Supply Chain Management (SCM): How It Works & Why It's Important

What Is Supply Chain Management (SCM)?

Supply chain management (SCM) is the monitoring and optimization of the production and distribution of a company’s products and services. It seeks to improve and make more efficient all processes involved in turning raw materials and components into final products and getting them to the ultimate customer. Effective SCM can help streamline a company's activities to eliminate waste, maximize customer value, and gain a competitive advantage in the marketplace.

How Supply Chain Management (SCM) Works

SCM represents an ongoing effort by companies to make their supply chains as efficient and economical as possible.

Typically, SCM attempts to centrally control or link the production, shipment, and distribution of a product. By managing the supply chain, companies can cut excess costs and needless steps and deliver products to the consumer faster. This is done by keeping tighter control of internal inventories, internal production, distribution, sales, and the inventories of company vendors.

SCM is based on the idea that nearly every product that comes to market does so as the result of efforts by multiple organizations that make up a supply chain. Although supply chains have existed for ages, a lot of companies didn't pay attention to them as a value-add to their operations until recently.

5 Phases of Supply Chain Management (SCM)

A supply chain manager's job is not only about traditional logistics and purchasing. They have to find ways to increase efficiency and keep costs down while also avoiding shortages and preparing for unexpected contingencies. Typically, the SCM process consists of these five phases:

1. Planning

To get the best results from SCM, the process usually begins with planning to match supply with customer and manufacturing demands. Companies must try to predict what their future needs will be and act accordingly. That means taking into account the raw materials or components needed during each stage of manufacturing, equipment capacity and limitations, and staffing needs.

Large businesses often rely on enterprise resource planning (ERP) software to help coordinate the process.

2. Sourcing

Effective SCM processes rely very heavily on strong relationships with suppliers. Sourcing entails working with vendors to supply the materials needed throughout the manufacturing process. Different industries will have different sourcing requirements. In general, SCM sourcing involves ensuring that:

• The raw materials or components meet the manufacturing specifications needed for the production of the goods.
• The prices paid to the vendor are in line with market expectations.
• The vendor has the flexibility to deliver emergency materials due to unforeseen events.
• The vendor has a proven record of delivering goods on time and of good quality.

SCM is especially critical when manufacturers are working with perishable goods.

3. Manufacturing

Using machinery and labor to transform the raw materials or components the company has received from its suppliers into something new is the heart of the supply chain management process. This final product is the ultimate goal of the manufacturing process, though it is not the final stage of SCM.

The manufacturing process may be further divided into sub-tasks such as assembly, testing, inspection, and packaging. During the manufacturing process, companies must be mindful of waste or other factors that may cause deviations from their original plans. For example, if a company is using more raw materials than planned and sourced for due to inadequate employee training, it must rectify the issue or revisit the earlier stages in SCM.

4. Delivery

Once products are made and sales are finalized, a company must get those products into the hands of its customers. A company with effective SCM will have robust logistic capabilities and delivery channels to ensure timely, safe, and inexpensive delivery of its products.

This includes having a backup or diversified distribution methods should one method of transportation temporarily be unusable. For example, how might a company's delivery process be impacted by record snowfall in distribution center areas?

5. Returns

The SCM process concludes with support for the product and customer returns.

The return process is often called reverse logistics, and the company must ensure it has the capabilities to receive returned products and correctly assign refunds for them. Whether a company is conducting a product recall or a customer is simply not satisfied with the product, the transaction with the customer must be remedied.

Returns can also be a valuable form of feedback, helping the company to identify defective or poorly designed products and to make whatever changes are necessary. Without addressing the underlying cause of a customer return, the SCM process will have failed, and returns will likely persist into the future.

Types of Supply Chain Models

Supply chain management does not look the same for all companies. Each business has its own goals, constraints, and strengths that will shape its SCM process. These are some of the models a company can adopt to guide its SCM efforts:

Continuous Flow Model

The continuous flow model relies on a manufacturer producing the same good over and over and expecting customer demand will show little variation. One of the more traditional supply chain methods, this model is often best for mature industries.

Agile Model

The agile model prioritizes flexibility, as a company may have a specific need at any given moment and must be prepared to pivot accordingly. This method works best for companies with unpredictable demand or custom-order products.

Fast Model

This model emphasizes the quick turnover of a product with a short life cycle. Using a fast chain model, a company strives to capitalize on a trend, quickly produce goods, and ensure the product is fully sold before the trend ends.

Flexible Model

The flexible model works best for companies affected by seasonality. Some companies may have much higher demand requirements during peak season and low volume requirements in others. A flexible model of supply chain management ensures that production can easily be ramped up or wound down.

Efficient Model

Companies competing in industries with very tight profit margins may strive to get an advantage by making their supply chain management process the most efficient. That could involve coming up with ways to do a better job of utilizing equipment and machinery, managing inventory, and processing orders.

Custom Model

If any model above doesn't suit a company's needs, it can always apply a custom model. This is often necessary for highly specialized industries with high technical requirements, such as an automobile manufacturer.

Example of Supply Chain Management (SCM)

Understanding the importance of SCM to its business, Walgreens Boots Alliance Inc. decided to transform its supply chain by investing in technology to streamline the entire process. That included using big data, collected from its 9,000 stores and 20,000 suppliers, to help improve its forecasting capabilities and better manage sales and inventory. In 2019, it appointed its first-ever chief supply chain officer.

Walgreens Boots Alliance also incorporated SCM into its environmental, social, and governance (ESG) initiatives. For example, the company began asking suppliers to fill in an online survey that asks questions about their ESG practices, such as whether they have an emissions reduction target in place and the types of materials they use.

The Bottom Line

A supply chain starts with the ordering of raw materials or components from a supplier and ends with the delivery of a finished product or service to the end consumer. In supply chain management, every link in that chain may offer an opportunity to add value or reduce inefficiency. A well-run SCM program can increase a company's revenues, decrease its costs, and bolster its bottom line.