply chain structure. Operational decisions are those dealing with every day activities and problems of an organization. These decisions must take into account the strategic decisions already in place. Therefore, an organization must structure the supply chain through long-term analysis and at the same time focus on the day-to-day activities.
Furthermore, market demands, customer service, transport considerations, and pricing constraints all must be understood in order to structure the supply chain effectively. These are all factors, which change constantly and sometimes unexpectedly, and an organization must realize this fact and be prepared to structure the supply chain accordingly.
Structuring the supply chain requires an understanding of the demand patterns, service level requirements, distance considerations, cost elements and other related factors. It is easy to see that these factors are highly variable in nature and this variability needs to be considered during the supply chain analysis process. Moreover, the interplay of these complex considerations could have a significant bearing on the outcome of the supply chain analysis process.
There are six key elements to a supply chain:
- Production
- Supply
- Inventory
- Location
- Transportation
- Information
- Production
- Supply
- Inventory
- Location
- Transportation
- Information
The following describes each of the elements:
1. Production
Strategic decisions regarding production focus on what customers want and the market demands. This first stage in developing supply chain agility takes into consideration what and how many products to produce, and what, if any, parts or components should be produced at which plants or outsourced to capable suppliers. These strategic decisions regarding production must also focus on capacity, quality and volume of goods, keeping in mind that customer demand and satisfaction must be met. Operational decisions, on the other hand, focus on scheduling workloads, maintenance of equipment and meeting immediate client/market demands. Quality control and workload balancing are issues which need to be considered when making these decisions.
2. Supply
Next, an organization must determine what their facility or facilities are able to produce, both economically and efficiently, while keeping the quality high. But most companies cannot provide excellent performance with the manufacture of all components. Outsourcing is an excellent alternative to be considered for those products and components that cannot be produced effectively by an organization's facilities. Companies must carefully select suppliers for raw materials. When choosing a supplier, focus should be on developing velocity, quality and flexibility while at the same time reducing costs or maintaining low cost levels. In short, strategic decisions should be made to determine the core capabilities of a facility and outsourcing partnerships should grow from these decisions.
3. Inventory
Further strategic decisions focus on inventory and how much product should be in-house. A delicate balance exists between too much inventory, which can cost anywhere between 20 and 40 percent of their value, and not enough inventory to meet market demands. This is a critical issue in effective supply chain management. Operational inventory decisions revolved around optimal levels of stock at each location to ensure customer satisfaction as the market demands fluctuate. Control policies must be looked at to determine correct levels of supplies at order and reorder points. These levels are critical to the day to day operation of organizations and to keep customer satisfaction levels high.
4. Location
Location decisions depend on market demands and determination of customer satisfaction. Strategic decisions must focus on the placement of production plants, distribution and stocking facilities, and placing them in prime locations to the market served. Once customer markets are determined, long-term commitment must be made to locate production and stocking facilities as close to the consumer as is practical. In industries where components are lightweight and market driven, facilities should be located close to the end-user. In heavier industries, careful consideration must be made to determine where plants should be located so as to be close to the raw material source. Decisions concerning location should also take into consideration tax and tariff issues, especially in inter-state and worldwide distribution.
5. Transportation
Strategic transportation decisions are closely related to inventory decisions as well as meeting customer demands. Using air transport obviously gets the product out quicker and to the customer expediently, but the costs are high as opposed to shipping by boat or rail. Yet using sea or rail often times means having higher levels of inventory in-house to meet quick demands by the customer. Using the correct transport mode is a critical strategic decision. Above all, customer service levels must be met, and this often times determines the mode of transport used. Often times this may be an operational decision, but strategically, an organization must have transport modes in place to ensure a smooth distribution of goods.
6. Information
Effective supply chain management requires obtaining information from the point of end-use, and linking information resources throughout the chain for speed of exchange. Overwhelming paper flow and disparate computer systems are unacceptable in today's competitive world. Fostering innovation requires good organization of information. Linking computers through networks and the internet, and streamlining the information flow, consolidates knowledge and facilitates velocity of products. Account management software, product configurators, enterprise resource planning systems, and global communications are key components of effective supply chain management strategy.
The Issues
The supply chain has also been called the value chain Just like anything else, supply chain management is no panacea, nor should it be embraced as a religion. It is an operational strategy that, if implemented properly, will provide a new dimension to competing: quickly introducing new customerized high quality products and delivering them with unprecedented lead times, swift decisions, and manufacturing products with high velocity. Software companies have jumped on the bandwagon and attempted to claim SCM as their own. Information transfer is critical to swiftly moving parts through the chain of processes, but information is only one of six key elements.
Pragmatic Applications
Fast delivery is critical in most markets today. Many companies address this market demand by carrying higher inventories. Higher levels of inventory are often maintained because a company is unable to produce the material within the time demanded by the market. Analyzing the processes in the supply chain can identify the causes and facilitate solutions to reduce overall throughput time. Compressing time in the chain of events from the time a customer places an order until the order is satisfied can provide a competitive edge without the burden of carrying excessive inventory.
There are six basic elements to the strategic and operational management of the supply chain:
The task at hand is to optimize the elements for velocity, flexibility, quality cost and customer service. We suggest companies start with a rigorous analysis of the current supply chain, assess their supply chain competitiveness, build a vision of what the new supply chain should look like, identify the performance gap, and develop an action plan to close the gap.
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