Definition of supply chain management (SCM)


What is supply chain management (SCM)?

Supply chain management is the management of the flow of goods and services and includes all the processes that transform raw materials into final products. It involves actively streamlining a company’s supply-side activities to maximize customer value and gain a competitive advantage in the marketplace.

Key takeaways

  • Supply chain management (SCM) is the centralized management of the flow of goods and services and includes all the processes that transform raw materials into final products.
  • By managing the supply chain, companies can reduce excessive costs and deliver products to the consumer more quickly.
  • Good supply chain management keeps companies out of the headlines and away from costly recalls and lawsuits.

Supply chain management (SCM) explained

How Supply Chain Management (SCM) Works

Supply chain management (SCM) represents an effort by suppliers to develop and implement supply chains that are as efficient and economical as possible. Supply chains encompass everything from production to product development to the information systems required to run these companies.

Typically, SCM attempts to centrally control or link the production, shipping, and distribution of a product. By managing the supply chain, companies can reduce excessive costs and deliver products to the consumer more quickly. This is done by maintaining tighter control of internal inventories, internal production, distribution, sales, and inventories of the company’s suppliers.

SCM is based on the idea that almost all products that reach the market are the result of the efforts of various organizations that make up a supply chain. Although supply chains have been around for centuries, most companies have recently turned to them as an added value to their operations.

Five parts of SCM

At SCM, the supply chain manager coordinates the logistics of all aspects of the supply chain, which consists of five parts:

  • The plan or strategy
  • The source (of raw materials or services)
  • Manufacturing (focused on productivity and efficiency)
  • Delivery and logistics
  • The return system (for defective or unwanted products)

The supply chain manager tries to minimize shortages and keep costs low. The job isn’t just about logistics and inventory purchasing. According to Salary.com, supply chain managers “monitor and manage the overall supply chain and logistics operations to maximize efficiency and minimize the cost of the organization’s supply chain.”

Improvements in productivity and efficiency can have a direct impact on a company’s bottom line. Good supply chain management keeps companies out of the headlines and away from costly recalls and lawsuits.

SCM versus supply chains

A supply chain is the network of people, companies, resources, activities, and technologies that are used to make and sell a product or service. A supply chain begins with the delivery of raw materials from a supplier to a manufacturer and ends with the delivery of the finished product or service to the end consumer.

SCM oversees every point of contact for a company’s product or service, from initial creation to final sale. With so many places along the supply chain that can add value through efficiency or lose value through increased expenses, the right SCM can increase revenue, lower costs, and impact a company’s bottom line.

SCM example

Realizing the importance of SCM to its business, Walgreens Boots Alliance Inc. decided to transform its supply chain in 2016. The company operates one of the largest pharmacy chains in the US and needs to efficiently manage its supply chain to stay ahead of changing trends.

Walgreens invested in the technology side of its supply chain. You have implemented a forward-thinking SCM that synthesizes relevant data and uses analytics to forecast customer buying behavior, then works its way up the supply chain to meet expected demand.

For example, the company can anticipate flu patterns, allowing it to accurately forecast the inventory required for over-the-counter flu remedies, creating an efficient supply chain with little waste. With this SCM, the business can reduce excess inventory and all associated inventory costs, such as the cost of warehousing and transportation.

What is an example of supply chain management?

Supply chain management is the practice of coordinating the various activities necessary to produce and deliver goods and services to a company’s customers. Examples of supply chain activities can include design, agriculture, manufacturing, packaging, or transportation.

Why is supply chain management important?

Supply chain management is important because it can help you achieve various business goals. For example, controlling manufacturing processes can improve product quality, reducing the risk of recalls and lawsuits while helping to build a strong consumer brand. At the same time, controls over shipping procedures can improve customer service by avoiding costly shortages or periods of oversupply of inventory. In general, supply chain management offers several opportunities for companies to improve their profit margins and is especially important for companies with large and international operations.

What are the five elements of supply chain management?

Supply chain management has five key elements: planning, sourcing of raw materials, manufacturing, delivery, and returns. The planning phase refers to the development of an overall strategy for the supply chain, while the other four elements specialize in the key requirements to execute that plan. Companies must develop expertise in the five elements to have an efficient supply chain and avoid costly bottlenecks.

www.investopedia.com

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Mark Holland

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