Supply Chain 101: The Basics You Need to Know

The reality of today’s global economy is such that manufacturing firms everywhere face stiff competition as a result of outsourcing to countries where cheaper labor is readily available. Because of this, new methods of manufacturing and delivery have been created, and out of this has come supply chain management (SCM).

To better appreciate this relatively new area of technology, one needs to understand the general supply chain model, the economic factors involved in the supply chain process, and how the software market has developed solutions to meet the challenges faced by today’s manufacturers and distributors.

Fierce competition is not today’s manufacturers only concern. Rising fuel costs, an increase in the number of government regulations, a greater need for visibility (as products or components move cross country and across nations), maintaining customer satisfaction—all these issues are forcing organizations to look for faster, more efficient ways of producing and moving goods. SCM software is now available to accommodate the needs of manufacturers today.

So What Exactly Is Supply Chain Management?

SCM encompasses the areas of customer requirements, warehouses, distribution centers (DCs), factories, and suppliers. The two main goals of SCM are 1) to combine all manufacturing and distribution functions into an integrated process that enables manufacturers to lower the costs of manufacturing, known as true lean manufacturing, and 2) to allow the efficient distribution of the products delivered throughout the supply chain and to the final customer, whether a business or a consumer.

SCM is thus a dynamic way of producing one or many goods through a network of suppliers and manufacturers, strung together by different transportation and logistics methods or networks.

The five stages of SCM are 1) planning, 2) sourcing (procurement), 3) making the product, 4) delivery, and 5) returns (reverse logistics). This process allows products to move back and forth throughout the supply chain, allowing companies to leverage different resources to make better products and to lower manufacturing and distribution costs throughout the supply chain.

General Supply Chain Model

Figure 1. General supply chain model.

Figure 1 depicts the entire supply chain, including manufacturers and distributors. The first thing to note is that many types of manufacturing and distribution models can be developed because of the generality of the model. As well, there can be as little as two parties involved in the supply chain, or many different manufacturing and distribution partners located in different countries. Multiple networks can be involved to develop and deliver final goods to their destination, be it to retail locations, business locations, or a hybrid of both, or goods can also be procured from the Internet or telephone order.

In figure 1, there are six main paths. Path (1) and Path (6) are the “simplest” of the paths in the diagram. Path (1) indicates a simple wholesale distribution model, where goods are sourced from one or just a few different providers, and are sent directly to one or many retail locations. Path (6), on the other hand, is what is known as reverse logistics. Reverse logistics is the act of moving goods from their final destination back to the original manufacturer because there is a problem of some kind with the product. Even though it is indicated as a line directed back to “Original Supplier(s),” reverse logistics can be a very complex process, especially if it involves moving products back through multiple countries, and tracking and accounting for these items tends to be complicated.

Paths (2) to (5) show the combination of manufacturing a good and distributing it to either a final DC or to another manufacturer for additional assembly or further manufacturing purposes. All of these paths end at a “Final Destination” even though hundreds of parties can be involved in the manufacturing and distribution of the goods.

Economic Factors Involved in the Supply Chain Process

SCM is very complex, and because products move through multiple partners, it is quite difficult to achieve maximum profits, minimum costs, and to gain the needed competitive edge. As well, as figure 1 shows, SCM has many nodes that connect suppliers, manufacturers, and distributors together. The supply chain also brings manufacturers and distributors closer to the outsourced producers, creating a value chain, where each manufacturing process and each product is tracked from the manufacturer all the way to the final consumer.

In order for this value chain to be created, throughout the supply chain as well as at each node, software has been developed to help companies turn out a profitable bottom line and increase market share in their respective industries. Using these software solutions, profits are maximized, costs are kept to a minimum, and scheduling and timing are kept in check.

The immediate economic factors relating to the increased adoption of the supply chain model are discussed in Infor’s 2007 report, Charting a New Course in Effective Distribution Supply Chain Management:

Financial analysis of the distribution industry shows that businesses are stretched so far, that for the average $100 million wholesaler, pursuing one additional percentage point of revenue growth would generate negative six percent in cash flow, whereas pursuing an additional percentage point in total operating expense improvement or days in inventory would generate an additional $250,000 in revenue.

To reverse this dangerous trend, it’s imperative that wholesale distributors quickly chart a new course to supply chain effectiveness. They must regain control of their operations and match their investment with their demand levels to ensure profitability.

In addition, collaboration between partners can be daunting, especially since each partner wants to make a profit. Because of this and other factors (such as rising petrol prices and the steady increase of goods being manufactured in China and Eastern European countries), international collaboration and quick inventory turnover are essential. SCM software can equip a facility with the capacity to receive the increased volume of product shipments coming from lower-cost countries.

Software Solutions for Today’s Manufacturers and Distributors

Because of the growing complexity of today’s supply chains, including geographic and international issues, financial constraints, and the sheer number of players that can be involved, SCM software has been developed so that manufacturers and distributors can work without missing a beat.

People typically involved in supply chain activities include manufacturers, distributors, logistics professionals, procurement specialists, vendor managers, commodity buyers, planners, and even retailers. All of these players need assistance in solving complex business issues that arise in the supply chain.

SCM software addresses the needs of both manufacturers and distributors. The software can be customized to meet manufacturers’ needs by sourcing and obtaining the materials required to produce semi-finished or finished goods, and to aid distributors in moving products quickly and efficiently, allowing maximum visibility across the logistics network.

Supply chain software includes many types of software solutions that may be sold as stand-alone modules. Yet when combined together, these solutions give supply chain professionals the visibility they need into their operations. In terms of lean manufacturing, a hybrid of both manufacturing and distribution modules is used, giving way to maximum efficiency and low or zero wasted materials in the manufacturing environment.

Components of SCM Software

In a typical SCM solution, software modules included are a warehouse management system (WMS), transportation management system (TMS), supplier relationship management (SRM), international trade logistics (ITL), procurement, demand management (DM), supply chain analytics, order management, and service parts planning.

At the heart of an SCM solution lies both the WMS and the TMS applications. The WMS solution deals with the inventory that is to be moved throughout the supply chain. For inventory movement within the warehouse to be efficient, the process must be optimized through visibility of the products. Visibility is usually enabled by radio frequency identification (RFID) technology.

The TMS software is one of the key components to the supply chain. This software manages the scheduling of all transport modes used to move products from one location to another, in addition to finding the best routes to take and determining which products are best transported by what type of transportation (that is, truck, rail, sea, or plane). TMS software also allows individuals within the transportation network, such as drivers or managers, to log in to a transportation portal to communicate directly and make updates in real time.

The ITL module within the SCM suite handles the details for international trade. Collaboration between countries, compliance issues, tariffs and taxes, event management, shipment tracking, and import and export management are all dealt with by giving many people across the supply chain access and visibility into the issues that can occur at any node within the supply chain, and not only into the products themselves in the international context.

SRM software enables suppliers and delivery site individuals to access supplier portals for the following two reasons: 1) to facilitate communication among these parties and to update them on any problems the supplier may be experiencing at its end, and 2) to allow managers to use scorecards to rate suppliers as good, average, or poor. For example, if a supplier is not complying with standards or is not respecting delivery times, or if the supplier’s goods are simply not available, the supplier will be given a poor rating. If the supplier receives too many poor ratings or if the problems continue to occur, the supplier can be justifiably replaced by a new one.

DM software gives both manufacturers and distributors the ability to forecast and manage the demand for particular products sold within their respective markets. DM software takes historical sales and warehouse data, and provides a guideline to what should be procured and at what time, taking into account seasonal variability. This helps in the planning of what is needed to be produced and how much of each material is to be procured. DM software can also help manufacturers obtain particular components from different sources to produce complex products within appropriate timelines. The software may also take data from the human resources (HR) application to schedule laborers according to production demand. For more information on DM, please see Attribute-based Demand Planning: A Powerful Tool for Process Manufacturers.

Supply chain analytics is a tool that allows managers and others involved in decision-making processes the ability to create what-if scenarios, enabling work-around scenarios to be put into place before incidents occur. This also enables production and supply chain planning to be optimized.

Finally, order management and service parts planning are modules that would typically be areas of manufacturing, yet they are geared toward supply chain manufacturing, allowing for true lean manufacturing.

The Final Word

SCM software has been designed to meet the needs of firms with global distribution, logistics, and manufacturing needs. Lean manufacturing and visibility in the supply chain are crucial elements for both distributors and manufacturing executives. Moving products among multiple locations and countries can be a daunting task, and SCM software offers the flexibility to track all inventory at any point in the supply chain.

Additionally, the issues of compliance, scheduling, flexibility, coordination, and visibility can be greatly improved because of the combination of business processes integrated into SCM software, no matter how complex the supply chain is.

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