What Is Supply Chain Management? An Ultimate Guide in 2019

Gabriel Gheorghiu
Gabriel Gheorghiu  |  January 4, 2019

Companies looking for software to manage their supply chain tend to consider ERP systems as their first choice

While ERP for distribution products has some benefits, this type of software is not always the best option. Other kinds of ERP are either too generic or too tailored and do not offer robust features for supply chain management.

To understand what types of features and tools can help you with supply chain management, it’s important to know what a supply chain is and how it works.

What is a Supply Chain?

A supply chain is a network of partners that work together to manufacture or deliver products. This network can include companies of all sizes from different industries, including:

  • Suppliers of parts, components or raw materials used in manufacturing

  • Providers of services such as logistics, customs brokerage or warehousing

  • Manufacturers that manage production for their own purposes or for others’

  • Distributors and retailers who sell and deliver products to B2C and B2B customers

Challenges and Benefits of Supply Chains

Supply chains are an integral part of the wholesale and trade industry sectors. These sectors are expected to generate $34.6 trillion by 2024.

Globalization helps these companies find better ways to cut operational costs. However, supply chains exist for a more important reason: the economic principle of comparative advantage. This states that countries should specialize in making the products they do best and import everything else. In “The Wealth of Nations,” economist Adam Smith stated:  

“If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our industry employed in a way in which we have some advantage.”

In theory, everyone benefits from this economic strategy because no country could ever manufacture all the products it needs. In practice, the comparative advantage principle is based on the assumption that free trade does not restrict imports and exports. As recent “trade wars” showed, free trade isn’t really “free.”

At a microeconomic level, there are other challenges that companies face when managing their supply chains.

Probably the most critical challenge is that an essential part of the network is invisible to companies. For instance, manufacturers don’t always know much about the origin of the raw materials or parts they use in production, and retailers may not have many details on the products they sell.

This matters for several reasons:

  • Quality is critical for manufacturers, especially in industries like food and beverage, or chemicals. The wrong ingredient can completely compromise an entire food production batch (which can be worth tens or hundreds of thousands of dollars), or seriously jeopardize the health of consumers.

  • Compliance is usually related to quality, and it’s a way to enforce standards to protect consumers. The problem with compliance is that it isn’t applied the same way everywhere. When companies manufacture goods in countries where the law is very lax, their products usually need to go through quality tests when they are imported in the United States or Europe.

  • Consumer preferences and expectations are changing but can also vary depending on the market, demographics, and the type of product. We tend to have lower expectations from providers of cheap products, even though they are supposed to comply with the same quality rules as everyone else.

All these reasons can be combined when consumers expect good quality, fair and sustainable products, and transparency. Few products in the market comply with all these criteria, and they are usually more expensive than similar products. An example is the Fairphone, a smartphone manufacturer that claims to “aim to create positive social and environmental impact from the beginning to the end of a phone’s life cycle.” They even created a map of their supply chain which provides information on all of their 112 suppliers.

Fairphone supplier map

Another critical challenge of supply chains is the fact that all activities require advanced planning, which means that there is little room for error. For instance, a product that has just been launched has probably been designed one year before, manufactured a few months later, and delivered to retailers weeks before being sold.

If for some reason, one of the parts used to make a new smartphone hasn’t been tested enough to ensure that it will work properly, the manufacturers who produce it and the retailers selling it will have a hard time addressing the issue after the launch of the product. Remember the BlackBerry Storm? Having only taken nine months to design, the BlackBerry Storm was launched with all kinds of problems and completely ruined BlackBerry’s chances of challenging Apple. (For more failed smartphone launches, here’s a list of Worst Phone Launches of All Time.)

Supply chain management software features

Like all business software, SCM should help you solve business problems. For the supply chain, the fundamental challenge is to match offer and demand. Let’s take a look at how to do it by using SCM functionality.

Demand planning

helps you identify who may buy your products, so you know what needs to be purchased or manufactured. When evaluating demand for products, you cannot rely exclusively on the customers that already placed orders because some will change their minds and you’ll hopefully find new customers. This means that demand can vary greatly, which makes it difficult to estimate.

To help with demand planning, SCM software provides features for forecasting using historical data and taking into consideration market characteristics such as volatility and seasonality.

Volatility may refer to changes in customer behavior that may impact demand but to the market of raw materials and components. For instance, Europe risks a shortage of 14 materials that are in high demand because they are used to manufacture mobile devices and computers.

Seasonality is not an anomaly but a standard characteristic in markets such as fashion and apparel or agriculture. While companies from these industries usually know when their activity will peak, they also need to determine the demand for each season to plan accordingly.

Sales and operations planning (S&OP)

S&OP is used to align business processes across all departments involved in supply chain management: sales, manufacturing, procurement, and financials. This alignment is particularly important for medium and large companies who use multiple software products with different business rules and workflows. By using S&OP software, companies ensure that all departments have the same goal: to increase the revenues and the profitability of the company. This type of functionality also helps businesses create forecasts and what-if scenarios at the company level, and identify how each department can impact the other or the success of the organization.

Supplier relationship management

Supplier relationship management helps you choose the best suppliers to fulfill the demand for your products. Manufacturers need raw materials, parts, and components, to manufacture finished products, while retailers and distributors need to buy products and resell them. Managing relationships with suppliers can be very complicated; research shows that there are 145 forms of formal and informal types of relationship links between buyers and suppliers, which can be grouped into 11 categories:

Supplier performance management helps companies evaluate suppliers based on multiple criteria such as on-time deliveries, product quality, costs, reputation, and so on. An essential challenge of managing suppliers is that their performance can change significantly in short periods. A recent example is one of the largest providers of airbags, Takata. The company’s faulty products led to the most important recall in the history of the automotive industry, with an estimate of 20 million cars affected

Procurement software

Procurement software helps you buy the products you need to fulfill demand, from reliable suppliers. If you already found suppliers and evaluated them to identify their strengths and weaknesses, you’ll need to make sure that they can deliver the products you need. Even when you worked with a supplier for a long time and you have a great relationship, it helps to consider the offering of other providers so you can compare.

To make sure that you compare supplier offerings on an apples-to-apples basis, you need to use functionality for request for Information (RFI), request for proposal (RFP), and request for quotation (RFQ).

As the name implies, RFI is used to ask for details on the products offered by suppliers, including item descriptions and standard pricing. RFIs are usually sent to many suppliers and sometimes made public so that any supplier can respond. This information should allow you to eliminate 80–90 percent of the suppliers that aren’t a good fit for your company. To further differentiate the finalists, you can send them an RFP, which includes more details such as custom pricing and high-level specifications of the items provided. Comparing RFQs will help you identify only a few finalists, which will receive an RFQ document to provide even more information on how they can meet your specific requirements.

It is not always necessary to use all three types of requests, but it can be beneficial when you’re looking for components that are critical for you. For instance, a computer manufacturer will need to carefully choose compatible and reliable hardware drives, while the selection of computer cases is not as essential.

Logistics

Logistics software helps companies move products between different locations such as manufacturing facilities, warehouses, harbors, distribution centers, and retail stores. The most critical aspects of logistics operations are the management of the warehouses where products are stored, and the transportation operations needed to move products between locations.

Warehouse management can be straightforward when companies only have only one location where they store parts and finished goods. Things are more complicated when businesses use multiple warehouses, third-party storage providers, or distribution centers (which are hubs used to redistribute products to retailers and consumers). When companies store their products in multiple warehouses, they need to know precisely where which product is, in what quantity, and in what location (ideally down to the shelf or bin level). This helps companies keep track of their inventory and quickly find products for picking and shipping.

When goods are ready to be shipped, companies need to find the optimal transportation options to deliver on time and at reasonable costs. The businesses that own their fleet of trucks use logistics software to plan their utilization so that each vehicle is utilized to the maximum capacity. All other companies need to find providers of transportation services. Logistics software should provide features for both options since many companies prefer not to rely exclusively on one or the other.

Supply chain visibility

This is a somewhat abstract concept which should ideally allow companies to know everything that’s happening in their supply chain. Since this is almost impossible, companies tend to focus on visibility challenges that matter most for their industry.

One example is traceability, which is critical for food and beverage manufacturers, who need to be able to identify the origin of any ingredient used in production. This is important not only to hold suppliers accountable but also to determine the causes of health hazard such as outbreaks of salmonella or listeria. According to the World Health Organization, foodborne diseases are a significant global problem.

Supply chain traceability

What to do next

It helps to familiarize yourself with the concepts and terms used in supply chain management, which aren’t always self explanatory. Here are a few glossaries that provide much valuable information

It is also essential to learn about the main providers of supply chain & logistics software. Even though you may not need new software, you will find out what they offer, what’s new in the market, and what companies like are doing to optimize their supply chain activities.

Gabriel Gheorghiu
Author

Gabriel Gheorghiu

Gabriel’s background includes more than 15 years of experience in all aspects of business software selection and implementation. His research work has involved detailed functional analyses of software vendors from various areas such as ERP, CRM and HCM. Gheorghiu holds a bachelor's degree in business administration from the Academy of Economic Studies in Bucharest (Romania), and a master's degree in territorial project management from Université Paris XII Val de Marne (France).