What is supply chain management?
Supply chain management covers the entire value and supply chain from the end customer to the raw material supplier. Supply chain management plans and controls the flow of goods, information, and money in a process-oriented manner. The aim of supply chain management is to improve the performance of companies and the entire supply chain in the long term.
Why supply chain management is of great importance
In the past, it was common for companies to divide work steps among their employees for increased profitability. Nowadays, this principle has changed or been extended. It is now common practice for organizations worldwide to share their various tasks within the value chain. As a result of globalization, partial products cover long distances. Companies that manufacture in a network can do this more efficiently and more cheaply than companies that produce alone. New markets can be opened up through integrated planning.
Why integrated planning is important in supply chain management
If sales, production, and procurement planning is poorly integrated, this has serious negative consequences for the entire supply chain planning. Due to internationalization or when a change in strategy is imminent, comprehensive planning processes must be integrated. These ensure an ideal result by synchronizing goals and tasks for all parties involved.
Many of the big players in online retailing are now increasingly including face-to-face sales in their strategy in addition to online business. They combine online and offline sales to generate more revenue. The original idea was that brick-and-mortar retail should use different sales channels through multi-channel retailing to compete with the booming online business.
In the long term, this means for stationary retail that local stores serve as “showrooms” where the customer merely tests but buys online. As a result, local stores need to stock significantly less, which is also a major advantage at the same time, as it saves on warehousing costs. Of course, this makes inventory management in the main warehouse locations from which the goods are shipped much more complex.
Such an extreme change in corporate strategy for significantly more planning effort for the supply chain. If such a change does not already have the supply chain running smoothly, this becomes a major challenge for the company. Globalization and the individualization of products also pose new challenges for companies in terms of planning future purchases. For this reason, well-considered planning based on reliable data that brings together all sub-processes of the supply chain is essential.
Bring people together and identify goals
First of all, reliable sales planning, which comes at the beginning of the planning phase, is the most important component in supply chain management. The higher the quality of sales planning, the better sales potential can be exploited. This, in turn, influences subsequent processes and thus on the company’s overall success. To be oriented to the market alone and to take into account that the results are also economically feasible, all departments must work closely together and plan strategically at an overarching level. Although many companies are aware of this approach, it is poorly implemented due to so-called “isolated solutions.” Not only is internal communication very sparse, but media discontinuities within the company’s own IT infrastructure also ensure that the flow of information is inadequate.
For integrated planning, information from sales planning to production planning must be compiled. Likewise, this information must be aligned with the supply chain’s corporate goals. To realize this, sub-goals must be known:
Sales must know its turnover.
- Production must know its capacities.
- Inventory management must know its resources.
- Management must know its strategy.
Each department is focused on different goals. Therefore, individual planning levels must be set up within the overall planning. For example, sales focus on the customer area, and the procurement level focuses on articles and article groups.
Clever integration of algorithms in the planning
To ensure that the result is also reliable, it is not enough to bring together departments relevant to planning on a uniform IT basis. This is where intelligent algorithms also come into play. On the one hand, these provide reliable forecasts so that planning is not based on a wild guess or estimate. On the other hand, an optimum is achieved in the overall context when strategic questions are asked:
- How will production capacity be affected if additional capacity is needed?
- Using apparel as an example: Where do stocks have to be stored so that distribution really only happens from one location?
On the way to the intelligent supply chain
Both large online stores and companies from any other industry must be prepared to meet today’s requirements with successful solutions. This is the only way to ensure that they can establish themselves on the market in the long term and not sink into the mire of insignificance. Strategy changes, internationalization, and, above all, increasing digitization all go hand in hand. These changes can only occur smoothly if planning is based on an integrated, well-founded, and intelligent supply chain. It is a challenge to bring together the isolated plans of each department into an overall strategic plan. However, algorithms are a great help in determining the optimal plan.
How do logistics and supply chains differ from each other?
In earlier times, the terms logistics and supply chain management were often used together as synonyms. But supply chain management – in contrast to logistics – goes far beyond internal company boundaries. Supply chain management and logistics are concerned with designing object flow at the process stages of the respective supply chain. Both are concerned with increasing customer value (effectiveness) and improving the cost-benefit ratio (efficiency) system-wide.
Especially when it comes to transportation and warehousing within the company, in supply chain management, the structured, coordinated, and entrepreneurial units of a value creation system, which act autonomously with each other, are included in the analysis. Supply chain management thus provides an overall view of all business units based on the company. SCM is interconnected in all areas of business administration, such as purchasing, production, distribution, marketing, controlling, etc. When it comes to strategic aspects of the functional areas, the tactical issues are left to the individual participants themselves by Supply Chain Management.
What are the goals and tasks of supply chain management?
Supply chain management makes it possible to plan and control the entire value chain beyond the company in a process-oriented manner. Since the purchasing behavior of consumers forces the logistics departments of companies to rethink, the expectations of customers and the short product life cycles, especially in today’s world, are taken into account. To plan and control goods deliveries, cash flows, and information flows in a targeted manner, relationships with suppliers are taken into account. This type of relationship management with suppliers is known as supplier relationship management.
The tasks of supply chain management:
- Relationship management with the customer (Customer Relationship Management): The company consistently aligns itself with the end customers’ demand. As a result, the company is much more flexible and meets the ever-increasing demands of customers.
- Compliance and production on demand: Continuous reduction of costs and optimization of resources across all value chains.
- Matching demand and procurement: increasing the supply chain’s ability to adapt and evolve.
- Subtasks of the Supply chain management
- Inventories are to be reduced along the value chain.
- Inventory costs are to be reduced.
- Just-in-time supply is to be ensured.
- Cash-to-cash cycles are to be shortened.
- The reliability of deliveries is to be increased.
- Lead times are to be shortened.
Why unresolved supply management issues lead to problems
Despite the rapid development of IT or digitalization, there are some problems that can prevent the successful implementation of supply chain management:
Goals that are mutually exclusive: Companies implementing and participating in supply management can sometimes hinder each other as they pursue different and sometimes mutually exclusive goals.
- Costs, profits, and risks are not shared fairly: There is a risk that costs, risks, and profits from value-added activities are not shared fairly.
- Processes are not transparent enough: The partners within the supply chain may be afraid of their knowledge being exploited, and different levels of competition among them mean that the processes along the supply chain are opaque.
- Metrics are not consistent enough: Internal metrics with partner companies are not consistent.
- Dependence on each other increases: Information has to be exchanged intensively between companies and cooperation has to be even closer. This leads to an ever-increasing dependency among each other.
- Legal problems: Legal issues need to be clarified, such as what the contracts between the partners look like or how to deal with the exchange of sensitive, internal company data among each other. It must also be clarified how to act in the event of a breach of these agreements.
- Lack of relationship management: In order not to become dependent on a small number of employees, trust must be built up and relationships cultivated among each other.
Seven prerequisites for successful supply chain management
For companies, the introduction of supply chain management is associated with a change in culture and processes. SCM is intended to optimize processes, improve performance, reduce costs and increase customer satisfaction. For this to succeed with supply chain management, these seven conditions must be met:
1) Comprehensive cooperation
For needed know-how to be built up, comprehensive collaboration within the processes is necessary. These include:
The awareness that supply chain management does not end within one’s own company.
- The necessary understanding to understand the process chains and their interrelationships.
- Focusing on joint solutions rather than proprietary paths to optimization.
- Minimize risk throughout the supply chain.
- To adapt the supply chain management process to the ever-changing conditions.
2) Trustworthy information exchange
There should be a trustful exchange of information with all companies involved in the supply chain management process:
- Talk openly about the strengths and weaknesses of technical processes.
- Admit risks to partners.
- If there are changes to be made at short notice, report them openly to the partners.
- Position the business partner accordingly so that the partner’s strengths can be incorporated.
- Motivate business partners through honesty.
3) React quickly to changes
High-quality process networking comes from responding quickly to change:
- Opportunities must be created to respond to necessary changes, such as customer demand.
- Customer and material orders should be adapted to the current times required for material procurement.
- To discover the need for action within the process chain and to be able to react to it, the actual state must be compared with current key figures.
- Employees should be motivated so that they are open to faster response times.
- Any delay within the process chain must be avoided. Otherwise, there is a risk that the process chain will be negatively affected in the long term.
- Despite the speed, attention must be paid to the necessary quality.
4) Short times between processes
The link between manufacturing times and process times in upstream processes serves as a starting point for reaction speed. Manufacturing times are usually only a few hours or a few days. Operational upstream process times, on the other hand, amount to several days. These times need to be reviewed:
- Process times outside of manufacturing should be reviewed regularly.
- It is important to determine how long it takes to provide a customer with a reliable order confirmation.
- Process times must be recorded, and a concept created so that process times can be shortened.
5) Powerful ERP system
To achieve high speed and dynamics within the process chain, a powerful ERP system is essential. Here, it is important to check the existing ERP system to see whether it can cope with the demands of the company’s day-to-day operations. By sustainably building up a performance profile of the IT systems, it is ensured that the complex structures within logistics are reduced. A good ERP system includes:
- Production planning processes that run automatically.
- Processes that are intelligently checked in order management.
- If action is required, the ERP system should inform the employees concerned.
- Automated dunning processes.
- Parts lists that are automatically imported.
- Tools that assist in the calculation of quotations.
6) Unified logistics
Processes that affect information. Material and process logistics must be adjusted. Disruptions within processes and their interactions should not be underestimated.
- Delays in changes should be avoided.
- A targeted EDP connection between the individual participants in the supply chain saves time.
- Supply chain management should be integrated into all affected areas. This includes customers, suppliers, purchasing, sales, production planning as well as manufacturing.
7) Binding set of rules
Only when the rules governing the processes are clear will the supply chain be successful. These rules include:
- Processes with their times.
- Areas of responsibility.
- Claims that are made within the supply chain.
- Key figures are handled uniformly for self-assessment and external assessment.
- Appropriate escalation techniques are necessary for goal-oriented conflict management.