Understanding Supply Chain Management

What is Supply Chain Management?

In order to produce and distribute a product, a company needs to set up a network of companies that can handle the different steps and processes that transform raw materials into the final product – and deliver that final product to the customer. This network of suppliers is known as the supply chain.

Supply chains are made up of several different companies, such as producers, vendors, warehouses, shipping companies, distribution centers, and retailers. Depending on the company and the type of goods or services they’re providing, this network can become incredibly complex.

A simple example of a supply chain would be:

Raw Materials → Producer → Distributor → Retailer → Customer

Supply chain management is the practice that handles all of these entities and their operations. The main goal of supply chain management is to ensure that all of these parts work together smoothly throughout the production cycle.

How Does Supply Chain Management Work?

The supply chain is the most obvious “face” of the business in the eyes of customers. Therefore, the better and more effective a company’s supply chain runs, the better reputation and stability the company will have.

There are 5 key stages to effective supply chain management:

1. Planning

Planning is vital to control inventory and manufacturing processes. Companies must first decide on their operations strategy. This first step plans for and manages all the resources required to meet the demand for the product or service you’re providing. One example of a major decision to make during this stage is whether to manufacture a product or component yourself or outsource it from a supplier. Other important steps of the planning stage include:

  • Map out the entire supply chain (suppliers, manufacturers, distributors, etc.)
  • Determine communication plans for the entire supply chain
  • Establish metrics to measure supply chain performance and gather data

2. Sourcing

Sourcing involves organizing how you will obtain all the raw materials and components needed for your product or service. Once sources have been selected, companies must negotiate contracts, schedule deliveries, and manage supplier relationships. Other key sourcing processes include:

  • Ordering
  • Receiving
  • Managing inventory
  • Assessing supplier performance
  • Authorizing supplier payments

3. Manufacturing

Manufacturing is the stage that takes all of the raw materials and components and transforms them into the finished product. This may be done in-house, or by outsourcing to a manufacturer. Essential parts of the manufacturing stage include:

  • Assembling
  • Quality testing
  • Packing for shipping
  • Scheduling for delivery

4. Delivery & Logistics

Delivery & logistics encompasses everything related to shipping the product to a retailer or customer. Vital aspects of delivery & logistics include:

  • Coordinating customer orders
  • Scheduling deliveries
  • Warehousing/Inventory management
  • Invoicing
  • Payment processing

5. Returns

The Returns stage is a post-delivery customer support process that handles returns of damaged or defective products. Another name for the returns stage is “Reverse Logistics”, and it is arguably the most important component of supply chain management. Major parts of the returns stage include:

  • Identifying the product’s condition
  • Authorizing returns
  • Scheduling shipments 
  • Replacing the defective products
  • Providing refunds

In addition to customer returns, this stage also applies to materials you receive from your suppliers. If you receive low-quality, damaged, or defective raw materials or components, this stage handles returning these items to the supplier.

Why Is Effective Supply Chain Management Important?

Supply chain management has a huge impact on a business – both in terms of company success and customer satisfaction. Today, the retail industry runs on a “just-in-time” supply chain – where shelves or online inventories can be restocked just as quickly as product is sold. Ensuring that your supply chain runs as smoothly as possible can prevent all sorts of headaches for you and your customers.

Effective supply chain management has several crucial benefits to businesses:

  1. Reduced Overhead Costs
  2. Improved Quality Control
  3. More Efficient Production Cycle
  4. Improved Collaboration
  5. Able to Meet Increased Demand

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