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The mobile phone you have bought online, the grocery you buy from your local store, the textile you procure to manufacture garments in your factory, there’s an entire ecosystem of goods procurement and transportation that has gone into it. And at the core of it all, lies the successful execution of an efficient supply chain operation. We take a look at the components of supply chain management that goes into enabling businesses to manage the entire system of delivering customers the right product in time.
What are the components of supply chain management?
Supply chain is a key component of every business, its activities impacting all verticals of the business, from sourcing and procurement, to production, inventory, and logistics.
Also read: Components of logistics management
We take a look at the components of SCM, share examples and try to understand how they drive efficiency and success in business.
1. Planning SCM at strategic and tactical level
At the core of supply chain operations lies planning – both at the strategic and tactical levels.
At the strategic level, planning involves having a deep understanding of market trends, customer preferences, and competition to forecast demand in the long and short run. At the tactical level, planning would involve identifying and monitoring vendor, supplier, distributor performances, signing contracts, renewal of contracts, to maintain production schedules and customer deliveries.
As a primary component of supply chain management, planning involves the following main functions:
- Demand forecasting – i.e., predict future demand by analysing historical data, using tools, and studying market trends
- Production planning – i.e., planning for procurement, scheduling production, and monitoring inventory to keep holding costs in check, manage lead time, and minimise production costs.
- Vendor, supplier, distributor relationships – i.e., drawing contracts, monitoring performance, negotiating rates, etc.
- Logistics and transportation – i.e., fleet management, route optimisation, order processing, returns management in SCM, etc.
Example of Planning as a component of SCM
For an electronics manufacturing company making mid-range smartphones, planning would involve:
- Forecast demand for handset sales, study new market entry, competition, and any other seen/unseen contingencies
- Procuring raw material for production (push or pull method), maintaining safety stock, placing reorders in time
- Building handsets, quality checks, maintenance and repairs, managing production capacity and labour availability
Also read: Understanding production logistics in manufacturing processes
2. Sourcing goods and services from trusted suppliers
If planning required identifying potential vendors and suppliers and arranging for procurement, then the next element of supply chain management – that is, sourcing is the actual execution of it.
Sourcing involves finalising suppliers/vendors based on multiple parameters and procuring the goods and services for manufacturing. This is a key step as any delay or damage in receiving goods/services will impact the overall production schedule. Sourcing requires finding vendors who can deliver as per production schedule or demand in the most cost-effective and efficient manner.
Businesses as such need to:
- Establish a foolproof procurement strategy
- Revisit the strategy periodically to identify gaps and improve the procurement process to keep it aligned to overall business goals
- Monitor vendor performance and supplier relationships, to ensure all SLAs are being adhered to
- Check product quality/quantity on delivery, manage inventory, make payments
- Reorder as per demand, economic order quantity or any other method being followed, allowing required lead time to vendors
Procurement and logistics in SCM are more than purchase and transportation. Efficiency in one can directly impact the other.
3. Managing inventory in-house and by vendors (VMI)
Of the various components of supply chain management, inventory management and control is the next important element.
As a business, it is one thing to procure quality goods in time. However, ensuring that they are stored safely as per standard guidelines, is another.
Many businesses fail to control and manage inventory intelligently, leading to losses and delay in the value-chain. There are numerous instances of overstocking, understocking, dead stock, wastage, damage and other instances of inventory management misses. Not surprisingly, modern businesses prioritise inventory management and use smart tools, data and advanced calculations (e.g., using inventory turnover ratio to calculate the time between inventory/stock and sales conversions) to optimise.
In certain cases, businesses might collaborate and work with vendors to manage inventory. This is usually the case with eCommerce businesses that require to manage volumes of inventory and keep delivery timelines to the least. Vendor Managed Inventory is usually adopted by B2B units where vendors have managed control over stock levels and replenish stock based on sales to avoid stockout.
Example of inventory management and VMI as components of SCM
For a garments manufacturer, inventory needs to be managed before and after production.
Now, when the manufacturer is taking B2B pre-orders, managing inventory is easier. Based on the PO, the manufacturer procures fabric/textile from its vendors and starts manufacturing. New fabric is received as per schedule and inventory is monitored systematically with limited variations or misses. Once the order is complete, the goods are transported in batches. Payments are received and the order is closed.
However, the scenario is times more complex when it’s a case of e-Commerce fulfilment catering to a B2C audience ordering online. In this case, the manufacturer has to plan production (Component 1) based on data, trends, and forecast. Based on the frequency and type of online order, the manufacturer will have to:
- Reorder fabric/textile from the supplier
- Monitor inventory level in collaboration with vendors
- Rearrange warehouse layout to optimise stocking space
4. Production process efficiency
Achieving production process efficiency is critical to business success and must align with the other elements of SCM. This can be achieved by adopting lean manufacturing practices which streamline operations, minimise waste, and optimise resources.
JIT or Just-in-Time inventory system is an example of this. Unlike the push and pull method, it aligns production schedule with demand, ensuring the final product is ready when there is demand for it. This naturally saves inventory space, reduces any wastage, lead time and storage costs, and keeps the process efficient.
Let us elaborate with a B2B delivery example. In our previous example of the garments manufacturer, keeping semi-stitched or half-stitched garments is an example of JIT approach. Once the actual order is received, the final garment is customised and completed as per the requirements, saving businesses time and driving agility.
5. Packaging, Transportation and Delivery
When discussing the difference between logistics and SCM, the next component of SCM is typically tagged as logistics tasks.
The order fulfilment process begins with order picking followed by packaging and labelling. There are three distinct activities that play a vital role here –
- Order picking, that is ensuring the right products are selected from the shelves, the data is updated, and the product after quality checks is sent for packaging
- Packaging, ensuring that the right packing materials are being used for the parcel, e.g., for apparel logistics, garments need to be packaged with appropriate protection to ensure there’s no wear and tear during transit
- Labelling, that is, addressing the right package to the right recipient, following the right instructions, messaging and documentation, e.g., tagging a package as ‘fragile’ when containing ceramic or glass
Transportation and delivery on the other hand, is often managed by third-party logistics service providers to reduce costs, cater to a wider audience base, and ensure efficiency. This is an integral element of SCM as it impacts direct customer experience. Poor delivery experience (i.e., delays, lack of updates, damaged products, missing products) will automatically lead to negative customer experience. When using third-party providers it’s therefore recommended to understand risks and ways to mitigate risks for 3PL.
6. Returns management or Reverse Logistics
The last element of SCM is returns management – that is, what happens when a customer decides to return a good.
One must understand that reverse logistics has become commonplace thanks to the e-Commerce revolution. With buyers having the option to return a product within a stipulated number of days, more buyers are encouraged to buy online and return goods if not satisfied.
But there is more to the reverse logistics process than the simple idea of returning goods. There are often refunds involved and goods once returned have to be sold to avoid losses. There are also the cases of goods not being sold which raises the additional question of disposal, repair or maintenance, or refurbishing or put back on shelf.
Similarly, when manufacturers procure goods from suppliers, after quality checks if products are not meeting the SLA/quality standards, goods are returned to the suppliers. This naturally delays production and affects the entire cycle.
As such, what businesses need to establish is to develop a process that makes returns management in SCM easy, quick and cost-effective.
Understanding the components of supply chain management is key to understanding the role of every element in the overall process. Businesses can plan and make better strategies that are aligned to the overall goals and bottom lines.
Businesses need to plan their supplier relations and understand how to choose and work with suppliers, how to plan inventory, manage resources, and other aspects of the organisation.