Supply Chain Management

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.

A relatively new SCM option involves Web-based software with a browser interface. Several major Web sites now offer auctions and other electronic marketplaces for buying and selling goods and materials. Also, Web-based application service providers are now promising to provide part or all of the SCM services for companies that rent their services.

SCM is so big that it can be difficult to plan the deployment of such a system. Just remember, a chain connects one link to the next, and an SCM implementation can proceed similarly. Each added link brings more efficiencies. When all of the links are in place, and when the information, goods and finances are flowing properly, the benefits are enormous. This is truly a case in which the whole is greater than the sum of its parts.

Implementation of Supply Chain Management
Typical Functional Silos

Business Processes

Sales and marketing Technical Logistics Manufacturing Purchasing Finance and accounting
Customer relationship management Account management Requirements definition Requirements definition Manufacturing strategy Sourcing strategy Customer profitability
Customer service management Account administration Technical service Performance specifications Coordinated execution Priority assessment Cost to serve
Demand management Demand planning Process requirements Network planning Capability planning Sourcing Trade-off analysis
Fulfillment Special orders Environmental requirements Distribution management Plant direct Selected supplier(s) Distribution cost
Manufacturing flow management Packaging specifications Process stability Prioritization criteria Production planning Integrated supply Manufacturing cost
Procurement Order booking Material specifications Inbound flow Integrated planning Supplier management Materials cost
Product development and commercialization Business plan Product design Movement requirements Process specifications Material specifications Research and development cost

Source: Adapted from the article “Supply Chain Management: What Does It involve?” in the Fall 2001 issue of Supply Chain & Logistics Journal, by Douglas M. Lambert, a professor of marketing and logistics at The Ohio State University’s Fisher College of Business (

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Copyright © 2001 IDG Communications, Inc.

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