What is Supply Chain Management Definition, Introduction, Process & Examples

What is Supply Chain Management? Definition, Introduction, Process & Examples - AIMS UK

Introduction

A supply chain is a global network used to deliver products and services from raw materials to end customers through an engineered flow of information, physical distribution, and cash. The below article explains the various components, strategies, flows, and examples of supply chains.

Basic Supply Chain for a Product

The figure below illustrates a very basic supply chain with three entities: a producer, one supplier, and one customer. Four basic flows connect the supply chain entities together:

Flow of physical materials and services from suppliers to the end customer.
Flow of cash from the customer to the raw materials supplier.
Flow of information back and forth along the chain.
Reverse flow of product returns.

Entities in a Basic Supply Chain

Seller: A supplier who provides goods and services or a person or organization with whom the buyer does business. The generic term in the marketplace is seller.
Supplier: Provides materials, energy, services, or components for a product or service such as plastic, fabric, electric wiring, or aircraft.
Producer: The one who receives components from the seller to produce a finished good or service such as shirts from fabric, crockery from plastic, power from electric wiring, or provides transportation through aircraft.
Customer: The one who receives the finished product, that is, the one who wears those shirts, uses the crockery, turns on the lights, or flies in an airplane.

Strategies

There are three types of supply chain strategies:

Stable Supply Chain Strategy: Focused on execution efficiencies and cost performance. Uses simple connectivity technologies and has little need for real-time information, e.g., table salt manufacturer.
Reactive Supply Chain Strategy: Works well when the chain acts to fulfill demand from trade partners, e.g., manufacturer of sports team apparel.
Efficient Reactive Supply Chain Strategy: Focuses on efficiency and cost management on the total delivered cost of finished goods, e.g., supermarket chains.

Flows in Supply Chains

There are four flows in supply chains:

Information Flow: Includes invoices, sales literature, specifications, receipts, orders, and rules and regulations.
Primary Cash Flow: Includes payments of products and supplies.
Primary Product Flow: Includes materials, components, supplies, services, and finished products.
Reverse Product Flow: Includes returns for repair, replacements, recycling, and disposals.

Supply Chain Example

Consider a supply chain model of a bakery that sells a variety of cakes:

Supplier: A wholesale food distributor that provides ingredients such as flour, cream, and sugar.
Producer: The bakery that turns those ingredients into a variety of cakes.
Retailer: The bakery owner who sells these cakes to the customer.

Supply Chain in Manufacturing

For a complex manufacturing supply chain model:

Tier 1 Suppliers: Suppliers of components immediately to the left of manufacturing.
Tier 2 Suppliers: Suppliers of Tier 1 suppliers.

Primary product flows from left to right and primary cash flows from right to left.

Supply Chain in Services

Initially developed for manufacturing, the supply chain model applies to service industries too. Examples include electricity providers, legal advisors, real estate construction, software houses, and even federal government services.

Supply Chain Integration

Firms generally pursue one of the two types of supply chain management:

Vertical Integration: An arrangement in which the supply chain of a company is owned by that company, e.g., Ford owning iron ore mines, steel mills, ships, manufacturing plants, and showrooms.
Horizontal Integration: Expanding a business by acquiring a similar company in the same industry, e.g., a shampoo manufacturer adding other brands.

Benefits of Integration

Vertical Integration: Control, no dependency for components or services, synchronized operations.
Horizontal Integration: Economies of scale and scope, expertise development, market knowledge.

Differences between Vertical and Horizontal Integration

Vertical integration seeks to strengthen the supply chain, reduce production costs, capture upstream or downstream profits, or access downstream distribution channels. Horizontal integration seeks to increase size, diversify products or services, achieve economies of scale, reduce competition, or gain access to new market customers.

Stages of Supply Chain Management Evolution

There are typically five sequential stages globally and within organizations:

Stage 0 - Stable
Stage 1 - Multiple Dysfunction: Lack of internal definition and goals, unplanned activities, poor payment flows.
Stage 2 - Semi-Functional Enterprise: Improved effectiveness and quality within functional areas, but no inter-department collaboration.
Stage 3 - Integrated Enterprise: Fully integrated between departments using ERP, focus on business processes.
Stage 4 - Extended Enterprise: Integration with supply chain partners, complete sharing of information, team building, and planning across corporate boundaries.

Conclusion

Supply Chain Management (SCM) includes the management of the flow of goods and services, movement, and storage of raw materials, work-in-process inventory, and finished goods from origin to consumption. Effective SCM ensures the cumulative effort of multiple organizations delivering products to the final customer seamlessly.

Keywords

Supply Chain
Supply Chain Management
Supplier
Producer
Customer
Information Flow
Cash Flow
Product Flow
Reverse Product Flow
Vertical Integration
Horizontal Integration
ERP
Stages of Supply Chain Management

FAQ

Q: What is a supply chain? A: A supply chain is a global network used to deliver products and services from raw materials to end customers through an engineered flow of information, physical distribution, and cash.

Q: What are the basic flows in a supply chain? A: The basic flows include the flow of physical materials and services, flow of cash, flow of information, and reverse flow of product returns.

Q: What are some strategies used in supply chain management? A: Strategies include stable supply chain strategy, reactive supply chain strategy, and efficient reactive supply chain strategy.

Q: What is the difference between vertical and horizontal integration in supply chain management? A: Vertical integration involves a company owning its supply chain, while horizontal integration involves expanding a business by acquiring similar companies in the same industry.

Q: What are the stages of supply chain management evolution? A: The stages include stable, multiple dysfunction, semi-functional enterprise, integrated enterprise, and extended enterprise.

Q: Can the supply chain model be applied to service industries? A: Yes, the supply chain model can be applied to service industries such as electricity providers, legal advisors, real estate construction, and software houses.