What is a Supply Chain and SCM?

Posted On January 4, 2016 by Charles Hsieh

If you own a business, then you have a supply chain. Don’t worry if you can’t figure out what it is yet. In this article, we will define exactly what a supply chain is and the different types of supply chains. You will also find out why supply chains are not just for product based companies. For some deeper understanding, we will explore the history of supply chains: where they have been, where they are, and where they are going. All of this background should give you the basic understanding needed to talk about what goes into SCM. But what exactly is SCM? What is expected from someone that specializes in SCM? With all of this new found knowledge you will be on the path to making your business more productive, and running smoother than ever.

Supply Chain

A supply chain is not just a list of where things are coming from and going to. Supply chains are complex systems that rely on the interconnectedness of people, information, resources, organizations, and activities. The end result of this chain is to move a product or service from the supplying company to the paying customer. For a the sake of having a simple definition, we will say: A supply chain begins with the acquisition of the raw materials and ends when your customer is satisfied with the final product or service. Though every type of business has a supply chain, what you are producing will influence the focus of the chain. The two main categories of business are product and service. A product based business sells a physical thing. A product could be scissors, laundry detergent, smartphones, window panes, and anything else that can be owned. A service based business sells something that is intangible. These intangible services might take the form of landscaping, plumbing, accounting, wedding planning, sandwich making, as well as anything else that abstractly exists through someone else’s actions.

Wrap Up

• Supply chain- Begins with the acquisition of the raw materials and ends when your customer is satisfied with the final product or service.
• The two main types of businesses are: product and service.
• Both product and service based businesses have a supply chain.

Product Supply Chain

One of the most important things to remember about product based businesses is that product cost is not equal to material cost. Buying things, making things, moving things, selling things, and servicing things all cost money. On top of the cost, all of these things must be done using sustainable material, energy, and methods. Materials will cost an initial fee. Those materials may need to be boxed. The materials may need to be packaged a certain way to keep them safe. The packaging material (boxes, styrofoam, bubble wrap, etc.) and the employee salary needed to make sure that the packaging is done, will each have costs. From there the packaged items will have to be loaded onto a truck, which is often the job of a separate employee. Once the package is loaded, a driver will need to drive it to the next location. That driver will need fuel and insurance. Will your product have a unique design or any written information that requires a printed label? If it will, then there is the added cost is to design that label, print it, and then ship it to a point on the supply chain where it can be applied to your product.

Shipping the label will also require packaging, shipping, and driving. Driving will again cost money for fuel and insurance. Besides adding the labels to your materials, there may also be some assembly required to turn your materials into finished products. If this requires a factory and machines, energy and employee costs can be added to the equation. If you must run a factory, then you are essentially running a workspace that will also have mundane costs such as cleaning, machine maintenance, stocking bathroom supplies, replacing equipment, etc. Once the product is completely finished and ready to ship, it will need to be packaged, shipped, and driven once again. This time, they will be delivered to distribution centers. So now you can start making your money, right? Not yet. The distribution center also has costs of its own, just like any business. It has employees, machinery, energy costs, etc. The next step is more packaging, shipping, and transportation, and all the costs that go along with those things. This time, when the products arrive at their destination they will be in the hands of the retailers. Those retailers will need employees of their own to stock the products. If the product must be refrigerated, there will be an additional energy cost. Maybe the store needs security in the way of a guard and/or alarm service. The store will also need insurance of its own.

Once everything is in the hands of the people that will be selling it, the costs are not over. If anything has been damaged at any point in the process, it will need to be returned. That will be additional costs for packaging, shipping, and transportation as well as the potential losses in replacing that product. The replacing process will also mirror the supply chain and all of its costs. If you offer customer support for your product, you will also need to keep employees staffed to answer questions. Boxes, buildings, people, fuel, vehicles, machines, and energy will cost money every time they are used. Nothing in the process is outright free. If your business is selling a product, your supply chain is going to look something like this. It may have more or fewer links in the chain. There may be many manufacturers that you rely on, which requires a lot of shipping and assembly, or you may have an eCommerce site ships directly to customers, cutting out the retailer aspect.

Wrap Up

• Product supply chain- An interconnected network of processes, people, information, resources, organizations, and activities that results in the delivery of a final product.
• Product cost is not equal to material cost.
• Your exact process might look different depending on the type of business you do, and the product(s) you sell.

Service Supply Chain

Service economies also rely on a supply chains. They are not as obvious as the steps in a product supply chain, but understanding them will still help your business. The easiest place to start in a service supply chain is with the products the business uses. To illustrate this, business professors usually talk about restaurants. A restaurant is not really making a product, they are delivering a service. Before they can make your food, though, the ingredients need to be there. Those things need to be ordered, packed, shipped, unloaded, and stocked. On top of ingredients, you will need napkins, utensils, drink cups, straws, etc. Now we can take this example and expand it out to any service based business. A pet groomer needs shampoos, faucets, gloves, towels, etc. A mechanic needs wrenches, jacks, bolts, rags, receipt paper, etc. The service supply chain starts simply with materials, similar to the product supply chain. These supplies must be stocked and functional. Those supplies need to be organized and sometimes assembled so that they are ready for use.

On top of buying necessary products, service businesses are manufacturing services. This is where the supply chain becomes abstract. Service oriented supply chains cause us to refocus our thinking. Product based supply chains mainly center around increasing productivity and utilizing all existing assets. The focus on assets is because they are the means of production. Service is more about capacity. How are the employees managing the work that they have to do? The success of a service based company is centered around ensuring quality service. Staying at or below capacity is the way quality can be controlled. Structuring this supply chain is all about getting the most out of the knowledge and talent in the company. The amount of work will determine how knowledge and expertise can be utilized.

Wrap Up

• Service supply chain- An interconnected network of processes, people, information, resources, organizations, and activities that results in the delivery of a service.
• This process has similar elements to a product supply chain, but becomes more abstract.
• Service supply chains will vary greatly depending on the industry and goals of the company.

The Past, Present, and Future

The supply chain is not that old of an idea. Its origins only date back about two or three decades. During that very brief span, the ideas behind supply chains have changed quite a bit. Originally the supply chain was viewed as a means to reduce cost, and an improvement in the supply chain meant that the costs were reduced. This is still the focus many companies place on the supply chain, but there is a school of thought that is straying away from this norm. The supply chain is now being seen as the way in which the business brings value to the customer. The supply chain is the company. It is an opportunity for branding and defining your difference in the market. No longer is an individual business seen to compete with another individual business. It is the quality of the supply chains that is the competition. This shapes our attitudes toward partnerships and relationships.

Supply chains use to be vertical, way back when. What that means, is that companies use to own every part of the chain. If you made a car, you made the entire engine, the wheels, the tires, owned the rubber tree plantations, the metal foundries, ore mines, etc. This was referred to, at the time, simply as vertical integration. At this point, there was no real concept of a supply chain. You were a business that did, and made, everything your business needed. It was somewhere around the late 1900s, somewhere near the turn of the century, where horizontal integration began to build traction. It seemed as though the solution to having to manage every part of the business was to outsource different aspects to specialized companies. To do this, companies began to create partnerships. This, in turn, makes a business very reliant on suppliers, who may not even be in the same continent. Horizontal integration goes hand in hand with a lack of control. Through removing burden, the business sacrifices vigilance.

There is another change happening now. Right now there is a bit of instability in supply chains. That is due to the wide uncertainty in the business market in general. The modes of operation have always been based around the stability in the world. Forecasting was not hard when tomorrow was going to look just like today. Planning for tomorrow was in fact based on the idea that we knew what tomorrow held. Now there is uncertainty in the demand and the supply side of the chain. Is the company I am partnered with going to be here in a year? Will my customers support this change? It is a time of demand-driven production, with no ability to forecast future events.

Going along with events as they happen seems to be the best method for success. For that reason, we will need agility and flexibility in our supply chains. Forecasting allows for refining. Refining is fantastic and it can allow you to focus on increasing productivity. Unfortunately, it is just not possible to forecast like we have in the past. Flexibility is based around taking action quickly. It is strong reliable relationships that allow you flexibility. These relationships have to exist on both ends of your supply chain. That means strong communication with other companies you work with, and the customers that buy your goods or services, will allow you to act quickly on demand. By having open channels of communication, demands can be relayed to you, and subsequently, travel down the supply chain until the product/service is delivered to the purchaser.

Efficiency will eventually fall to the company’s ability to respond. As a result, the supply chain may take the form a demand chain. The importance of marketing will be seen as linked with the chain, because marketing is meant to generate demand. The supply chain is tied more than ever to the marketing capability. Something that the company wants to offer needs to be ready to deliver without much time for preparation and planning. Things are happening quickly, and success will be defined on how quickly the chain can capitalize on that change. In the larger companies today it is not just about a low cost for a valued item, it is about the supply chain and how it cradles the value proposition. By offshoring supply chains we have lengthened them, and in instances, this has caused companies to lose control of the product. Finding and building the proper supply chain architecture will be the saving grace of businesses. Design should be the focus going forward.

Wrap Up

• Supply chains are a relatively new concept.
• The focus of supply chains has expanded from just simply cost.
• The changing business market has changed what is expected out of supply chains.

SCM

Supply chain management is often referred to as SCM. At the root, SCM is the management of the chain of supplies. Everything described in the product and service supply chain needs to be overseen. Supply chains are the like the internal organs of the human body. First off, they need to be there. Second off, they need to function. If at any time they start to fail, you are in an emergency situation. Some people may say that the supply chain is more the foundation that everything needs to be built around, but a foundation is too stable for this metaphor. Your organs have processes, some of which are involved in seemingly unrelated tasks. However, at the end of the day, the organs all help to keep the body alive. All the organs demand different levels of attention and nourishment. Without constant attention, the systems will fall apart. The largest responsibilities of a supply chain manager are understanding the focus expected out of the chain, designing the chain, negotiating partnerships, and keeping it all running smoothly.

Before design or negotiations start, a supply chain manager should understand the goal of the supply chain. Is the goal to cut costs, create a flexible system for quick response, increase productivity, or utilize knowledge? It may be none of these, but what is important is that you know whether or not it is one or none of these examples. Once you know the goal you can start to design the supply chain. Now you may not be able to do a complete redesign, so what does your particular supply chain look like? Can you cut out anything? Are there things the company should be doing that it is not? Are there ways to cut costs without sacrificing quality or efficiency? These are questions that the supply chain manager will have to ask. Beyond asking, the manager will have to answer these questions and even use them to construct further questions.

A big part of SCM is negotiating the cost of each part in your supply chain. Negotiation is going to determine how much you are paying for the services and materials you need. If done well, negotiation will also get you other perks and incentives to make the supply chain run smoother. To have a functional supply chain, your supplies have to be functional. The only way to assure functionality is to invest in high-quality services and materials. Purchasing executives buy the materials and services. If this position is not handled by you specifically, in order to manage your supply chain, you will need to make sure that these executives are not making purchasing decisions based solely on cost. A purchase based solely on cost assures that you are going to get the cheapest product. Cheap is often associated with low quality. This is not always the case, but if it is the sole driving factor for all of you buying, then it will ensure that you are getting many low-quality products and services. You are what you negotiate. You are who you buy from. You are reliant on your team of executives to understand the finer points of corporate purchasing. And your success comes down to how you manage all of those parts of the business.

In the current state of horizontal integration, everything that goes into the supply chain needs to be managed. That management is not as simple as keeping track of shipments, dates, and account information. Managing a supply chain takes the thinking of a business executive or more specifically, an entrepreneur. Chances are, the process is not going to be handled efficiently every step of the way. Along with damaged products, some may just end up missing. Often business owners believe that outsourcing or even offshoring might be able to save them money. The most it may offer you is the experiences of a company that specializes in the task you need to be completed. This practice can save you a hefty initial investment, and a lot of time, but in the end, any outsourcing will simply pass along the costs to you.

Wrap Up

• SCM- Stands for supply chain management.
• Supply chain management- The management of the chain of supplies.
• Supply chain manager- The person hired to make sure that the supply chain is running smoothly, reduce the effort involved, and keep costs to a minimum.
• It is up to management to make sure the end product is what the customer is looking for.
• Giving the product requires the product to be available on a reliable schedule for a price that the market will support.
• The supply chain manager needs to keep the business in mind so that the company can make a profit.

Conclusion

Supply chains begin with the acquisition of the raw materials and end when your customer is satisfied with the final product or service. Both product and service based businesses have a supply chain. Be aware that your product cost is not equal to your material cost, and that service supply chains may be very abstract. Your exact process might look different depending on the type of business you do, and the product/service you sell. With this basic understanding of supply chains and supply chain management, you should be able to figure out the methods that would benefit your business. Remember that a supply chain is a living process. Things naturally breakdown, so maintenance must be swift and constant. Now go forth and dominate the business world.