SCM Meaning and Definition

Supply Chain Management can be defined as: “The planning, organizing, coordinating,
controlling, and monitoring of all activities involved in bringing a product or service from
its raw materials state to its final form”. It encompasses everything from sourcing raw
materials to delivering finished products to customers. Overall, SCM is about achieving
efficiency and cost-effectiveness in the supply chain process while also maintaining
quality and meeting customer demands. A supply chain on the other hand is defined as
“A network of interconnected entities that work together to deliver products or services
to end customers”. These entities include suppliers, manufacturers, wholesalers,
retailers, and logistics companies. Each stage in the supply chain plays an essential role
in fulfilling customer needs and preferences.

3 Entities in a Supply Chain

The existence of a supply chain pivots upon three core entities. These entities, integral
to the supply chain processes, may represent departments, functional areas, or even
individuals within a broader organizational context. They feature prominently in both
internal and external supply chains, showcasing the universal applicability of supply
chain principles. The three essential entities are:

1. Supplier
2. Producer
3. Customer
1. Supplier
A supplier, in the realm of supply chain management, is not just a provider or seller; they
represent a strategic partnership that contributes to the overall functioning and success
of a business. This entity supplies a myriad of resources, from goods and services to
energy and components, all critical in the production process of a product or service.
Suppliers’ offerings are as diverse as the businesses they cater to – from farm-fresh
sugar cane and fruits, and industrial-grade metals, to specialized items like roofing nails
or electric wiring. They also supply technologically advanced components, such as
computer chips and aircraft turbines. In addition, suppliers also render services such as
natural gas provision, electrical power, and transportation. Unlike vendors, who are
generically classified as sellers in the market, suppliers are entities with whom
businesses maintain a dedicated relationship, aligning their goals with the buyer’s
objectives to achieve mutual success.

2. Producer
The producer plays a vital role in transforming inputs (from Entity-1) such as services,
materials, supplies, energy, and components into high-quality finished products. These
products can range from dress shirts and packaged dinners to airplanes, electric power,
legal counsel, or guided tours. It is important to note that supply chain management for
services may have a more conceptual nature, compared to manufacturing.

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3. Customer
As an indispensable part of the SCM system, the customer represents the final
destination in the product’s journey. After traversing through the stages of production,
the finished goods reach the consumers. These consumers might adorn themselves with
the crafted shirts, savor the pre-packaged meals, embark on journeys aboard the
aircraft, or illuminate spaces using the supplied electricity. The customer’s role is not
merely passive – their preferences, needs, and feedback can greatly shape the dynamics
of the whole SC, rendering them a crucial cog in the SCM machinery.

SUMMARY
In the realm of supply chain management (SCM), three key players emerge the supplier,
the receiver, and the customer. The supplier is the starting point, providing essential
goods and services that fuel the operations of the receiver. The receiver, in turn, skillfully
combines these resources to produce valuable products or services. Ultimately, these
creations end up with the customer, whose preferences and feedback can significantly
influence the entire SC. Each entity is a critical piece of the SCM puzzle, contributing to
the overall efficiency and effectiveness of the system.

5 Phases of Supply Chain Management:

The process of Supply Chain Management (SCM) can be divided into five distinct phases,
which together allow businesses to move from raw materials to finished products optimally.

1. Plan
The first phase involves strategic planning of the supply chain. Businesses determine the
best way to meet customer demand while minimizing costs and anticipating potential
problems. For instance, a clothing manufacturer might analyze market trends to anticipate
future demand and schedule production accordingly.
2. Source
The second phase involves sourcing the raw materials or components needed for production.
Companies need to find reliable suppliers who can deliver high-quality materials on time and
at a reasonable cost. For example, a car manufacturer might source steel from a particular
supplier because of their track record for quality and punctuality.

3. Make
The third phase of SCM involves the production or manufacturing process. This is where the
raw materials or components sourced are transformed into the final product. For example, a
bakery will take raw ingredients like flour, sugar, and eggs and turn them into baked goods.

4. Deliver
This fourth phase, also known as logistics, involves the storage and delivery of products to
retailers or customers. For example, a book publisher might store books in a warehouse
before distributing them to bookstores and libraries.

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5. Return
The final phase involves managing product returns due to defects, damages, or customer
dissatisfaction. Businesses must have processes in place to handle returns efficiently to
maintain customer satisfaction. For instance, an e-commerce company might have a
streamlined return process that includes pre-printed return labels and quick refunds or
exchanges.

Supply Chain Management Costs

Supply chain management costs encapsulate the monetary expenses linked with the
production and delivery of goods or services. In certain industries, the costs incurred in
managing the supply chain can account for up to half of a company’s total revenue.
Research conducted by internationally recognized consulting firm A.T. Kearney suggests that
inefficiencies within the supply chain could contribute to a quarter of a firm’s operating
expenses. In scenarios where profit margins are razor-thin, hovering around 3% to 4%, even
minor enhancements in efficiency could potentially double a company’s profitability.
Consequently, the implementation of a cost-focused organizational structure and strategy
becomes not just important, but critical to a company’s financial sustainability.

The supply chain management costs can be broadly categorized into two types: Direct and
Indirect costs.

DIRECT COSTS
Direct costs, commonly known as Cost of Goods Sold (COGS), include raw materials, labor,
and expenses related to the manufacturing process. For example, a company crafting
furniture might have direct costs including timber ($500), labor ($300), and factory
overheads ($200), leading to a total COGS of $1,000.

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INDIRECT COSTS
Indirect costs, on the other hand, consist of expenditures such as warehouse storage,
transportation, and administrative overheads. Continuing with the furniture company
example, they might incur $150 for warehouse storage, $200 for transportation, and $50 for
administrative tasks. This adds up to a total indirect cost of $400.

TOTAL SUPPLY CHAIN MANAGEMENT COST

Hence, the total supply chain management cost for this company would be the sum of direct
and indirect costs. In our example, it is $1,000 (COGS) + $400 (indirect costs) = $1,400.
Managing these costs effectively and efficiently is a fundamental aspect of supply chain
management, underpinning the financial health and sustainability of a business.

Supply Chain Management Examples

Let’s delve into three examples of supply chain management (SCM) across diverse
industries.

Supply Chain in the Automotive Industry

Renowned for its lean supply chain management, Toyota utilizes the ‘Just-In-Time’ (JIT)
approach. This means materials for manufacturing arrive precisely when needed, minimizing
inventory costs and waste. Toyota’s SC is a testament to the company’s commitment to
continuous improvement and efficiency.

Supply Chain in the Technology Industry

Apple’s SCM is a model of excellence, primarily due to its ability to coordinate with suppliers
and manufacturers across the globe. Apple maintains high-quality standards at every stage
of the SC, ensuring the production of innovative and reliable products that resonate with its
customer base.

Supply Chain in the Retail Industry

Amazon epitomizes effective SCM in the retail industry. Leveraging technology, the company
has streamlined processes from warehousing to delivery, providing a seamless and efficient
shopping experience for its customers. Amazon’s SCM has been pivotal in its ability to offer
vast product selections and speedy delivery times.

In each of these examples, SCM plays a significant role in the company’s success, underlying
the importance of a well-coordinated SC. The principles and practices adopted by these
companies offer valuable insights for entities looking to enhance their own SCM strategies.

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Complexities in Simplest Supply Chains
Supply chain management is a complex, multi-faceted discipline, requiring strategic
planning, coordination, and execution across several stages and geographies. Despite these
challenges, effective SCM can lead to improved operational efficiency, cost savings, and
competitive advantage.

DEMAND FORECASTING
One of the first complexities that arise in SCM is predicting demand accurately. For example,
a sudden rise in demand for at-home workout equipment during the COVID-19 pandemic
caught many suppliers off guard, resulting in stock-outs and delayed deliveries.

SUPPLIER RELIABILITY
Next, supplier reliability is an inherent challenge in SCM. Companies depend on their
suppliers to deliver quality materials on time, but any lapse can disrupt the entire SC. For
instance, the infamous 2010 Toyota recall was due to defective accelerator pedals from a
single supplier, demonstrating how supplier issues can escalate.

LOGISTICS AND TRANSPORTATION

Additionally, planning and managing the logistics and transportation of goods is another
complicated aspect. As an example, consider how weather conditions can delay shipments,
causing a ripple effect all through the supply chain.

INVENTORY MANAGEMENT
Ensuring optimal inventory levels is a delicate balancing act in SCM. For example, Apple’s SC
is renowned for its lean inventory management, but the global chip shortage exposed the
risks of this approach.

REGULATORY COMPLIANCE
Lastly, complying with different laws and regulations across various countries can be
daunting. A case in point is how multinational firms must navigate complex import-export
regulations, tariff systems, and customs requirements in their global supply chains.

Future of Supply Chains

As we forge ahead into the future, supply chains are expected to evolve significantly,
spurred by technological advancements and changing market dynamics. Here are some key
trends that will shape the future of SCs:

ARTIFICIAL INTELLIGENCE (AI) AND MACHINE LEARNING (ML)

AI and ML are set to revolutionize SCM by streamlining operations and enhancing decision-
making. For example, AI can be used to predict consumer demand with high accuracy,
allowing companies to optimize their inventory levels and reduce costs. Global retailer
Walmart, has been leveraging ML to improve its demand forecasting and inventory
management.

BLOCKCHAIN TECHNOLOGY

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Blockchain has the potential to improve transparency and traceability in supply chains. This
technology can be used to create a secure, immutable record of all transactions, making it
easier to track products from the manufacturer to the consumer. De Beers, the diamond
company, has implemented a blockchain solution to trace the journey of diamonds from the
mine to the consumer, reducing the risk of conflict diamonds entering their SC.

INTERNET OF THINGS (IoT)

IoT devices can provide real-time tracking and monitoring of goods in the SC, improving
efficiency and reducing risk. For example, DHL uses IoT technology to monitor the
temperature of sensitive goods, such as pharmaceuticals, throughout their journey.

SUSTAINABILITY
As awareness of environmental issues increases, companies are under pressure to make
their supply chains more sustainable. This could involve using renewable energy sources in
manufacturing processes, choosing suppliers who follow sustainable practices, and reducing
waste. For instance, Nike has been investing in sustainable materials and manufacturing
processes to reduce its environmental impact.

ROBOTICS AND AUTOMATION

Automation can increase efficiency and reduce costs in the SC. Robots can be used for tasks
such as picking and packing in warehouses. Amazon, a pioneer in this area, uses robots
extensively in its warehouses to improve efficiency and speed up order fulfillment. The
future of SCM promises to be exciting and transformative, abounding with innovative
technologies and practices that will reshape the landscape of the industry.

INTERCONNECTED WORLD
In today’s interconnected world, the scope of SCM extends beyond national boundaries.
A global supply chain intricate web facilitates the efficient movement of goods, services, and
information from origin to destination, ensuring timely delivery and satisfaction of market
demand. Notably, a research-based online PhD in supply chain management can offer
invaluable insights into optimizing these global supply chains, contributing to enhanced
operational efficiency, risk mitigation, and competitive advantage.

Types of Supply Chain Management

1. SCM in Manufacturing
SCM for manufacturing primarily revolves around the efficient management of tangible
inputs such as raw materials, machinery, and labor. The ultimate goal is to produce physical
goods that can be stored, transported, and sold to consumers. The manufacturing supply
chain is often linear, with raw materials going through several stages of transformation
before emerging as finished products. The focus is on maintaining a smooth flow of
materials, minimizing waste, reducing lead times, and optimizing inventory levels.

EXAMPLE OF A FOOD VENDOR

When considering the context of a street food vendor, services such as utilities,
transportation, warehousing, carpentry, and cleanup emerge as critical aspects of the
operation. These services encompass everything from the provision of power and water to
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the transportation of goods and the cleanup process. Utilities, acting as essential suppliers
for manufacturers, greatly impact decisions regarding the placement of plants and
warehouses. In the absence of readily available water and electricity (or natural gas in some
cases) at a proposed site, the site becomes impractical for use. The availability of these
utilities is a non-negotiable prerequisite for any viable location.

TIER-1 AND TIER-2 SUPPLIERS

In the complex world of SCM, we find a cascading structure of suppliers. At the core are Tier
1 suppliers, each having its network of Tier 2 suppliers serving them. Take for example a
wholesale food distributor, providing daily ingredients and raw materials for menu items.
This distributor is not isolated but is supported by its array of material and service suppliers.
In turn, these suppliers also have their supply chains. Consider the flour used for making
crepes. It’s far from being a raw material. Rather, it is a product of an elaborate SC starting
from a farmer’s wheat field, leading to processing plants, then onto wholesalers, and finally
making its way to the corner store. No matter how far you navigate upstream, an endless
array of supplier tiers greets you, reinforcing the extensive and interconnected nature of
supply chain management.

EXAMPLE OF A COAL MINER

Consider a coal mine, an extractor of raw materials. This entity relies on its suppliers for
mining machinery and services. Interestingly, the SC can loop in on itself. For instance, the
coal mine sends its coal to a power-generating plant. This plant, in turn, provides power to a
manufacturer who produces a machine. The completed machine then travels to a distributor.
This distributor, a business entity specialized in purchasing and reselling products without
manufacturing anything itself, sells the mining equipment back to the same coal mine that
initiated the process. This showcases the intricate and often cyclical nature of supply chains.

2. SCM in Services
SCM for services deals with the orchestration of intangible assets such as knowledge, skills,
and information. The services supply chain is more interactive and dynamic, often requiring
real-time responsiveness to customer demands. Here, the emphasis is less on physical
goods and more on creating unforgettable experiences and offering solutions to customer
problems. This type of supply chain management aims at enhancing service quality,
improving customer satisfaction, and building long-term customer relationships.

SERVICE-ORIENTED SUPPLY CHAIN ALSO REQUIRES SOPHISTICATED MANAGEMENT

In an electric utility’s SC, products, services, and supplies are actively acquired and then
distributed into three distinct channels: residential customers, commercial clients, and other
utilities. This process is more complex than it initially appears and can be compared to the
intricacies of a street vendor’s operation. The ‘products’ flowing through the chain can
encompass materials, supplies, and the components needed to create the menu items.
Information flow is crucial, starting with orders from end-users (caterers), moving to the
distributor (street vendor), then to the manufacturer (the assembler of ingredients), and
finally reaching the supplier (food source). Included in this information exchange are recipes,
shopping lists, potential demand forecasts, and possibly records of previous sales. Cash
flows are typically based on the data gathered from cash registers or credit card receipts.

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CASH TRAVELS
The cash follows distinct paths, moving from the manufacturer to the providers of goods and
services, and naturally, to any creditors or investors for payments of loans or dividends.

 There are also logistics management concerns: Transportation from one entity to the
other – perhaps drawing upon the private fleet of a car or two – as well as the
warehousing decisions. And finally,
 The reverses SCM exists to return any unacceptable menu items, recycle the
vegetable waste into a composter, reuse utensils, and other supplies after sterile
cleansing, and dispose responsibly of any packaging.

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