Historically built on Procurement, Operations and Logistics foundations; Supply Chain Management exceeds these traditional concepts. Supply Chain Management is involved with integrating three key flows, between the different stages, across the boundaries of the companies:
- Flow of information
- Product / materials
- Founds
Members of the supply chain act as partners who are <<linked>> together through both physical and information flows. It is this that makes an effective supply chain. The flows that involve the transformation, movement, storage of goods and materials and money are called <<physical flows>>. These flows are easily visible.
The physical flows are reinforced by information flows. Information flows are used by the various supply chain partners to coordinate their long-term plans, as well as efficiently control the day-to-day flow of goods and material to the supply chain. In essence, the supply chain enables the flow of products, services, and information goes both up and down the chain. Successful integration or coordination of these three flows produces improved efficiency and effectiveness for business organizations. (1)
Figure 1.1 shows a traditional seller-buyer relationship (a) and a basic supply chain (b).
Generalized Supply chain model
The general concept of an integrated supply chain is typically illustrated by a line diagram that links participating firms into a coordinated competitive unit. A conventional supply chain is shown in Figure 1.4. It is a chain of firms that are involved in providing a product or service, each firm performing its own functions that begins activities with a customer order and ends when a satisfied customer has paid for his or her purchase. Generally more than one player is involved at each stage.
A manufacturer may receive materials from several suppliers and then supply several distributors. Thus, most supply chains are actually networks.
The number of stages included should meet the primary purpose for the existence of the supply chain, i.e. is to satisfy customer needs.
It is in the process that the organization generates profits for itself. A typical supply chain may involve a variety of stages. These supply chain stages include:
Customers
Retailers
Wholesalers / Distributors
Manufacturers
Component / Raw material suppliers
In materials management, most participants performed as buyers and sellers independently of other firms supplying to the buyer. Supply chain management differs in the sense that its efforts involve individual firms taking steps to improve the flow of information with its suppliers and reduce the variation in business processes and practices between the firms that form the supply chain. In essence, the supply chain concept tries to make each participant in the chain more efficient by coordinating their efforts towards a common goal.(1)
Consider the supply chain shown in Figure 1.5. The component supplier after making the component sends the material to the material warehouse. From the material warehouse, the material goes to the manufacturer. After completion of manufacturing operations, the material goes to the finished goods warehouse, where it is transferred to the customer warehouse on receipt of an order. From the customer warehouse, the product moves to the retail outlet, from where it is purchased by the customer. (1)
The essence of supply chain management recognizes the symbiotic relationship among its participants. Retailers and suppliers are mutually dependent; one cannot thrive without the other, and ultimately, this interdependence directly impacts the customer’s experience.
Consequently, every product that reaches a consumer is the culmination of collaborative efforts across multiple organizations. This necessitates a broader perspective, extending beyond internal operations to encompass the entire supply chain. To maximize profitability, businesses must actively manage the interconnected processes that deliver products to the end customer. This collaborative approach transcends traditional partnerships, recognizing that each member influences the performance of the entire network.
The fundamental goal of supply chain management is to enhance customer value and satisfaction. By fostering innovation and customization, supply chain partners can create exceptional experiences that differentiate their offerings in the marketplace.
Did you Know?
The ultimate objective of Supply Chain Management (SCM) translates into a philosophy which has three main characteristics:
- System approach to viewing the channel as a whole, and to managing the total flow of goods, inventory from the supplier to the ultimate costumer.
- Strategic orientation towards competitive efforts to synchronize and converge the intra – firm and he inter – firm operational and strategic capabilities into a unified whole.
- Customer focus to create unique and individualized sources of costumer value, leading to costumer satisfaction. (1)
SCM philosophy drives supply chain members to have a customer orientation. To do this successfully, you need to synchronize the intra-firm and inter-firm operational and strategic capabilities into a unified, compelling marketplace force. Therefore, the SCM philosophy suggests the boundaries of SCM include not only logistics, but also all other functions within a firm and within a supply chain to create customer value and satisfaction. (1)
The primary SCM activities
Successful supply chain management hinges on collaboration and information sharing among suppliers, manufacturers, and carriers. By integrating customer demands, sharing data like inventory levels and forecasts, and aligning incentives, companies can create agile networks that swiftly adapt to market changes. This collaborative approach reduces uncertainty, enhances performance, and ultimately drives competitive advantage.
The primary SCM activities are:
- Integrated behavior and integration of processes;
- Mutually sharing information;
- Mutually sharing channel risks and rewards;
- Co-operation;
- Goal-sharing and partnership;
Effective supply chain management relies on open communication and data sharing among partners. By openly exchanging critical information like inventory levels, sales forecasts, and marketing plans, companies can reduce uncertainty, improve efficiency, and strengthen relationships within the supply chain. ESCM also requires supply chain partners mutually sharing channel risks and rewards that yield to competitive advantage.
The long-term cooperation among the supply chain members, risk and rewards sharing is extremely important and also, a very difficult task. Though conceptually, it is possible, but no organization likes to forego its revenues and profits, and it becomes very difficult unless you can sell the benefits to the organization.
Successful supply chain management requires close cooperation among all partners. This involves working together on everything from initial planning to evaluating final results. To achieve this, different departments within each company must coordinate their efforts with their counterparts in other companies.
A supply chain succeeds if all the members of the supply chain have the same goal and the same focus on serving customers. Establishing the same goal and the same focus among supply chain members means that they are working towards a form of policy integration. Most organizations go through four stages of policy integration:
The integration stages of Supply Chain Management
Stage 1. It represents the baseline case. At this point, the supply chain is a function of fragmented operations within the individual company. It is based on traditional concepts and characterized by staged inventories, independent and incompatible control systems and procedures, and functional segregation.
Stage 2. It is the start of internal integration. It begins with a focus on cost-reduction rather than performance improvement. It is characterized by an emphasis on internal trade-offs and reactive customer service.
Stage 3. The firm attains internal corporate integration. It is characterized by full visibility of purchasing through distribution, medium-term planning, tactical focus, emphasis on efficiency, extended use of electronics support for linkages, and a continued reactive approach to customers.
Stage 4. It has a strategic focus. The organization achieves supply chain integration by extending the scope of integration outside the company to embrace suppliers and customers.
All firms go through these four stages. Ultimately, policy integration is made possible by the supply chain members trying to create compatible cultures and management techniques.
Collaboration takes place when two or more independent companies work jointly to plan and execute supply chain operations with greater success than when they are acting in isolation. This is not easy and requires a sustained effort through cross-functional teams, in-plant supplier personnel, and third party service providers.
Firms that have reached Stage 4 proceed to build-up a series of partnerships. Successful partnerships aim to integrate supply chain policy to avoid redundancy and overlap, while seeking a level of cooperation that allows participants to be more effective at lower cost levels.(1)
The integrated key flows of SCM
SCM is involved with integrating three keyflows, between the different stages, across the boundaries of the companies:
- Product / materials. This is the most visible part of the supply chain. Physically the flow manifests itself in the form of goods and services. This is also called “value flow”.
Goods flows constitute raw materials (including material being transported), work in process, finished goods, and spares, and reverse flows due to returns, rework or recycling of the goods.
- Flow of information. The flow of information allow the various supply chain partners to coordinate their long-term plans and to control the day-to-day flow of goods and material to the supply chain. It consists of flows from vendor to customer and from the customer to vendor.
The downstream flow of information has important components like capacity estimates for plans, stock availability, dispatch advices, stock transfer notes, quality assurance reports, warranties etc.
The upstream components of information flows are inputs for forecasts, marketing plans, dispatch plans production plans and procurement quantities and timing, orders from customers and dealers, quality feedback, and warranties.
- Founds. This is the commercial part of the supply chain, and runs counter to the director of the value flow. Ir reflects the money paid with respect to the transfer of title and/ or service delivery in the supply chain. Other features of cash flow are credit periods / advances for payments from customers / dealers, and to vendors.
Value chain
Within a typical enterprise, physical distribution, manufacturing support, and procurement work together to manage the flow of materials, components, and products between different locations, suppliers, and customers. By treating each area as a key part of the value-adding process, the enterprise can leverage their unique strengths and improve the overall efficiency.
A key aspect of the modern industrial system is that organizations rely on specialized services, incorporate proprietary items, and develop support systems for their products and services. It is uncommon for a single company to handle every stage, from product design and component production to final assembly and delivery to the end user, on its own. Instead, various organizations specialize in different roles, collectively contributing to the creation of the final product. These organizations form a value chain system within the supply chain, all connected in delivering the product or service to the final consumer.
In the entire value system, only a limited profit margin exists, defined by the difference between the final price paid by the customer and the total costs of production and delivery (e.g., raw materials, energy). How this margin is distributed depends largely on the structure of the value system.
Each member of the value chain leverages its position, market standing, and negotiating power to secure a larger share of this margin. A value chain is successful when every member feels they are gaining value from the relationship.
Value chain analysis
Value chain analysis is conceptually straightforward, but it can become complex depending on the product, linkages, and primary processes involved. It often requires extensive information and data processing. A typical value chain analysis involves the following steps:
- Analyze your own value chain: Identify primary and support activities, break them down into basic components, and allocate costs to each component.
- Analyze customers’ value chains: Assess how your product fits into the customer’s value chain.
- Identify differentiating activities: Determine activities that set your firm apart and identify potential cost advantages over competitors.
- Identify value added for the customer: Explore how your product can add value to the customer’s value chain, such as by lowering costs or enhancing performance. Understand where the customer perceives this potential.
- Identify activities providing a differential advantage: Focus on activities that give your firm an edge over competitors.
(1) Quoted from: Important of supply chain management. Khari Kleab.