The supply chain is a network of businesses that partner together to manufacture and deliver specific products or services. Suppliers make up the individual “links” of the chain and move a product along, from its original creation as raw material to assembly of the final product, and ultimately to delivery/consumption. Organizations are linked through either information or physical goods; physical goods are the most visible aspect to the chain, while information allows various business partners to coordinate the flow of materials up and down the supply chain.
It’s possible to regulate this flow of goods and services so that all the companies involved achieve maximum benefits. Supply chain management (SCM) is the supervision of activities within the supply chain. These activities involve production, shipment, and distribution, not only to the end consumer but between the suppliers themselves. SCM is increasingly become an important role in a variety of industries, including manufacturing, retail, technology, and healthcare.
Supply chain managers aim to develop and run supply chains in the most effective way possible, as well as:
- Improve trust and collaboration among supply chain partners
- Ensure inventory movement is efficient so the customer receives their product or service as quickly as possible
- Minimize costs and material shortages
- Improve inventory visibility along each section of the chain
- Maximize customer satisfaction
- Achieve a competitive advantage that can be sustained into the future
As a cross-functional approach, SCM additionally covers the logistics and information systems required to coordinate activities. It’s not just about the cost and movement of physical assets; a large aspect to today’s SCM involves the management of data. Analytical experts use software programs and other tools to study the data created by the chain process. They monitor sales, make future predictions, and ensure products are delivered as fast as possible. This often leads to recommendations for improving the quality and efficiency of operations.
The Development of Supply Chain Management
The concept of SCM is based on two main ideas:
- Every product that end users receive is the cumulative effort of a variety of organizations
- Traditionally, most organizations simply supervised what happened within their “four walls”, which resulted in inefficiency for both the consumer and the business
Supply chains have existed for a long time, but the core ideas behind SCM emerged especially in the 20th century for several reasons. Among the biggest influencers were growing attention to Japanese management practices such as Lean manufacturing, and the event of globalization. It wasn’t until the late 1980s that businesses even began to incorporate supply chain activities on a large scale. Walmart and Procter & Gamble were the first major corporations to work together, and are considered to be the classic example of supply chain collaboration. By sharing their information and automating the billing and payment process, the two businesses obtained lower costs. Once they were able to demonstrate that there were benefits to these types of partnerships, many other companies followed suit.
Globalization made a large impact on supply chains. Companies began to extend their supply chains internationally and took advantage of other countries’ lower wages, as well as the ability to report profits in places that had lower corporate taxes. The globalization era of supply chain management is characterized by reduced costs, increased competitive advantage, and added value. Consumers benefited as well as they gained access to cheaper services, and products they had not seen or heard of before.
In the 1950s and 60s, the principles of Lean manufacturing were developed by the Toyota Motor Corporation in Japan. These revolutionary production methodologies included goals such as maximizing efficiency, improving quality, and eliminating waste, and became known as the Toyota Production System (TPS). They are much like the goals that supply chain managers aim to achieve; effective SCM allows cost, waste, and time to be reduced in the production cycle. Today, many supply chain managers have incorporated Lean manufacturing methods into their operations.
An important concept that the Toyota Production System introduced is just-in-time manufacturing. Just-in-time systems don’t attempt to predict customer demand; instead, they produce for actual customer demand and create what is exactly needed only when it’s needed. Many supply chains have adopted this mindset, which is also known as a “pull” system, as a means to prevent waste and save on costs.
Core Components to SCM
There are several central elements to supply chain management that ensure success. They are interdependent; all together, they create a smooth system and prevent any gaps, weak links, or other types of problems in the supply chain.
The five core components include:
- Creating a plan. The first step to effective SCM is to identify demand and supply trends in the market and finalize business-specific strategies to navigate these trends. Many companies create a blueprint or roadmap as they consider the pros and cons, and determine metrics for all aspects of production. A proper management plan makes it possible to achieve long-term benefits, meet company goals, and deliver value to customers.
- Sourcing raw materials or services. Supply chain management involves selecting the suppliers needed to create the product/service, then monitoring the supplier relationship. This includes managing inventory, payments, orders, and receiving. Materials should be obtained at cost-effective prices and in a timely manner, and should be of high quality, as all of these make an impact on the reputation of each individual company within the supply chain.
- Manufacturing. This section encompasses not only the production of goods, but also quality testing, packaging, and the final preparation/schedule for delivery. Alongside a focus on efficiency and productivity, a detailed account of inventory must be kept.
- The delivery of goods. Transportation is vital to supply chain management, and includes both the delivery of raw materials for production and the delivery of the final product to the market. Timely, safe, and secure transportation is essential; the aim is to achieve minimal loss or damage during transit. Two aspects to secure transportation are efficient invoicing and well-managed logistics.
- The return of goods. No business is perfect, and in certain circumstances products are bound to be unwanted, defective, or produced in excess. To ensure a smooth process and positive reputation, SCM creates a way for customers to return their goods and acknowledges complaints. Additionally, a return process should be in place all along the supply chain, not just for the end product; if it’s noticed that raw material is defective, that material should be returned to the original supplier before it is incorporated into manufacturing.
Supply Chain Legislation and Compliance Requirements
Although a global supply chain provides many benefits for a business, conducting widespread operations can come with challenges. Many governing bodies, including the European Union and the United States government, have created reporting requirements for companies that handle or manufacture physical products. These requirements also extend to third parties that engage with the company’s supply chain.
Many companies, such as Walmart, have taken advantage of lowered costs and wages in other countries. Unfortunately, workers may be underpaid or treated unfairly in these countries. Human rights violations and other social problems can occur in supply chains, and these present a great risk to reputations. For example, recent accidents such as factory fires and the Savar building collapse in 2013, which killed more than a thousand people, have shed light on the long hours, poor treatment, and servitude that some workers in other countries have suffered. Companies who included these garment factories as suppliers in their supply chains received a large hit to their reputations, and were often boycotted.
Currently, there is a growing demand for companies whose supply chains make environmentally sound choices, protect human rights, and cut ties with any supplier that conducts harmful operations. There has also been a recent interest in companies that utilize locally produced materials.
Lawmakers have passed official legislation that regulates supply chains and the materials that companies may or may not include in their operations. Although there are a wide variety of laws that may impact a business, a few common examples of supply chain legislation include:
- The Dodd-Frank Act. Section 1502 of this US law includes a requirement that companies which use “conflict minerals,” which are tantalum, tungsten, tin, and gold, must enact a review of their supply chain to ensure that these minerals are not from the Democratic Republic of Congo (DRC). In the DRC, the purchase of these conflict minerals often funds armed groups and warfare. Companies must publicly report their due diligence and have these reports audited by independent parties.
- The UK’s Modern Slavery Act. A “Transparency in Supply Chain” provision is included in this act, which overall attempts to eliminate slavery. Companies in the UK must have a description on their website about their efforts to ensure that slavery is not used by any of the suppliers within their supply chain.
- The EU’s Registration, Evaluation, Authorization, and Restriction of Chemicals (REACH), which regulates the use of potentially dangerous chemicals in electronics, furniture, clothing, paint, and more. If a company makes or sells a product that contains a restricted chemical, they must prove to the European Chemicals Agency that the product is indeed safe.
- California’s Transparency in Supply Chains Act, which aims to eradicate human trafficking. Companies that fall under certain requirements must include a statement on their website that indicates their “efforts to eliminate slavery and human trafficking from [their] direct supply chain for tangible goods offered for sale.”
When a company creates a strategy for supply chain management, extensive research must be conducted on applicable legislation. Compliance to these laws not only protects a company’s reputation, it also protects the livelihood of workers around the world.
The Significance of Supply Chains
Almost every single thing we use or interact with daily is available to us due to effective and harmonious supply chain management. Organizations are increasingly finding that in order to successfully compete in the global market, they must maintain sufficient supply chains. Although these chains can become quite complicated, the correct management of them is essential to the success and efficiency of a business.
SCM should aim for an integrated approach that utilizes information systemit's bs as much as possible as the movement of materials is coordinated. Supply and demand trends are difficult to navigate, but SCM can help execute an effective plan. By adopting the core components of supply chain management and ensuring compliance to legislation, businesses will ensure that the timely delivery of goods, and high customer satisfaction, is consistently achieved.
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- Peter Drucker: The Founder of Modern Management Studies
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