What is Supply Chain Management, and Why is it Important?

What is Supply Chain Management, and Why is it Important?
American Express
Supply Chain management is one of the most important things to look at when streamlining your business. Here’s how to effectively manage your supply chain.
In today's rapidly changing economy, organizations must enhance their market responsiveness and become cost-competitive to thrive. Supply chain management is one of the most important things to look at when streamlining your business. We’ve put together a useful guide on how to effectively manage your supply chain to reduce costs and improve efficiency.
What is supply chain management?

Supply chain management (SCM) is, simply put, the handling of the flow of goods and services. This covers the entire process from manufacture to consumption, including transport and storage of goods. Managing your supply chain is essential for achieving established business goals, from boosting your ROI to keeping customers happy.

Why is supply chain management important?

Every business owner knows that having a reliable supply chain is essential. But what some may not know is that investing to make it more efficient will pay dividends.

As Nicky Wacey, Founding Director of maternity and nursing clothing brand Tilbea, acknowledges, there are numerous benefits of effective supply chain management. "A supply chain effectively bridges the gap between the point of production and the point of consumption, factoring in the complexities of supply and demand networks. And, because it assists in financial planning, time management and forecasting, it's crucial that it's well-managed."

The benefits of implementing good SCM can be far-reaching. For example, managing shipments properly will mean you don’t rack up unnecessary costs for transport (needing more shipments as not enough goods were moved at the same time) or storage (holding onto unneeded inventory). Properly managing your supply chain will also foster better supplier relationships, reduce shipping costs for customers and ultimately improve your brand perception both within the industry and among your customers.

Of course, the inverse is also true: poor SCM can cost a business. As Daniel Levan-Harris, Founder of Mango Logistics Group, acknowledges: "A robust supply chain is imperative to maintain continuity of service. This mitigates the risk of dips in service delivery and potential service failure, which may result in losing a client in what is a very competitive and saturated market."

If you can’t ensure the steady and safe delivery of materials to assembly plants, not only will you be paying more for transportation, you may end up with costly delays in manufacturing and knock-on effects further down the supply chain.

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How does supply chain management work?

The supply chain manager controls all aspects of the supply chain: planning, sourcing, manufacturing, delivery and returns. However, exactly what that looks like has changed significantly even in the past few years.

A 2020 Gartner survey revealed that 89% of supply chain professionals said they wanted to invest in supply chain agility, while 87% were planning investments to improve supply chain resilience in the next two years.1Recent events have catalysed changes in consumer behaviour and consequently the demand placed on supply chains, not to mention its impacts on the global movement of goods.

According to McKinsey & Company2, supply chain managers faced the following challenges:

  • 85% struggled with insufficient digital technologies in the supply chain
  • 75% faced issues in the production and distribution footprint that require changes in the future
  • 73% encountered problems in the supplier footprint that require changes in the future

There have also been significant shifts in sourcing and transport between the UK and EU as a result of Brexit. Supply chain managers need to keep a close eye on these kinds of high-level changes, as well as trends specific to their own region or industry.

Almost all sectors are seeing a rapid move towards digitisation, which supply chain managers are having to implement and integrate at all stages. While this transfer can be challenging, the benefits can be far-reaching. Leveraging AI technologies, for instance, can provide real-time feedback on consumer behaviour and accurate forecasting.

The components of supply chain management

SCM is made up of five key elements:

Planning: Managing all resources that will be used to make a product that meets customer demand. Effective planning makes it easy for supply chain managers to meet customer demands, deliver value and help achieve organisational goals. "Part of our planning process involves having the right insurance in place, too," says Nicky. "As a result, we have insurance that covers the goods from the moment they leave the factory and they are then covered while being stored in the warehouse."

Sourcing: Choosing suppliers who can deliver goods and services needed to create products promptly and without sacrificing quality. Daniel says it begins its process by vetting and shortlisting suppliers before moving onto a negotiation phase. This helps the business discover if it shares the same values and also knows its sustainability before signing contracts.

To increase supply chain resilience, you may opt to dual-source some materials. This means working with two or more separate suppliers to mitigate the risks of price increases, transportation issues and other unforeseen problems. However, Daniel advises proceeding with caution, as dual-sourcing can be a double-edged sword: "If you spread the business too thinly then you limit the spend with your supplier and potentially become less important as a client, however, key business critical subjects always have three suppliers available to supply to ensure continuity of service."

Dual-sourcing is therefore certainly worth considering as a means of mitigating against risk and managing supply chain disruptions and, according to McKinsey & Company, 53% of executives are planning to implement this approach as they aim to increase resilience in their supply chain.

Manufacturing: This requires a schedule of activities such as production, testing, packaging and preparation of the product for delivery. This stage also comprises setting guidelines for performance measurement, your production facilities, data storage and regulatory compliance.

Logistics: Processing and distributing customer orders. Logistics ensures effective coordination of orders, develops a storage house system and carriers for delivery, and sets up an invoicing system. In addition, partnering with an international distributor can help to expand your small business into new markets and grow your business overseas.

Returns: It is only normal for a few customers to want to return defective or excess items. This is why creating a network allowing consumers to easily return items is an important SCM component.

Popular supply chain management systems

A supply chain management system helps in the operation of interconnected businesses that provide products and services to customers. The system should enable business owners to effectively plan, design, implement and monitor their supply chain.

Depending on the needs of your business, you might want to create a bespoke SCM system. However, there are already many available which support SMEs at each stage of the process. These systems are fully digitised and provide data-led insights that can lead to smarter decision-making.

There are also systems that cover specific aspects of SCM. Daniel points to the customer relationship management (CRM) system in place at Mango as one of the most useful parts of their SCM, as it helps the team, client base and potential clients keep in contact.

Supply chain management is a vast area and one that is rapidly changing. As consumer priorities shift, sometimes in ways that are incompatible within our current systems (for example, the increased desire for both sustainability and convenience), the role of the supply chain manager is having to shift with them. Having efficient, adaptable SCM in place is more important than ever in today’s quickly changing business environment.

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12020 Gartner Survey

2McKinsey, Resetting supply chains for the next normal

This article is intended for general informational purposes only and does not constitute legal advice or an opinion on any issue. It should not be regarded as comprehensive or a substitute for professional advice.