Supply Chain Management (SCM) Explained for Dummies

What is supply chain management? 

Supply chain management (SCM) refers to managing the flow of goods and services from raw material suppliers, via manufacturers and retailers, to end-users (customers). Put differently, SCM involves a centralised management process which oversees the transformation of raw materials into a final usable product.  

The way supply chain management works 

Supply chain management (SCM) applied by suppliers aims to manage the control of goods and services through production, development, and distribution, implementing supply chains that are as economical and efficient as possible. The ultimate goals of SCM are to satisfy product demand and to maximise value for customers. Simply put, supply chain management is used to meet goals that benefit suppliers and customers (end-users).  

SCM is a predefined process, typically comprising two key supply areas, namely physical flow, and flow of information. 

• Physical flow

Physical flow includes the transformation of raw materials into products, the transportation of the products into storage facilities, and the final distribution of the products to retailers. 

• Flow of information 

Information systems gather data to direct the physical flow of products and to coordinate short-term and long-term goals of the production processes. The information flow involves keeping tighter control of inventories, internal production, distribution, sales, and the inventories of business retailers. 

Supply chain management is based on the concept that almost every product that is available on the market results from the plans and efforts of different organisations that represent a supply chain. 

Objectives of supply chain management 

As a whole, the objective of supply chain management (SCM) is to improve the efficiency of all the elements involved in the supply chain, from the manufacturing process to delivering the end product to the customer. 

The objectives can be categorised into three main categories: quality customer service, reduced operating costs, and improving the financial position of the organisation. 

Quality customer service 

Quality customer service includes, amongst others, aspects such as: 

• The correct quantity of a product or variety of products.  
• The required products are at the right location. 
• To provide products on time. For instance, a customer will not be satisfied when a product is delivered after the date the product was needed.  
• After-sale support. For example, to attend swiftly to complaints about products or honour product guarantees. 
• Quality customer service is also based on an overall improvement in efficiency, flexibility, and agility, increasing the rate of production, and optimising the value chain.  

Reduced operating costs 

Simfoni, a company claiming, ‘we are revolutionizing how businesses spend,’ explains that there are four ‘cost reduction essentials’ every business should know, namely: 

• ‘Cost reduction must involve reducing and not cutting out costs entirely. 
• The reduction measures should not affect the processes and product quality. 
• The manufacturing process should be changed without affecting product quality or nature. 
• Cost reduction should never be a short-term process; rather it should be more of a long-term solution.’ 

To reduce operating costs, a business needs to reduce the following three types of costs: purchasing costs, production costs, and total supply chain costs.  

• Reduce purchasing costs

This type of reduction is also referred to as the reduction of procurement costs. There are numerous ways to reduce purchasing costs. For example: 

Request discounts from suppliers (vendors). If a business qualifies for a discount on purchases, the conditions of the discounts must be included in the contract between the business and the specific supplier. 

Check the inventory and evaluate the products in your store/warehouse, asking, amongst others, the following questions: 

• Do you use every product you order? 
• Are some purchases really necessary? 
• What is the quality of the products supplied by vendors? 

Apply vendor relationship management 

This type of management includes the following actions: improve communication between the business and vendors, evaluate their performance and let them agree on specified standards. Furthermore, order only from approved suppliers. 

Educate and train staff on procurement and spending processes. 

 Incorporate well-defined procurement policies that can easily be adhered to.  

• Reduce production costs

Production costs refer to the costs incurred by a business to produce goods (products) and render services. In accounting, production costs are referred to as ‘cost of goods sold (COGS).’ 

There are various reasons why it is important to reduce the production costs of a business. For instance: 

• It can help generate and increase the profits of a business. 
• It helps businesses to produce more affordable products for customers. 
• It strengthens the competitiveness of a business in the marketplace. 
• It enables firms to protect the environment by using fewer resources. 

Basically, production costs comprise direct costs and indirect costs. 

• Direct costs refer to costs that can be directly connected to production on a per-unit basis. These costs include direct material costs, direct labour costs, consumables, and general overhead costs for the premises, like electricity and water, and other costs related to production. 
• Indirect costs are incurred during production but cannot be tied directly to the production of finished goods on a per-unit basis. Indirect costs include inter alia, the following costs: administrative costs, office supplies, salaries and wages, maintenance costs, and cleaning. 

Although often used interchangeably, production costs and manufacturing costs are not alike. Production costs refer to all the costs (direct and indirect) mentioned above while manufacturing costs comprise only those costs used to manufacture goods physically. For instance, labour, consumables, and raw materials.  

There are numerous ways to reduce production costs, including the following methods: 

• Apply continuous improvement programs like eliminating redundant paperwork, re-evaluating procedures, and a quality management strategy. 
• Optimise the use of technology, including software that can manage inventory, employees’ performances, and security. 
• Make supply chains and procurement more efficient and reduce supply costs. 
• Eliminate waste to reduce production costs and improve efficiency. For example, be aware of material waste from scrap caused by ineffective processes or human error. 
• Motivate employees to increase their production performance. It is important to treat employees fairly regarding salaries, vacations, paid leave, and retirement plans. Use a performance management system to increase productivity. Also, provide training opportunities. 
• Optimise space for storage and manufacturing. 
• Keep a regular record of production costs on a spreadsheet, allowing you to exactly know what your costs entail and what is necessary to reduce your production costs.  

• Reduce total supply chain costs

Visibility is crucial in reducing costs in the bigger supply chain strategy. This implies that businesses need to know where their inventory is at any given point in time. To boost and streamline the supply chain, companies need to trace their products from point A to point B. 

Furthermore, manufacturers and retailers need supply chain managers to provide networks that meet customer service goals and needs at the least cost possible. Efficient supply chains enable businesses to be more competitive in the marketplace. 

Improve the financial position of a business

The third objective of supply chain management (SCM) is to improve the financial position of an organisation/company.  

Supply chain managers can improve the financial position of a business in several ways, including: 

• Decrease fixed assets 

Supply chain managers allow firms to reduce the use of fixed assets such as plant and equipment, warehouses, and transportation vehicles. 

• Increase profit leverage  

By controlling and reducing supply chain costs, supply chain managers help businesses to increase their profit leverage. 

• Increase cash flow 

Supply chain managers expedite the flow of products, allowing firms to sell products sooner to customers, and enabling the firms to have a healthy cash flow. 

Elements of supply chain management 

Supply chain management consists of five key elements:  

1. Planning (the developing of a comprehensive strategy for the supply chain) 
2. Sourcing raw materials 
3. Manufacturing  
4. Delivery  
5. Returns 

The last four elements concentrate on the requirements to execute the strategy which was developed in the plan.  

Types of supply chain management 

Businesses use different models to manage their supply chains, depending on the nature and goals of the business. 

The following six types are examples of supply chain models that can be used by companies: 

1. Continuous flow model 

This is one of the most traditional supply chain models. This model is often best for mature businesses that operate with stability. It is a model that requires a continuous flow of goods and is based on the stability of supply and demand in the market.  

2. Fast model

The fast model (also called the fast chain model) is suitable for businesses that provide products with short life cycles. This model is mostly used by businesses that sell goods which are associated with a certain trend. A firm aims to capitalise on the specific trend by quickly producing goods and making sure that the goods are fully sold before the trend ends. 

3. Efficient model 

The efficient chain model is used in industries which are extremely competitive with very tight profit margins. The main goal is to maximise efficiency by utilising plant and equipment most effectively and to manage inventory and the processing of orders most efficiently. 

4. Flexible model 

The flexible model is suitable for businesses impacted by seasonality, enabling them to handle high demand in peak season and quickly adjust to low volume requirements during a low period. This type of supply chain model enables managers to ensure that production can quickly be escalated or wound down.  

5. Agile model 

The agile model is suitable for businesses providing speciality products or customer-order products with unpredictable demand. This model prioritises flexibility and is known for the expertise it needs to transport the products from point A to point B. 

6. Custom model 

The custom model, also called the custom-configured model, requires custom setups in the assembly and production stages to suit the needs and requirements of a specific company. It is typically used in highly specialised industries such as the automotive industry. 

Importance of supply chain management 

There are numerous reasons why SCM is considered important. For instance: 

• By overseeing the supply chain, companies can reduce excess costs and provide products to the end-user (customer) faster, more efficiently, and cheaper.  
• It provides opportunities for businesses to improve their profit margins.  
• SCM fulfils an important role in job creation. Supply chains include areas such as transportation, warehousing, inventory management, packaging, and logistics information. All these areas provide numerous job opportunities. 
• Supply chain management allows individuals access to basic life necessities such as clothing, food, medicines, and health care products, to name a few. 
• The energy supply chain transforms raw materials into usable electrical energy, enabling people and businesses to use the energy for light, heat, and air conditioning and to freeze certain products and preserve perishables. 

Frequently Asked Questions

What is supply chain management (SCM) and why is it important?

Supply chain management (SCM) oversees the flow of goods and services from raw materials to the final product reaching customers. It is crucial for reducing costs, improving efficiency, and ensuring businesses can meet consumer demand effectively.

What are the key objectives of supply chain management?

The main objectives of SCM include improving customer service, reducing operating costs, and strengthening a business’s financial position by optimizing production, logistics, and inventory management.

What are the different types of supply chain models?

Businesses use various SCM models based on their needs, including the continuous flow model, fast model, efficient model, flexible model, agile model, and custom model, each tailored to specific industry demands.