Supply chain management (SCM) is the combination of art and science that goes into improving the way your company finds the raw components it needs to make a product or service and deliver it to customers. The following are five basic components of SCM.
Plan – This is the strategic portion of SCM. You need a strategy for managing all the resources that go toward meeting customer demand for your product or service. A big piece of planning is developing a set of metrics to monitor the supply chain so that it is efficient, costs less and delivers high quality and value to customers.
Source – Choose the suppliers that will deliver the goods and services you need to create your product. Develop a set of pricing, delivery and payment processes with suppliers and create metrics for monitoring and improving the relationships. And put together processes for managing the inventory of goods and services you receive from suppliers, including receiving shipments, verifying them, transferring them to your manufacturing facilities and authorizing supplier payments.
Make – This is the manufacturing step. Schedule the activities necessary for production, testing, packaging and preparation for delivery. As the most metric-intensive portion of the supply chain, measure quality levels, production output and worker productivity.
Deliver – This is the part that many insiders refer to as logistics. Coordinate the receipt of orders from customers, develop a network of warehouses, pick carriers to get products to customers and set up an invoicing system to receive payments.
Return – The problem part of the supply chain. Create a network for receiving defective and excess products back from customers and supporting customers who have problems with delivered products.
Supply chain management software is possibly the most fractured group of software applications on the planet. Each of the five major supply chain steps previously outlined composes dozens of specific tasks, many of which have their own specific software. Some vendors have assembled many of these different chunks of software together under a single roof, but no one has a complete package that is right for every company. For example, most companies need to track demand, supply, manufacturing status, logistics (that is, where things are in the supply chain), and distribution. They also need to share data with supply chain partners at an ever increasing rate. While products from large ERP vendors like SAP’s Advanced Planner and Optimizer (APO) can perform many or all of these tasks, because each industry’s supply chain has a unique set of challenges, many companies decide to go with targeted best of breed products instead, even if some integration is an inevitable consequence.
It’s worth mentioning that the old adage about systems only being as good as the information that they contain applies doubly to SCM. If the information entered into a demand forecasting application is not accurate then you will get an inaccurate forecast. Similarly, if employees bypass the supply chain systems and try to manage things manually, then even the most expensive systems will provide an incomplete picture of what is happening in a company’s supply chain.
Many SCM applications are reliant upon the kind of information that is stored in the most quantity inside ERP software. Theoretically you could assemble the information you need to feed the SCM applications from legacy systems (for most companies this means Excel spreadsheets spread out all over the place), but it can be nightmarish to try to get that information flowing on a fast, reliable basis from all the areas of the company.
ERP is the battering ram that integrates all that information together in a single application, and SCM applications benefit from having a single major source to go to for up-to-date information. Most CIOs who have tried to install SCM applications say they are glad they did ERP first. They call the ERP projects "putting your information house in order." Of course, ERP is expensive and difficult, so you may want to explore ways to feed your SCM applications the information they need without doing ERP first. These days, most ERP vendors have SCM modules so doing an ERP project may be a way to kill two birds with one stone. Companies will need to decide if these products meet their needs or if they need a more specialized system.
Applications that simply automate the logistics aspects of SCM are less dependent upon gathering information from around the company, so they tend to be independent of the ERP decision. But chances are, you'll need to have these applications communicate with ERP in some fashion. It's important to pay attention to the software's ability to integrate with the Internet and with ERP applications because the Internet will drive demand for integrated information. For example, if you want to build a private website for communicating with your customers and suppliers, you will want to pull information from ERP and supply chain applications together to present updated information about orders, payments, manufacturing status and delivery.
Before the Internet came along, the aspirations of supply chain software devotees were limited to improving their ability to predict demand from customers and make their own supply chains run more smoothly. But the cheap, ubiquitous nature of the Internet, along with its simple, universally accepted communication standards have thrown things wide open. Now, you can connect your supply chain with the supply chains of your suppliers and customers together in a single vast network that optimizes costs and opportunities for everyone involved. This was the reason for the B2B explosion; the idea that everyone you do business with could be connected together into one big happy, cooperative family.
Of course, reality isn’t quite that happy and cooperative, but today most companies share at least some data with their supply chain partners. The goal of these projects is greater supply chain visibility. The supply chain in most industries is like a big card game. The players don't want to show their cards because they don't trust anyone else with the information. But if they showed their hands they could all benefit. Suppliers wouldn't have to guess how many raw materials to order, and manufacturers wouldn't have to order more than they need from suppliers to make sure they have enough on hand if demand for their products unexpectedly goes up. And retailers would have fewer empty shelves if they shared the information they had about sales of a manufacturer's product in all their stores with the manufacturer. The Internet makes showing your hand to others possible, but centuries of distrust and lack of coordination within industries make it difficult.
Over the last few years most companies have gotten over the trust issue. In many cases "gotten over" is a euphemism for "have been bullied into sharing supply chain information from a dominant industry player." Want to sell your goods in Wal-Mart? Better be prepared to share data.
The payoff of timely and accurate supply chain information is the ability to make or ship only as much of a product as there is a market for. This is the practice known as just-in-time manufacturing, and it allows companies to reduce the amount of inventory that they keep. This can cut costs substantially, since you no longer need to pay to produce and store excess goods.
Let's look at consumer packaged goods for an example of collaboration. If there are two companies that have made supply chain a household word, they are Wal-Mart and Procter & Gamble. Before these two companies started collaborating back in the '80s, retailers shared very little information with manufacturers. But then the two giants built a software system that hooked P&G up to Wal-Mart's distribution centers. When P&G's products run low at the distribution centers, the system sends an automatic alert to P&G to ship more products. In some cases, the system goes all the way to the individual Wal-Mart store. It lets P&G monitor the shelves through real-time satellite link-ups that send messages to the factory whenever a P&G item swoops past a scanner at the register.
With this kind of minute-to-minute information, P&G knows when to make, ship and display more products at the Wal-Mart stores. No need to keep products piled up in warehouses awaiting Wal-Mart's call. Invoicing and payments happen automatically too. The system saves P&G so much in time, reduced inventory and lower order-processing costs that it can afford to give Wal-Mart "low, everyday prices" without putting itself out of business.
There are several roadblocks to installing SCM software. Here are a few:
Gaining trust from your suppliers and partners.
Supply chain automation is uniquely difficult because its complexity extends beyond your company's walls. Your people will need to change the way they work and so will the people from each supplier that you add to your network. Only the largest and most powerful manufacturers can force such radical changes down suppliers' throats. Most companies have to sell outsiders on the system.
Moreover, your goals in installing the system may be threatening to those suppliers, to say the least.
If selling supply chain systems is difficult on the outside, it isn't much easier inside. Operations people are accustomed to dealing with phone calls, faxes and hunches scrawled on paper, and will most likely want to keep it that way. If you can't convince people that using the software will be worth their time, they will easily find ways to work around it. You cannot disconnect the telephones and fax machines just because you have supply chain software in place.
There is a diabolical twist to the quest for supply chain software acceptance among your employees. New supply chain systems process data as they are programmed to do, but the technology cannot absorb a company's history and processes in the first few months after an implementation. Forecasters and planners need to understand that the first bits of information they get from a system might need some tweaking. If they are not warned about the system's initial naiveté, they will think it is useless.
The extended supply chain is a clever way of describing everyone who contributes to a product. So if you make text books, then your extended supply chain would include the factories where the books are printed and bound, but also the company that sells you the paper, the mill where that supplier buys their stock, and so on. It is important to keep track of what is happening in your extended supply chain because with a supplier or a supplier’s supplier could end up having an impact on you (as the old saying goes, a chain is only a strong as its weakest link). For example, a fire in a paper mill might cause the text book manufacturer’s paper supplier to run out of inventory. If the text book company knows what is