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Supply Chain

What Is Supply Chain Management - and Why Is It So Important?

Toby Mcinnis

02, Sep 2020

10 mins

40% of food being procured in the USA is lost during its journey from field to fork. And while such waste might seem extraordinary, the food industry is in fact far from unique in this regard.

From fashion and food to electronics and healthcare, virtually every industry you can think of faces profound challenges in successfully sourcing, producing, preserving and transporting its products. In 2019, 51.9% of businesses reported at least one significant disruption to its supply chain; 2020, one must assume, has proven a greater deal more difficult still.

With the rise of globalised trade, even seemingly simple goods like bread and cheese require dozens of suppliers and producers across multiple countries to work in perfect coordination to match pace with consumer demand.

The art of maintaining and optimising this coordination is known as Supply Chain Management (SCM).

What is Supply Chain Management?

In the simplest sense, SCM is the process of securing and continually optimising the flow of a supply chain – the flow of information, the flow of cash and the flow of physical goods.

It involves designing, planning, and monitoring the interactions between suppliers, producers and consumers, with the intention of avoiding and resolving disruptions, improving efficiency and ultimately increasing profitability for the business selling the product.

When done correctly, this can have an extraordinary effect: 57% of companies believe their SCM strategy gives them a competitive edge, enabling them to operate more efficiently and grow their business more effectively; 70% of industry professionals say that an effective supply chain creates better customer service; and increasingly in global business, competition is based not simply on the popularity a given product or brand but the efficiency, effectiveness and agility of a company’s SCM.

To better understand how SCM works in practise and why it is such a vital component of modern business, let’s explore some of its key elements in more detail.

The Key Elements of Supply Chain Management

Network Logistics

From the extraction of raw materials to the delivery of a final product, supply chains typically involve a large network of individual suppliers, manufacturers and vendors who are connected only in their shared participation in a particular business’s supply chain.

Supply Chain Managers are responsible for ensuring that this network operates smoothly, so that every actor knows what is needed from them when, and has the time, information and necessary cash to deliver it.

If a single supplier or producer is unable to fulfil their tasks in the allotted time, these delays will cascade through the rest of the chain, causing excess costs and potentially damaging your business’s image. This means Supply Chain Managers must pre-emptively secure their chains against potential disruptions.

In recent years, just-in-time manufacturing has become increasingly popular. By tightening production schedules and delivering goods as close to point of consumption or sale as possible, businesses aim to create greater efficiency within their procurement process.

This requires Supply Chain Managers to create increasingly agile networks which can adapt effectively to Realtime fluctuations in supply and demand.

Supply and Demand

Every supply chain’s ultimate destination is a consumer – whether that’s another business or a member of the public. Because the demand for products rarely remains static or consistent, Supply Chain Managers are tasked with measuring and predicting how much of a product is going to be needed and adapting production accordingly.

Underproducing your product – so that a portion of potential buyers don’t have access to it when they want it – entails both financial and reputational losses, as KFC discovered in 2018, when a single delivery disruption caused more than two thirds of its restaurants to shut for a week – leading to widespread mockery and nearly £1 million each day they were under supplied.

But overproducing your product –creating excess stock which will either lose value or actually be rendered unusable – is likewise damaging to a business’s bottom line.

Managing these demand-related dangers often involves predictive market analytics, as well as smart financial management so that cash flows properly and can be readily accessed in the event of an extreme disruption to demand.

Financial management

At any given time, a large percentage of most business’s finances are likely tied up in their supply chain. From the very first phase of production, parts – and the labour required to produce them - need to be paid for, and that creates serious potential for finances to get tangled up in the chain.

SCM involves ensuring that costs are kept as low as possible and that budgets are adhered to. This involves continually looking for ways to cut costs and improve efficiencies – whether through changing suppliers, re-negotiating deals or simply finding more effective ways of structuring the network.

But it also involves simply ensuring that cash flows efficiently to the right people at the right time, never getting clogged up in the system. If cash flow is disrupted even briefly, the subsequent delays will cause further excess costs, creating a feedback loop of inefficiency which has the potential to cripple a company.

The Coronavirus pandemic illustrates this: Two thirds of businesses around the world report paying more for goods and services as a result of the pandemic, and this has the potential to create huge bottlenecks in their ability to produce at scale.

Quality and Due Diligence

From straightforward safety regulations to ethical and sustainability concerns, how a business sources its goods is increasingly scrutinised. Due diligence must be ensured at every step of the supply chain, and Supply Chain Managers are tasked with ensuring that happens.

This involves understanding and carefully choosing where suppliers are bought from, how they are handled and what the ethical and safety impact of this process is.

H&M, Adidas and Nike have all fallen foul of poor due diligence in recent years, having been accused by Greenpeace of using suppliers who poured toxic chemicals into Chinese rivers.

Consumer demand for more sustainable practises is rising rapidly; many are now willing to pay more for more ethically sourced products. This leaves Supply Chain Managers tasked with the challenge of finding financially viable ways of improving the quality of their suppliers and innovating so that plastics, palm oil and the like can be removed from their products.

Equally, simply maintaining and improving the quality of supplies – and therefore the final product – is vital. Because Supply Chain Managers are trying to continually reduce costs and improve efficiency, quality is an important concern, as cutting corners on supplies can have deadly externality.

Technology

No serious supply chain can function today without substantial technological aid, and Supply Chain Management involves the harnessing and streamlining of this technology for the specific needs of a specific chain.

Whether it’s managing finances to ensure cash flows efficiently or creating visibility in the supply chain so that diligence is maintained and scammers are thwarted, every element of SCM we’ve discussed now benefits from the smart leveraging of technology.

81% of supply chain managers report that data analytics are a crucial aid in reducing costs, and a 2016 Boston Consulting Group study discovered that adopting digital supply chain technologies produced 10% higher product availability and a 25% faster response to market changes.

With the maturation of technologies like AI and Blockchain, SCM will increasingly involve the intelligent use of tech to improve supply chain efficiency and find new avenues of growth for businesses; Supply Chain Managers must be champions of these technologies.

Conclusion

The future of business looks increasingly to be strategic; rather than

Schumpeter’s creative destruction, the innovations that will drive most businesses into the future will be about how, not what, they produce.

Supply Chain Management is at the heart of this, and while it may not have the glamour of innovation, it is a hotbed for the kind of steady-but-profound strategic improvements which most global businesses require in order to survive.

As the global pandemic persists, businesses across every industry find themselves in free fall; by leveraging a dizzying range of disciplines and technologies, Supply Chain Managers will be the air traffic controllers who eventually help them safely land.

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