These are times when customers have the upper hand. They are demanding more because it is clear that companies will have to keep buyers happy if they want to survive. With competition heating up for every product, organizations are trying everything to retain their customers. Any deficiency in service can make people go to another brand. Customers are constantly expecting lesser prices and faster deliveries. This is where supply chain management plays a crucial part. Before we look at what comprises this function, we must know what it is and its importance to the business.
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Understanding The Process From Logistics And Supply Chain Management Courses
As taught in the supply chain management courses, the supply chain is a network of processes, individuals, resources, and technology involved in the manufacturing and sale of products. The chain starts with the procurement of raw materials from suppliers. In many industries, these materials must be refined or processed into parts that combine to create the final product. Once they make an item, they must deliver it to the customer promptly. The processing of orders and the stocking of materials are also part of the supply chain.
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Why Do Companies Need Efficient Supply Chain Management?
From the above description of the supply chain, it is clear that a company’s most essential functions fall in this department. Raw material purchase for production is a critical function. One cannot leave it without proper controls. A firm must purchase these items at a cost that will ensure that the final product will remain competitive in the market. Those attending supply chain courses can tell you the importance of purchasing raw materials of the highest quality. Any failure in this will result in a finished product that disappoints the customers.
The other important part is the production which companies must handle well and economically. Stocking products is a very critical function in the supply chain. Warehouse heads must stock raw materials and finished goods so that their quality doesn’t suffer in any manner. They must also be easy to move from the warehouse so as not to delay production and order fulfillment. Companies must make sure that they don’t carry excess inventory, which results in extra spending.
Logistics is also part of SCM. Companies must find quick and economical ways of transporting their goods safely. The other important aspect that many companies consider very important is the return policy of the company. Supply chain managers must ensure that the return and replacement of goods are done smoothly. Logistics and supply chain management courses also teach students to be aware of the risks involved in the process. So many functions in the supply chain are prone to various risks that can derail the whole process.
With the online retailers offering same-day delivery and no-condition return policies, companies must optimize their supply chain system in the best manner. This is why supply chain management is critical for all companies, whether B2B or B2C. By now, we understand that SCM is all about managing flows. But it is not just product flow that comes under supply chain management. Let us see the different flows in this process.
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Flows In Supply Chain
The Product Flow
This is probably what first comes to anyone’s mind when they think of the supply chain. Everything else works around the flow of material from the supplier to the customer. This can include vendors, transport agencies, warehouses, manufacturers, distributors, retailers, and customers. In many factories, the customer can be internal where parts are assembled and given to another unit where these are combined to make the final product. What is essential is that the flow happens without any disruption. In the event of a product return, the flow is in the reverse direction.
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The Financial Flow
Supply chain management courses teach us that there are two types of financial flows in a supply chain. The first one is that of cost and investment, which flows downstream. There are costs involved at every stage of the supply chain. Optimizing this can contribute significantly to the profitability of a company. There is also an investment into the supply chain infrastructure, which also forms part of the returns a company earns on its investments. The second type of flow is the revenue from the sale of products, which happens in the reverse direction.
The Information Flow
Proper flow of information is vital in a supply chain. There are various external entities in this process, and without an efficient communication system in place, things could go awry very fast. Information about raw material and transport availability is crucial to planning production. Store managers should update details of items available in the warehouse to ensure product availability to fulfill orders. Retailers and distributors must also pass timely information about item requirements so that customers get their orders delivered on time.
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Those who have attended the logistics and supply chain management courses know about the value flow in a supply chain. A material that travels through the supply chain gathers value at each stage. It arrives as raw material at the manufacturing unit, where it is processed to be ready for use in production. When it is used in manufacturing, it becomes a product that the customers need. Further, it acquires value by packaging. Even at the last point, it earns value because the product is kept where consumers can easily access it.
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Risk is associated with almost all activities in this world. The dangers can be internal or external. Operations and processes can be the reason for internal risks. External risks include a fall in demand for the product or constraints in supplies caused by problems in the company. Environmental risks are also due to external factors. Business risks and physical risks can be associated with a supplier. Business risks can occur due to change in personnel, reporting structures, or business processes. Poor planning is also a risk that arises within the organization.
Now that we have seen the process of supply chain management as taught by the supply chain courses, it is time to see what components make up the supply chain. Looking at the elements will allow us to know why efficient management of the process is very important.
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Components Of Supply Chain Management
Though experts can tell us about different supply elements, seven components commonly make up the supply chain process. They are – Planning, Information, Sourcing, Inventory, Production, Transportation, And Return of goods. Every person aspiring to become a supply chain manager must know these in detail.
Supply chain planning can simply be explained as planning the supply of materials caused by demand from customers. But the process is not so easy as told. Every aspect of the supply chain must be planned very carefully. One must start with planning the demand moving on to the source, manufacturing, storing, and delivery. As each of these is highly important, one must look at them separately in detail. As with everything in a business, we must start with the customer’s end from where the demand comes.
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a) Demand Planning
The market demand for a product will dictate all activities in a company. If organizations can know the demand accurately, they can plan production, raw material purchase, and storage of goods in a better manner. This means that demand planning is the basis for all other planning activities. Using the historical data of the company itself is an excellent way to forecast demand. Latest technologies like predictive analytics are helping organizations know precisely how much product will be in need at different times of the year.
b) Supply Planning
Once the demand is known, it is easy to decide what quantity of items must be produced. Once this quantity is arrived at, the next step is to plan the purchase of raw materials. This is called a supply plan. It is not just raw materials that a company must keep ready. One must also check if all the other items like packaging, labels, etc., are available to deliver the goods in the best manner. The purchasing team must ensure that everything needed is available by the time the production starts.
c) Production Planning
The production team must plan the manufacture of the required products. They must ensure that it is possible to deliver the goods to the customers on the committed dates. The department must make sure that there is enough production capacity to give timely delivery to the customer. Companies must produce only items according to orders received to avoid wastage. Supply chain management helps do this with excellent visibility across the various supply chain functions.
d) Sales & Operations Planning
This planning intends to bring together all entities concerned with the delivery of goods to the customer. The sales team must bring with them the expected market demand for a period. Those doing the production must plan the manufacture based on sales forecasts done by the sales team. The integration of both teams helps the company to reduce over-production and wastage. It also makes sure that customers get the product they ordered on time.
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There can be no doubt that sourcing is the next important step in the supply chain. Supply chain management courses teach us that sourcing doesn’t just mean the purchase of raw materials. There are many elements in sourcing that the sourcing manager must attend to. The quality and price of raw materials can have a lot of impact on the finished goods and their acceptability in a market. This is why one must understand this activity in detail. Many external entities and factors are involved in this function. Let us see the different steps in sourcing.
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a) Finding A Supplier
This is the first step in sourcing. Companies that have a stable and regular business need not perform this step. But for new companies and those who are in the growing phase, this is a critical activity. One must look at the experience and reputation of the supplier. It is also necessary to see if the vendor can offer all the items or at least many items that are needed. They must also offer flexible payment methods. Purchase managers must also check the quality of products and services provided by the company.
b) Finalizing The Source
Once the company has identified the supplier, it is best to meet the person and discuss the terms for business. Those attending the logistics and supply chain management course learn that it is best to discuss all details at the beginning so that both parties know what they are getting into. Important aspects like payment terms, delivery schedules, and quality requirements must be made clear. One must also secure an assurance from the supplier that they will rise to the occasion and support the company in cases of extraordinary situations.
c) Delivery Models Taught In A Supply Chain Course
There are different delivery models to choose from depending on what will be most suitable for a company. They can use the continuous replenishment model where small batches of materials are sent in regular intervals depending on the inventory and order positions. This allows a lot of flexibility. The just-in-time delivery model is suitable for keeping low inventories. But the firm must have an accurate forecast of market demand. The on-time delivery model is ideal for companies with varying order levels. Supplies are sent only when the organization places the order.
d) Entering Into A Contract
Once everything is finalized, it is best to enter into a contract. Oral agreements have no value and leave room for future disputes. It is best to have an agreement drawn by an advocate with terms from both sides included. This will pave the way for smooth transactions with less need for frequent discussions. Details about the items to be supplied, including their quality, should be mentioned in the contract. The delivery model and method must also be mentioned. The period of the contract and payment terms should find a place in the document.
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Inventory is another crucial element of a supply chain. It refers to all the items that are in stock in a company. This could include raw materials, finished goods, or other materials like packing goods that are needed to ensure that the customers get the product when they need it. Inventory in service industries could be tools, gadgets, or machinery used to service the customer. As inventory is one of the major expenses of a company, it is worth seeing how it affects a business.
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a) Inventory & Customer Satisfaction
Maintaining inventory can be expensive. Whether it is unfinished or finished products, the company must have paid for what is remaining at the warehouses. Keeping a low inventory can benefit the firm financially. But it cannot afford to miss fulfilling an order because there was no material. Customers today expect companies to deliver goods immediately. This means that the organization must keep the items in stock as finished goods or raw materials that can be immediately converted to products.
b) Cost Of Inventory
Keeping goods at the company costs money. Keeping a lot of materials can help in fulfilling orders immediately. But keeping them for a long time is an unwanted expense. The company will invest money in raw materials which may not be used for a long time. The more they lie idle, the more the company loses. It is the same with finished goods too. Companies must keep an optimum level of goods for fulfilling orders without losing money. Supply chain management courses teach that accurate sales forecasting helps in maintaining an appropriate quantity of goods.
c) Recording Inventory
Keeping track of the available goods in a company is very important. This is called the recording of inventory. Some companies use the periodic method. This is a simple method where the actual count of goods available is taken at regular intervals. This will show the increase or decrease and can be compared with sales and goods received for accuracy. The other method is the perpetual method, where the entries are made every time there is a change. Every entry and exit of goods is recorded, and this may need special software for accuracy.
d) Inventory Analysis
Inventory analysis helps to see how the demand for different products changes over time. It will allow companies to have an optimum level of stocks. It will help in servicing the customers in a better way. This analysis is done by classifying the goods into three categories. One is the set of fast-moving goods that will cost less to stock. The second type consists of those items that are fast-moving but cost more to store. The third category is that of goods that are slow-moving and expensive to keep in stock.
This is the stage where the raw materials are converted into finished goods. This component of the supply chain also includes packing and testing. The storage of data, condition of production facilities, measuring performance, and compliance also are included in production. This activity is dependent on the other elements of the supply chain like market demand, sourcing, and inventory. Proper planning is essential to ensure that production happens on time to ensure the supply of goods to the customers. Logistics and supply chain management courses teach four types of production.
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a) Unit Production
In this type, only one unit is produced at a time. All items are made as per the requirements of individual customers. Creating an outfit as desired by the person is one example. Baking a cake for a birthday is another example. Some large car manufacturers also make only custom-built vehicles. Each of these cars will be different from another one made in the same factory. Customer satisfaction is critical in this kind of industry. The inventory will be minimal as raw materials will usually be purchased only after an order is received.
b) Batch Production
Batch production is most commonly seen in the consumer goods industry. These companies have several products or numerous variants of the same product. They may need to produce all these items in a specific number depending on the demand. So, each item is produced in batches of certain quantities as per orders received. Once one batch of a product is started, the production is stopped only after the set is completely produced. Stopping in the middle of a batch can end in huge losses for the company.
c) Mass Production
This is used for producing a large number of similar products. The automobile industry is a typical example of mass production. It is also called flow production, as the process flows through an assembly line. Each workstation in the line has a specific function which it does without any deviation. Products made in such a method are similar with absolutely no deviation. This method of manufacturing is highly sophisticated. Those who have completed supply chain courses know that the workstations are highly specialized in these industries.
d) Continuous Production
This method is often confused with mass production. The main difference is that continuous production happens all throughout the day with no breaks. It is a 24/7 function. A major difference between mass and continuous production methods is that the latter is automated to a great extent. Most plastic products are manufactured in this method. All one needs to do is continuously feed raw materials, and the machines will keep churning out the products with hardly any human interference.
Information is a vital component in supply chains because there are various internal and external entities in this system. Without a proper flow of information, no work can get done. The supply chain is a continuous process, and so the information must also flow continuously. While the materials mostly flow downstream, cash will flow upstream from the customer to the supplier. But the information in this system flows in both directions. This must happen on time and without any interruption. That is why most companies use software that will automatically share information with all the concerned people.
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a) Information Results In Order Fulfillment
Nothing can be as distressing for a company to see that there are orders that cannot be executed due to want of materials. Unless a company knows what orders can be expected in the near future, it cannot plan production to fulfill them. This information must flow from the customers to the company. Orders placed by the customers must reach the firm immediately. Distributors and retailers must also pass information about their requirements to replenish stocks and ensure customers get the goods.
b) Information Helps Cost Saving
It is common knowledge that keeping high inventory can cost the company heavily. Inventory is money invested without any returns. Only when the materials are sold, do the goods have any value. If they are lying at the warehouse, that much money is held up, causing cash flow problems. To save the cost of inventory, precise prediction of future sales is necessary. This information must go from the sales teams or channel partners to the production department so that they will produce only what is necessary.
c) Information For Adequate Raw Material Stock
As we have seen, communication happens in all directions in a supply chain. Having good relationships with external entities help companies to optimize their production. Purchase managers must remain in regular contact with the vendors. This will help them know the position of availability of raw materials. Suppliers can give information about any expected short supply of items. This will help the company to stock adequately and avoid a shortage of items. Information about price variations will also help purchase departments to plan their raw materials purchases in a better way.
d) Information To Customers About Product Arrival
One thing that people love about online retailers is the way in which information flows from them about orders. When an order is placed with these sellers, customers start getting communication about the movement of goods. This keeps the buyers happy because they know exactly where the items are at any moment. Such information is essential to keep the customers happy and loyal. Supply chain management courses teach that such communication is possible only if the company gets real-time data from its logistics partners.
Transportation Of Goods
The supply chain refers to the movement of goods from the raw material supplier to the customer. If goods must move, there must be a carrier. Transportation is a critical element in supply chains. Without this component, a supply chain will cease to exist. Transportation happens in many segments of a supply chain. Goods move from suppliers to the company. Sometimes they are transported from a central warehouse to different manufacturing units. Finished goods are sent from the warehouse to distributors, retailers, or customers.
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a) Transportation And Cost Of Goods
Transportation is a major component of a product’s cost. With increasing fuel prices, it is becoming more expensive to move goods from one place to another, having an impact on the cost of products. This is why companies must look at various options to move goods instead of only depending on one mode. Organizations can use different modes of transport for different products depending on how much returns these items bring. Attending reputed institutions’ logistics and supply chain management courses can teach SCM aspirants about reducing transportation costs.
b) Timely Delivery For Customer Satisfaction
Customer satisfaction is paramount in times when competition is severe, and customer loyalty is a rare commodity. Buyers have become habituated to getting their orders delivered very quickly. This puts pressure on the companies to look for ways to deliver goods as fast as possible. But that might increase the cost of transportation, which will, in turn, affect the company’s profitability. This is where companies must negotiate well with transport companies and ensure that they get the best bargains.
c) Prioritising Shipments And Using Different Modes Of Transport
As transport costs can be very high, companies must prioritize their shipments based on products and customers. A deep analysis of customer behavior can tell companies which customers need to be serviced in a hurry and who can wait. Using this information will help to reduce transport costs greatly. Using different modes of transport can also help reduce costs. They must check whether trucks are absolutely necessary. Can they get the raw materials by train if planned well ahead? This may help to reduce costs.
d) Overcoming Risks In Transportation
Transportation is rife with risks. Bad roads, inclement weather, or other man-made disruptions can greatly affect the speed of delivery. Shipments to other countries can be delayed due to transhipments at some ports. Overseas transportation can be costly, and the availability of space in ships can be difficult during certain times of the year. Companies must consider all these when they plan their delivery. Getting updated information will be helpful in avoiding delays. Supply chain courses teach about tools and techniques that can help in finding the most suitable transportation method for different shipments.
Return Of Goods
Most companies are struggling to meet customer demands with respect to product deliveries. Will they have time to think about product returns? But they must. Proper returns policy has become inevitable in today’s world. Popular online retailers have made returns very simple and easy, pushing everyone to follow suit. This is one more way to keep customers happy and loyal to a brand. Let us see the four basics to be followed in product returns.
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a) Have A Goods Return Policy
The first thing to remember is that return of goods is a necessity, and it must be included in the company’s policies. Product return is a cross-functional activity that involves all the departments in the supply chain. Sales, customer service, logistics, warehouse, accounting, and finance personnel must participate in this activity. Supply chain management courses insist that having such a policy will also help in making quality testing more stringent.
b) Gatekeeping And Disposition
Having a returns policy and allowing the return of goods is necessary. But a company must look at what products are being returned. Gatekeeping refers to the process of checking which products are coming back and how they reach the warehouse. Sometimes the cost of returning is more than the product price itself. In cush cases, it is wiser to refund the customer and not take the return at all. This will save money and a lot of administrative work involved in taking an item back into stock.
c) Re-entry and Reselling
It is not enough for companies to take goods back. Warehouse managers must enter them into the inventory. It is best to ensure visibility in the inventory as soon as possible. Inventory visibility helps in making quick disposition of the item. Goods that can be resold must be shown in saleable stock immediately. Those that require refurbishment or repair should be sent to the respective departments. Students of logistics and supply chain management courses know that recording all these movements are also necessary.
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d) Aligning Returns Management Performance
If a company wants the returns process to be smooth and quick, it must make this part of the performance areas of each department. Sales and marketing must know that handling returns will be part of their responsibility. The return process will be inefficient if their performance measurement does not include handling of goods that have come back to the company. Alignment of returns handling performance with the general assessment of an employee is necessary to make the process smooth.
Some experts also add other elements like location in the set of important elements of a supply chain. This can also vary with industries and companies depending on their unique processes and traditions.
Sales & Operations Planning
|Availability of raw materials
Prompt delivery of goods
Avoiding excess production
|Sourcing||Finding a source
Finalizing the supplier
Choosing delivery models
Singing a contract
|Helps get regular raw-material supply
Ensuring raw-material availability
Avoiding ambiguity in terms
|Inventory||Keeping adequate stocks
Calculating the cost of inventory
Keeping track of goods
Analyzing the inventory
|Ensures timely delivery of goods
Reducing the cost of inventory
Enabling smooth production
Ensures product availability
|Information||Conveying order details
Forecasting of sales
Information on raw material
Goods delivery information
|Prompt order execution
Product availability ensured
No shortage of raw materials
Customer is updated
|Transportation||Checking different transport options
Using multiple modes
Tackling transport risks
|Reduces product cost
Ensures customer satisfaction
Avoids delays in delivery
Gatekeeping & disposition
Reentry & reselling
|Ensures customer loyalty
A look at supply chain management’s important components clearly shows that supply chain management is a complex process. Anyone aspiring for a job in this department must possess the necessary knowledge and multiple skills to succeed. Supply chain courses available on ed-tech platforms like Talentedge offer an excellent way to acquire the necessary capabilities for the job.
FAQs on Supply Chain Management
Q. What is supply chain management?
Ans: Supply chain management is an approach to planning and executing the movement of goods, information, and money from raw material suppliers to customers of finished goods and in the reverse direction.
Q. What is the right inventory level for a location?
Ans: Having enough stocks to avoid loss of sales even if there is a temporary non-availability of raw materials or a spike in orders can be considered the optimal stock level for a location.
Q. How can a company reach goods safely to its customers?
Ans: Good packaging is key to the safety of a product. It is not wise to cut corners when it comes to packaging. Arranging a transporter that can be trusted for the safe transport of goods is another way to ensure the safety of goods.
Q. How can goods be reached to the customer quickly?
Ans: Having distribution centers close to where the customers are located is one way to improve delivery times. Having the right mix of products in stock is also crucial for ensuring prompt delivery of goods.
Q. How do you solve the space problem in the warehouse?
Ans: The first thing to do is to make sure that you are only keeping the required materials in stock. Having a good storage solution is also key to finding more space in the existing warehouse.
Q. How can a company reduce transportation costs?
Ans: Consolidating shipments to the same destination even if there is a slight delay is one way to reduce costs. Using parcel services instead of dedicated transport may also help in reducing transportation costs. Identifying other transporters and negotiating for better rates is also a way to save on costs.
Q. Why is the flow of information important in supply chain management?
Ans: There are various internal and external entities in a supply chain. Only with real-time information can everyone act immediately and ensure efficiency in the system. Information flow also helps keep customers updated about the delivery of their goods.
Q. What are the critical components of supply chain management?
Ans: Planning, sourcing, inventory, production, information, transportation, and returns are the main components of supply chain management. However, a few additional elements are added by some experts in the subject.
Q. Why is a returns policy important for a company?
Ans: Enabling easy return of goods for your customers is crucial to earning their loyalty. A return policy also assures buyers of the quality of goods sold by the company.
Q. How critical is planning in supply chain management?
Ans: As supply chain management consists of different activities, it needs proper planning to make everything work in tandem and ensure prompt delivery of quality goods to the customer.
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