Supply Chain Management

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December 17, 2001 (Computerworld) -- In the simplest terms, supply chain management (SCM) lets an organization get the right goods and services to the place they're needed at the right time, in the proper quantity and at an acceptable cost. Efficiently managing this process involves overseeing relationships with suppliers and customers, controlling inventory, forecasting demand and getting constant feedback on what's happening at every link in the chain.

The supply chain involves several elements:

• Location. It's important to know where production facilities, stocking points and sourcing points are located; these determine the paths along which goods will flow.

• Production. An organization must decide what products to create at which plants, which suppliers will service those plants, which plants will supply specific distribution centers, and, sometimes, how goods will get to the final customer. These decisions have a big impact on revenue, costs and customer service.

• Inventory. Each link in the supply chain has to keep a certain inventory of raw materials, parts, subassemblies and other goods on hand as a buffer against uncertainties and unpredictabilities. Shutting down an assembly plant because an expected parts shipment didn't arrive is expensive. But inventory costs money too, so it's important to manage deployment strategies, determine efficient order quantities and reorder points, and set safety stock levels.

• Transportation. How do materials, parts and products get from one link in the supply chain to the next? Choosing the best way to transport goods often involves trading off the shipping cost against the indirect cost of inventory. For example, shipping by air is generally fast and reliable. Shipping by sea or rail will likely be cheaper, especially for bulky goods and large quantities, but slower and less reliable. So if you ship by sea or rail, you have to plan further in advance and keep larger inventories than you do if you ship by air.

Managing the Chain

Once you've determined all of the elements in the supply chain, how do you manage the chain? There are three main paths in the process:

• Product flow includes the movement of goods from a supplier to a customer, as well as customer returns.

• Information flow involves transmitting orders and updating the status of delivery.

• Financial flow consists of credit terms, payments and payment schedules, plus consignment and title ownership.

Juggling these elements involves record-keeping, tracking and analysis by many departments. Supply chain software, especially large, integrated packages, combines many different technologies to give a single view of supply chain data that can be shared with others.

SCM applications fall into two main categories: planning applications and execution applications. Planning applications determine the best way to route materials and the quantities of goods needed at specific points. When such applications work well, they make possible the "just-in-time" delivery of goods. Execution applications track financial data, the physical status and flow of goods, and ordering and delivery of materials.

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