Supply chain management:
Definition, importance, and risks

Supply chain management is a holistic approach to monitoring the life cycle of materials as they flow in, through, and out of a business — from production to distribution to returns.

Supply chain management includes:

• Procuring
• Sourcing raw materials
• Manufacturing and production
• Shipping, receiving, storing, and fulfilling
• Managing returns and exchanges (reverse logistics)
• Optimizing the overall strategy for supply chain profitability

To get an idea of why supply chain management (SCM) is so important, let’s take a look at the overarching goals companies set for their SCM initiatives — and what happens when these initiatives succeed.

Supply chain management goals and benefits

The goals and benefits of proper supply chain management go hand-in-hand, but — for the sake of clarity — we’ll separate them into two types: (1) functional and (2) financial.

Goals of supply chain management

The functional goal is efficiency: operating as smoothly as possible.

Proper SCM removes friction throughout a company’s supply chain: procurement and manufacturing, receiving and warehousing, picking, packing, and fulfillment, as well as reverse logistics (returns).

This means mapping your supply chain in its entirety — both within and beyond your organization’s “four walls” — and then ensuring visibility and clear communication at each point:

1. Sourcing

   1. Materials
   2. Components

2. Manufacturing

   1. Product development
   2. Finished goods
   3. Quality assurance

3. Shipping and receiving

   1. In-house
   2. Warehouses
   3. Third-party logistics (3PL)

4. Distribution

   1. Order management
   2. Inventory management
   3. Picking and packing
   4. Fulfillment to customers

5. Reverse logistics

   1. Returns
   2. Repairs

For a more detailed examination of SCM — particularly how small and medium businesses are leveraging the “cloud” — download We are builders: The SMB’s guide to cloud manufacturing.

Importance of supply chain management

Attaining optimal — or even near-optimal — performance generates major financial gains for your business. Naturally, the more efficient your processes, the more cost-effective they become: money, time, and energy.

Better visibility, demand forecasting, and coordination reduces a host of supply-chain hang-ups … like redundancies, overstocks, and stockouts.

Additionally, SCM allows you to forge more trusting and valuable relationships with the out-of-house members of your supply chain.

On one side of the equation, your vendors and suppliers will appreciate the clockwork-like nature of reorders. On the other, your customers will love that you always have the products they need … in stock and ready to be shipped.

For instance, Deloitte found that 79% of companies with high-performing supply chains show “significantly higher-than-average” revenue growth than others in their industry.

If your supply chain processes run smoothly and economically; if you’ve found the best suppliers for your needs; and if you’re able to consistently provide for the needs of your customers, your company will be in prime position to spur major growth.

That is, as long as you approach supply chain management purposefully …

Supply chain management principles and strategy

Back in 1997, supply chain experts David L. Anderson, Frank F. Britt, and Donavon J. Favre collaborated on an academic paper titled The 7 Principles of Supply Chain Management.

So valuable and influential was this article that Anderson, et. al., updated it in both 2010 and 2013. 

The seven core principles remain just as relevant today to shaping a supply chain strategy …

1. Segment

Segment your customers based on their service needs, and adapt your supply chain to serve each segment efficiently — and profitably.

By keeping track of your individual customers’ purchasing habits (e.g., how often they purchase from you, how much they purchase in a transaction, etc.), you’ll always be prepared to deliver value as needed.

2. Customize logistics based on segments

Customize the logistics network to the service requirements and profitability of each segment. 

Once you’ve segmented your customers, ensure your processes are tailored to meet their individual needs — all while remaining optimally profitable for your business.

3. Develop demand forecasts

Listening to market signals and aligning demand planning across the supply chain, ensues consistent forecasts and optimal resource allocation. 

Build flexibility into your SCM initiatives, so that you’ll be ready to deal with any extenuating circumstances that may come about over time.

4. Differentiate products

Differentiate your product further down the supply chain (closer to the customer), as this will allow you to get more granular in determining true demand metrics. 

For example, if you have five customers looking for five different versions of a core product, you’ll still want to base your forecasting on the number of core products you’ll need to fulfill these orders.

You can then create and deliver the customized products as appropriate.

5. Reduce costs

Manage sources of supply strategically to reduce the total cost of owning materials and services.

Rather than only looking to decrease supply chain-related costs to your company, work with your suppliers to optimize their costs of doing business with you. If you can keep costs down while also maximizing productivity, you both stand to benefit majorly from the relationship.

6. Implement technology

Develop a supply chain-wide technology strategy that supports multiple levels of decision-making and provides a clear view of products, services, and information. 

This means ensuring that all supply chain-related personnel has access to any and all information they may need at a given point in time, and that it’s presented within context that matters to the specific team member.

7. Analyze performance

Adopt channel-spanning performance measures to gauge your overall ability to reach the end-user effectively, efficiently, and economically. 

This will allow you to easily identify areas in need of improvement, as well as areas where your supply chain processes are running as smoothly as ever.

While there are a variety of ways to put these principles into action, what’s most important is to understand that each are equally important to a well-rounded supply chain. 

By adhering to these principles, you’ll not only be able to easily mitigate any obstacles your organization may face — you’ll also know exactly what you need to do to set your company apart from your competition.

Speaking of competition...

Supply chain management risks and challenges

There will always be supply-chain related challenges you’ll need to deal with over time. Whether you overcome these challenges or let the challenges overcome you depends on how prepared you are to face them.

That said, let’s take a look at some of the most common challenges you’ll face as you manage the various aspects of your supply chain.

Overly lengthy lead times

Longer lead times mean more chances for things to go wrong.

If a company typically takes 30 days to fill an order, but it really should only take 25 (had their processes been optimized), those five extra days are days where the company has nothing to gain and everything to lose.

The shipment could get delayed, damaged, or even completely lost due to any number of catastrophic events.

It’s every business owner’s nightmare to disappoint their customers, explaining that their orders have been delayed or canceled “due to unforeseen circumstances.”

Unanticipated as these problems may be, the fact is they can be avoided by shortening and maintaining consistent lead times.

Increasing complexity

As the business world in general evolves, so too does the supply chain.

Often, that means supply chain management continues to become more and more complex as time goes on.

The advent of ultra-fast — even “on-demand” service — coupled with an increase in overall competition, have pushed companies to relocate manufacturing to countries with low labor costs.

By today’s standards, it’s become the norm for businesses to manage complex global networks of manufacturers, suppliers, distributors, transporters, and other players across different time zones and locations.

Many companies also struggle with multichannel sales and fulfillment. Although eCommerce and mobile-enabled consumers are helping to increase revenues, this has also raised the bar for companies in terms of ensuring their supply chain processes are running as optimally as possible.

Operational costs

Choosing to implement a lean manufacturing or distribution model doesn’t mean you should be saving money at the cost of productivity or quality.

In fact, overemphasizing cost cutting can be detrimental to your supply chain. It can hinder your ability to quickly adjust to supply and demand shifts without incurring heavy losses.

Deviations from the production plan could have catastrophic results for anything lower down the supply chain.

In order to be responsive to changes in orders, demand, and product, you need to be flexible. While keeping costs down is something all supply chain managers aim to do, there’s a fine line between trimming out unnecessary expenditures and unintentionally gutting your vital processes.

Forecasting problems

Accurate sales and inventory forecasting is crucial to the success of any business, but it’s a step that many retailers and wholesalers alike overlook. 

Without proper forecasting, businesses are likely to fall prey to stockouts or overstocks, resulting in increased holding costs or a poor customer experience. This is an especially high risk during seasonal fluctuations when demand levels stray from the norm. 

During these periods, competition among businesses is at an all-time high, so providing an exceptional experience is paramount.

By utilizing a sales and inventory forecasting template, you can turn historical sales data and other information into upcoming volumes and, in turn, how much stock you’ll need and when to order to ensure you’re meeting customer demand.

Factors that should be considered to develop an accurate forecast include:

• Historical sales data, market research, and ad spend increases
• Product types and categories per channel
• Sales from new customers versus repeat customers
• How long you plan to sell each product
• How long it takes from placing a purchase order to being ready to sell

Overall risk management

Risk is inevitable, but it helps when you have a proactive plan in place.

Having little or no idea of how to handle extenuating circumstances can cause your team to make snap judgment calls that end up doing more damage than the problem itself.

Having a solid risk management strategy help you minimize the damage unexpected events can have on your supply chain. Moreover, that plan may even enable your team to turn these negative events into overall positive experiences for your company and customers.