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What is Supply Chain Management?

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Published: 12Mar2010
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Supply chain management requires a holistic approach that measures critical points in the process. The modern business needs to change the traditional manner of procurement and logistics management, where functional areas are separated into stove-piped areas. The areas of sales, marketing, supply, maintenance, engineering, and logistics need to be integrated in a process that aligns these functions to gain efficiency and optimal performance. In 2009, the Institute of Supply Management stated that a 2.5% reduction in procurement costs produces the same amount of profit as a 10% increase in sales. Organizations can realize the value of strategic procurement, metrics, and performance evaluation by understanding the fundamentals and development process.

In 2003, Cook and Hagey discuss the fundamentals of an effective supply chain in their article published in the Journal of Business Strategy entitled "Why Companies Flunk Supply Chain 101." Five fundamentals make up effective supply chains: one, the correct strategy; two, talented managers; three, effective metrics; four, broad vision; and five, understanding the differences between components of the supply chain. Although each is important, replacing hunches with metrics enables managers to track quantifiable measures with rigorous methodology and quality data. The most successful metrics link operations to customers, suppliers, and logistics providers by monitoring the entire supply chain so that decisions can be made before problems impact customer service. Another critical component of the supply chain is flexibility allows a company to change as required to reduce cost, improve responsiveness, and fulfill customer requirements.

The process develops measurements meant to be flexible and enable the supply chain to be tailored to the unique needs of any organization. Five steps create an effective procurement foundation: metric mapping, metric validation, data collection, data and process analysis, and documentation of results and findings. By undergoing supply chain re-engineering, an organization focuses resources to improve all areas of the supply chain, such as relationships, planning, positioning, and delivery. The results of transformation are improved forecasting, distribution, collaboration, and automation. Managers require key personnel to monitor and evaluate key measurements of performance. Effective supply chain management ensures finished goods are available at the distribution centers, enable reliable and responsive production capabilities, make certain efficient use of production resources, and provide for effective production planning.

With standardization comes efficiency and flexibility, and methodologies, such as Six Sigma and Lean manufacturing, provide systemic methodology for the establishment of process standards. In 2004, Ramakumar and Cook stated in " Process Standardization Proves Profitable" for Quality Journal that companies engaged in process standardization are able to manage complex value chains and are 73 percent more profitable than organizations that do not use standards. To implement standardization, an organization must define metrics, enforce clear business rules, develop a logical flow of data and remain flexible to meet an evolving business climate. When sales are down and costs are rising, supply chain management enables an organization to maximize resource utilization and cash optimization. Explore supply chain management strategies as a way to improve the bottom-line of your business during these challenging economic times.

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