What is Supply Chain Management?

A supply chain is the collection of steps that a company takes to transform raw components into final products and deliver them to customers. Supply chain management (SCM) is the process that is used by a company to ensure that its supply chain is efficient and cost effective. This typically is comprised of five stages: planning, development, manufacturing, logistics and returns.

During the planning stage, a strategy must be developed to address how a given product will meet the needs of the customers. A significant portion of this strategy often focuses on planning a profitable supply chain. The development stage involves building a strong relationship with suppliers of the raw materials that are needed in making the product the company delivers. This phase involves not only identifying reliable suppliers but also creating methods for shipping, delivery and payment.

In the next stage, the product is manufactured, tested, packaged and scheduled for delivery. Then, at the logistics phase, customer orders are received, and delivery of the goods is planned. The final stage of supply chain management is when customers can return defective products. The company also must address customer questions during this stage.

Another model for supply chain management groups all management activities into three categories: strategic, tactical and operational. Strategic activities include building relationships with suppliers and customers and integrating information technology (IT) within the supply chain. Studying competitors and making decisions regarding production and delivery would fall under the tactical category. The operational category includes the daily management of the supply chain, including the making of production schedules.

Companies use forecast-distribution models to have the appropriate inventory that is needed to meet fluctuations in customer demand. Forecast-distribution models help companies maintain more efficient — and therefore more effective — supply chain management strategies. Under this model, participants in the lower end of the supply chain, rather than those nearest to the customer, increase their orders frequently when there is a rise in demand. Conversely, when there is a decrease in demand, they decrease or stop their orders to prevent excessive inventory.

This greater variation in demand that can be seen in the supply chain as one moves away from the customer is known as the whiplash or bullwhip effect. A possible solution to this effect is Kanban, a demand-driven method of supply chain management. Using this method, which originated in Japan, the participants in the supply chain would react to actual customer orders, not forecasts of them.