Surviving in a competitive environment requires companies to provide the best quality product that’s what the customer wants and for a reasonable cost, which suits well to the requirements of target customer. A significant part of the cost of a product is the transport and warehousing, which is where supply chain management comes in.
Supply Chain Management ( SCM ) is one of several tools available aimed at reducing costs. Two others are Business Process Re-engineering (Value Re-engineering) and Total Productive Maintenance. The supply chain framework is a method of breaking down the linked activities starting from basic raw material/component supply to the supply of the end product to customer/consumer. It’s a business process that links manufacturers, retailers, customers and suppliers to, develop and deliver products as a single virtual organisation of pooled skills and resources.
- The scope extends from sources of supply to final customers
- In addition to products and services, information and financial flows are included
- The objective is to satisfy customer demand at the lowest possible cost
- A global and integrative approach is needed to manage the process
Cost Reduction & SCM
SCM aims at cost reduction without affecting quality. SCM strategy is to reduce cost by eliminating all non value added activities in the flow of goods from Raw material supplier to End consumer. The Objective of SCM is to increase the competitive advantage of the business through improved efficiency and effectiveness which lowers the costs.
Decisions in Supply Chain Management
Decisions for supply chain management can be divided into two broad categories – strategic and operational. Strategic decisions are typically for the longer term and closely linked to the corporate strategy. They guide supply chain policies from a design perspective. Operational decisions are the short term ones that focus on daily activities and are the types of decisions needed to implement and manage the product flow described in the top-level strategy. The four main considerations are
- The location
- Production of the product
- Inventory control
- Distribution of the product
Each has strategic and operational elements.
Location: The geographic placement of production facilities, stocking points, and sourcing points is the natural first step in creating a supply chain. The location of facilities involves a commitment of resources to a long-term plan. Once the size, number, and location of these are determined, so are the possible paths by which the product flows through to the final customer. Although location decisions are primarily strategic, they also have implications on an operational level.
Production: Strategic decisions include what product to produce, which plant to produce them in, allocation of suppliers to plants, plants to Distribution Channel’s (DC), and DC’s to customers markets. Further considerations include the production schedules, scheduling of machines, equipment maintenance and quality control measures. All of these things have a large impact on the revenue, costs and level of customers service.
Inventory Management: Inventories exist at every stage of the supply chain – for raw material, semi-finished and finished goods. They can also be in process between Locations. Their primary purpose to buffer against any uncertainty that might exist in the supply chain. Since holding of inventories can cost anywhere between 20 to 40 percent of their value, their efficient management is critical in supply chain operations. It is strategic in the sense that top management sets goals.
Transport: The mode choice aspect of these decisions are the more strategic ones. These are closely linked to the inventory decisions, since the best choice of mode is often found by trading-off the cost of using the particular mode of transport with the indirect cost of inventory associated with that mode. Customer service levels, and geographic location play vital roles in such decisions. Since transportation is more than 30 percent of the logistics costs, operating efficiently makes good economic sense. Shipment sizes (consolidated bulk shipments versus Lot-for-Lot), routing and scheduling of equipment are key in effective management of the firm’s transport strategy.
Why Use Supply Chains ?
The importance and need of SCM will increase in the future. Customers are demanding faster delivery of orders. Manufacturing will expect greater knowledge of order requirements to better plan its operations and procurement processes. Similar expectations apply to external entities. This need for increased coordination among customers, suppliers and service providers dictates greater visibility and collaboration throughout the supply chain.
Dynamic business environment characterised with Time-based competition, Synchronisation with other corporate functions, Service customised to specific markets and customers, Increased consolidation of suppliers and service providers, Further privatisation and deregulation, Continued emphasis on outsourcing, Development of performance measures encompassing supply chain partners, Increased collaboration between supply chain partners, and Electronic commerce to enable communications throughout the supply chain will increase the need of of supply chain.
How Supply Chain Management Contributes to Corporate Performance
Leading manufacturers report SCM costs between 4 percent and 5 percent of sales, compared to the industry average of 7 percent to 10 percent Successful SCM can improve delivery performance by 25%, reduce inventory levels by as much as one-half and enhance overall productivity by at least 15 percent.