Principles of supply chain management (SCM) for beginners
Proper supply chain management helps businesses streamline operations, cut costs, stay ahead of competitors and deliver products to customers faster.
Almost every product that makes it to market requires the efforts of multiple business units and external suppliers that form a supply chain.
While supply chains have been around a long time, most companies have only recently begun recognising them as a way to add value to their operations. And since the pandemic, supply chain management has taken on greater significance.
In this guide, you’ll discover what supply chain management really is and why it’s important for businesses. Then you’ll learn about the different types of supply chain management, the current best practices, plus the supply chain KPIs you need to track and measure.
What is supply chain management?
Supply chain management (SCM) controls the flow of goods, processes, data and finances related to a product or service, from procuring raw materials to delivering the final product to the customer.
A supply chain can involve different companies, such as suppliers, manufacturers, wholesalers, transportation and logistics providers and retailers. It also includes various activities spanning procurement, inventory management, product lifecycle management, transportation management, order management and more.
By managing the supply chain successfully, companies can reduce waste and warehouse costs and deliver products to the consumer faster.
Why is supply chain management important for businesses?
The most effective SCM systems minimise cost, waste, and time in the production cycle saving businesses thousands of dollars.
The industry standard is a just-in-time supply chain where customer sales automatically send replenishment orders to manufacturers so that you can restock items as soon as possible.
Following the pandemic, managers are now moving towards more agile supply chains, chasing the following key benefits:
Reduce operational costs
Effective SCM identifies wasteful processes that don’t contribute value to the final product. You can then minimise or remove these processes to reduce your operational costs.
Reduce production costs
Manufacturers depend on supply chains to deliver raw materials to assembly plants on time and at the best price to prevent shortages that could slow or halt production.
For example, an unexpected shipment delay in components could cause a car assembly plant to shut down, costing millions of dollars per day in lost wages and revenue.
Reduce holding costs
Supply chains enable retailers, distributors and wholesalers to deliver products quickly and reduce the cost of holding inventory in their warehouses any longer than necessary.
Reduces overall supply chain costs
Manufacturers and retailers depend on supply chains that meet customer service goals with the minimum total cost. For example, Dell’s innovative supply chain involves making each computer based on a specific customer order and shipping it directly to the customer. As a result, Dell avoids having extensive computer inventories sitting in warehouses and retail stores that could become technologically obsolete.
Minimise wasted resources
Whether it’s time, effort or raw materials, wasted resources are the antithesis of operational efficiency. An effective SCM strategy minimises wastage by focusing on value-adding activities.
Optimise pricing strategies
Effective SCM identifies seasonal products with a limited shelf life and adjusts the pricing accordingly. For example, airlines, hotels, and retailers with perishable products can optimise their pricing to meet demand and improve margins.
A well-managed supply chain allows firms to speed up product delivery to customers and increase their cashflow. For example, if you could reduce your production and shipping time from 70 days to 10 days, you could invoice your customers 60 days earlier and get paid sooner.
Reducing operational costs and minimising wasted resources also contribute to positive cashflow.
Efficient and robust SCM generates more revenue and increases profits. Reduced operational costs enable you to run more marketing campaigns, set more competitive pricing and boost profit margins.
When the pandemic struck, Kelloggs had to quickly adapt its supply chain, from sending bulk volumes to restaurants to feeding people working from home. And finding enough paperboard packaging for cereal boxes became a major problem.
For example, in AMEA (Asia Pacific, Middle East, and Africa), the Korean supplier ran short, so they had to source a new supplier in New Zealand. Although the paperboard cost more, they reduced freight and transportation costs.
Overall, third-quarter net sales in 2020 grew by nearly 11% to $600 million, and operating profit grew 6% to $59 million, compared to Q3 in 2019.
Improve material, product and information flow
SCM focuses on improving process flows. Ideally, you want to shorten the cycle from procuring raw materials to delivering the finished product. At the same time, you want to improve the flow of information:
The less time it takes to procure raw materials, the more efficient the purchasing flow.
The faster products reach a customer, the more efficient the product flow.
The higher quality materials used, the fewer returns processed.
Efficient product flows reduce the lag between demand and supply and simplify accurate forecasting.
Efficient SCM also allows information to be shared along the entire supply chain, removing bottlenecks and enabling businesses to make informed decisions. Plus, real-time information lets stakeholders respond to changes quickly.
Strengthen supplier relationships
A successful supply chain requires robust supplier relationships. It only takes one weak link in the chain to impact your overall business performance.
The only way to protect against supply bottlenecks and inventory shortages is to strengthen the relationship between your organisation and direct suppliers.
SCM software provides a transparent view of what vendors charge, how they deliver products, and how they support them so that you can check which suppliers are a good fit.
Improve quality control
Effective SCM allows companies to improve quality control. For example, implementing standard minimum quality criteria allows you to partner with suppliers who meet those requirements. Some companies go one step further by auditing or verifying suppliers’ compliance steps.
According to CIO Review, the cost to replace or fix an item increases tenfold at each step of the supply chain, resulting in increased costs for companies when quality issues arise.
Mitigate supply chain risks
Supply chains have various risk factors, such as workplace safety, product quality and supplier relationships, that can affect the bottom line.
Analysing supply chain data allows companies to identify potential risks and put contingency plans in place. Companies can avoid negative impacts by taking proactive action rather than reacting to supply chain disruptions or quality control issues when they occur.
The COVID-19 pandemic brought supply chain risks to the fore and caused many companies to question their strategy. For example:
was the source of raw materials or production location too far from the markets they served?
were their chosen partners too exposed to trade disputes?
were they too reliant on a specific country or region?
As a result, in the CFO Signals Q4 2020 survey, 49% of respondents agreed that their supply chains would be more diversified in 2021 than pre-pandemic, and 37% agreed that their supply chains would be less reliant on China.
Boost customer satisfaction
Effective SCM can boost customer satisfaction and encourage more sales in the future by building brand loyalty and delivering the products customers want on time and at the right price.
What are the main elements of supply chain management?
The main elements of SCM are:
While the planning phase defines the supply chain strategy, the other four elements describe essential execution requirements, but businesses need to be competent in all 5 areas to operate efficiently.
Demand and supply planning
The first step lays out the plan for managing all the resources to meet consumer demand for your product or service.
Key activities include:
balancing resources with requirements
establishing communication along the entire chain (internally and externally)
setting metrics to measure whether the supply chain is efficient and effective
evaluating and improving the supply chain to deliver value to customers and achieve company goals.
Incomplete demand and supply planning can cause the bullwhip effect, where each stakeholder’s tendency to overreact to demand is amplified along the supply chain, causing gross inefficiencies.
Accurate demand and supply planning is critical – and SCM software plays a crucial role in achieving this.
Sourcing goods and services from suppliers
The next step involves choosing suppliers to provide the goods and services you require and establishing processes to monitor and manage those supplier relationships.
Key activities include:
developing a supplier network and supplier agreements
purchasing and receiving goods
authorising supplier payments
managing inventory and supplier performance.
An inefficient sourcing process can lead to increases in materials costs, delays in production, and shortfalls in raw materials, components and products.
Manufacturing the final product
The third step of SCM focuses on manufacturing and involves transforming raw materials into the final product to meet customer demand.
Key activities include:
accepting raw materials
manufacturing the product
testing for quality control
packaging for shipping
scheduling for delivery
managing production equipment, facilities and transportation.
Delivering goods and services
After you’ve produced your final product, you need to focus on delivering the finished goods or services to customers.
Key activities include:
coordinating customer orders
dispatching shipments (including customs requirements)
Managing returned items from suppliers or customers
The final step of SCM covers receiving returned items from suppliers or customers.
Key activities include:
managing post-delivery customer support
receiving defective, excess, or unwanted products
complying with regulatory requirements.
What are the different types of supply chain management?
There are several types of SCM – each suited to different industries.
For instance, in highly competitive industries with predictable demand, similar products, and low-cost prices, like chemical, paper, or commodity manufacturing, businesses choose efficiency-focused models, such as the continuous flow, fast chain or agile models.
On the other hand, in industries where customer demand is unpredictable, businesses opt for responsive-focused models, such as the agile, custom-configured, or flexible models.
The continuous flow model
The continuous flow model is a traditional supply chain strategy that’s best suited for manufacturers who produce the same goods repeatedly, with little variation. It’s ideal for high-volume, low-price commodity manufacturing where demand is constant and Just-in-Time manufacturing where customer sales automatically trigger replenishment orders.
The fast chain model
The fast chain model is flexible and responsive. It’s ideal for manufacturers who change their product line frequently, such as trendy products with short life cycles, and need to sell them quickly.
This model emphasises the competitive advantage of the first adopter – that is to say, the manufacturer that can flood the market before the trend cycle ends is the manufacturer that wins.
But the actual driver of the fast chain model is the design and the marketing teams. Together, they can focus on creating and promoting the new products while the supply chain ensures accurate forecast levels and seamless operations.
The efficient chain model
The efficient chain model is perfect for businesses in hyper-competitive markets where end-to-end efficiency is the goal. The model relies heavily on production forecasting plus commodity and raw material prices. For example, commodity businesses use the efficient chain model because they can base production on expected sales and competition on price.
This model aims to reduce costs by maximising efficiency, ensuring product availability with accurate forecasting and prioritising perfect order fulfilment.
Post-pandemic, businesses are struggling with capacity issues, such as labour and material shortages and delays, so they are exploring other models.
The agile model
The agile supply chain model is ideal for businesses that manufacture specialty order items. Manufacturers, like Dell, work on a make-to-order basis only after receiving a customer’s order. The model requires less automation and more expertise. But that additional value-add lets businesses using this model command higher prices.
If businesses want to use the agile model, they need the capacity and design manufacturing processes to ramp up production. However, once they exceed a specific threshold, it usually becomes uncompetitive. And at that point, they’re best suited to the efficient chain model.
The custom-configured model
The custom-configured model allows custom configurations, especially during assembly and production. Usually, these configurations occur at the beginning of a longer production and assembly run. For example, specific prototype or limited-production builds fall into custom-configured manufacturing.
It’s ideal for businesses, such as car manufacturers, who have products with multiple configurations. For instance, product configurations occur during assembly according to the customer’s specifications.
Essentially, the custom-configured model combines the continuous flow and agile models. Processes occurring before product configuration are managed under the continuous flow model, while the remaining processes follow the agile model.
The flexible model
The flexible model is most suitable for businesses that face high demand during a peak season, followed by periods of little or no demand.
Think of it as a light switch that you can flip on and off as required.
The flexible model enables highly adaptable businesses to meet specific customer needs or solve problems, but they need the right tools (or automated machinery) for the job.
They also require an extra supply of critical resources, quick response times, technical expertise in processes and engineering, a broad supplier network and a flexible process flow that they can reconfigure quickly.
Supply chain management best practices
Below are 9 SCM best practices your business can adopt.
Recruit supply chain professionals
Recruiting professionals to run your supply chain operations is difficult but rewarding if you can find and develop the right people.
Many supply chain managers use specialist supply chain recruitment agencies and forge links with universities to fulfil internships and graduate-level positions.
However you source new talent, it’s essential to provide ongoing career development to bolster employees’ skill sets and keep pace with new supply chain technologies and models.
Build strong supplier relationships
Building solid relationships with suppliers are vital to your supply chain success, as it reduces costs and improves reliability.
And if both parties treat this as a partnership, these relationships will also be mutually beneficial. To do that, you need to solve problems and co-create goals that help you both accomplish your plans.
Beyond supply chain basics, such as expertise, pricing, and timeliness, you should also look for suppliers with the same values and principles, like environmental sustainability and social responsibility. Scandals like labour law violations can quickly damage existing supplier relationships.
Look to diversify supplier networks
Delays on the supplier’s end often cause supply chain disruptions. Whether it’s a shortage of raw materials, import/export issues, weather and natural disasters, political and regulatory issues or other unforeseen obstacles, they can all hinder or even halt the delivery of supplies.
Although it’s difficult to predict such delays, you can still mitigate these problems by diversifying your supplier network. If you have a strong supplier relationship, you can have an open and transparent dialogue that flags any potential delays.
For example, suppose you know in advance that your supplier will have to introduce extra tariffs because of new government regulations. In that case, you could make a bulk purchase or source a new supplier before the new laws come into effect.
Use economies of scale to reduce costs
A cost-effective way to purchase inventory is to take advantage of economies of scale. Making a single purchase reduces supply chain costs through volume discounts and lower administrative and warehousing labour costs compared to multiple supply purchases.
Aside from one-time bulk purchases, there are two other methods of setting up volume purchases:
Blanket orders specify a set price and quantity that are delivered for a set period, usually a year. It protects you from price increases and stabilises inventory because you can request additional products when you run out.
Standing orders offer similar price protection to blanket orders, but supplies are delivered in fixed quantities on scheduled dates over a set period. They’re less flexible than blanket orders but eliminate guesswork and short-term forecasting.
Improve demand forecasting
Having too much or too little product in stock is an expensive problem for businesses. Overstocking suggests sales are down or you miscalculated demand and bought excess inventory. Under-stocking suggests sales are higher than expected, but supply is lagging, which means you’ll lose out on revenue opportunities. These are both consequences of inaccurate demand forecasts.
Forecasting errors have a significant impact on the bottom line. According to the Institute of Business Forecasting and Planning (IBF), a 15% improvement in forecast accuracy results in a 3% increase in pre-tax revenue. You can supply the right quantities to meet current and future needs with accurate demand forecasting by considering historical sales, forecast sales, seasonality and promotions.
Improve inventory management
Along with demand forecasting, inventory management is another vital part of supply chain management. Once you can reliably predict demand, you need to calculate optimal inventory levels for current and future demand and determine the best replenishment model for your business. Conversely, having visibility into inventory helps you forecast demand more accurately.
Another aspect of inventory management is ensuring alignment with supply chain objectives. You may need to make adjustments in your operations to fix inventory-demand mismatches, reduce the total cost of ownership, speed up the order-to-pay process, reduce delivery times, or improve document management.
Tracking inventory in real-time, monitoring item velocity, and automatically reordering stock based on item and demand-specific criteria can offer valuable insights into your inventory management strategy that allows data-driven planning and decision-making.
Integrate supply chain planning and enterprise planning
Many businesses use multiple systems, including Excel spreadsheets and manual processes, to manage their supply chain operations. However, this type of setup can lead to costly mistakes.
By integrating your supply chain and enterprise resource planning software, you can align your short-term operational planning with your broader business planning processes and make real-time updates to inventory forecasts and supply. Additionally, it allows stakeholders to create new scenarios and assess how to optimise their resources to achieve maximum profitability when unforeseen events occur.
Consider the total cost of ownership (TCO)
The total cost of ownership (TCO) includes the entire supply chain expenses. It’s a method for businesses to determine how much each supply chain activity will cost, including materials acquisition, storage, selling, transportation, currency exchange costs, plus trade incentives and restrictions.
The key to using TCO effectively is to include all the supply chain components and any other business units that make strategic decisions. For example, if a delivery partner can provide a low purchase price for bulk orders, but you don’t have enough storage space in the warehouse, then the TCO may increase due to the additional staff and space needed (including third-party warehouses) to organise and store the items.
Invest in SCM software
The most powerful way to optimise your supply chain operations is by investing in SCM software.
Real-time information and data-driven insights ensure your supply chain is more efficient and cost-effective. For example, MYOB Greentree’s Supply Chain and Distribution Suite will help your sales, finance, purchasing, and logistics teams deliver best-in-class results, growing confidence in your supply chain to drive customer satisfaction.
Supply chain management KPIs
With the right key performance indicators (KPIs), you can understand what is and isn't working in your supply chain. You can identify distribution bottlenecks causing frustrations with customers and see which costs are draining your bottom line.
Here are 9 essential supply chain management KPIs to start measuring today:
Cash to cycle time
The average length of time between paying for raw materials and receiving payment for goods delivered. The value is an important factor in determining working capital requirements. The smaller that number is, the better.
Perfect order rate
The number of orders delivered in full, on time, without errors. Many organisations view this as a crucial metric as it directly impacts customer satisfaction.
The total “small” costs associated with importing stock, such as brokerage fees, logistics fees, freight and shipping costs, insurance, handling fees, import duty, customs tariffs and taxes.
The percentage of successfully completed orders with the first shipment. It’s another important metric that impacts customer satisfaction.
Inventory days of supply
Here, your average daily inventory usage divides your inventory on hand. Here, your average daily inventory usage divides your inventory on hand. It’s beneficial to keep a low number for this KPI, as you have less money tied up in inventory sitting in the warehouse.
The cost of goods sold (COGS) for a specified period (such as a month, quarter or year) divided by your average inventory level over the same period. A high value indicates that you’re managing inventory efficiently and effectively.
The percentage of orders delivered on or before the promised date. In other words, either you delivered the order on time, or you didn't.
Like the on-time delivery metric, on-time shipment measures the percentage of orders you shipped on time – any variance between on-time deliveries and on-time shipments likely points to transportation and logistics problems.
Supply chain costs as a percentage of sales
The total cost of your supply chain as a percentage of your total sales.
Improve your supply chain and distribution
Supply chain management is an essential part of modern business operations. Implemented correctly, it can cut thousands of dollars off the bottom line.
The most effective supply chain management systems reduce operational costs, minimise wasted resources, strengthen supplier relationships, mitigate risks, improve quality control, increase cashflow, raise profits and boost customer satisfaction.
The best way to improve and optimise your supply chain operations is by investing in supply chain management software like MYOB Greentree’s Supply Chain and Distribution Suite:
Inventory management: track inventory levels by lot, batch or dimension (colour / size / style) to meet customer demand.
Supplier management: Track all your purchasing requirements from one dashboard for customer orders, stock replenishment, and unique agreements. Also, forecast cashflow accurately with real-time integration to financial modules.
Order management: Streamline the sales order process, managing backorders and customer expectations on the go with the mobile functionality.
Warehouse management: Manage multiple warehouses effectively and efficiently using warehouse bins within locations for granular stock control.
Material requirements planning: Analyse sales, purchasing, manufacturing, forecasts and more to build an accurate picture of inventory requirements.
Quality control: Automate all the necessary quality control processes to reduce the return of defective items and boost customer satisfaction and loyalty.
Real-time supply chain visibility: Always have an accurate picture as MYOB Greentree is live-updated across suites and modules.
Contact us today to find out how MYOB Greentree can improve your supply chain management and distribution.