What are the components of supply chain management?
We cannot discuss these components without first talking about supply chain management.
The growing supply chain management (SCM) software market speaks volumes about the ever-increasing importance of SCM within procurement.
In fact, the supply chain management market is already valued at $37.41 billion. And that’s not all. The projected Compound Annual Growth Rate (CAGR) is 11.2% from 2020 to 2027.
It is also evident from Google’s search volumes that people are keen to understand what is supply chain management and what are its key components.
We’re here to answer both of those questions.
What is Supply Chain Management?
The Chartered Institute of Procurement and Supply (CIPS) defines supply chain management (SCM) as:
“…the handling of the flow of goods and services from the raw manufacturing of the product through to the consumption by the consumer.”
The supply chain is itself defined as:
“…a channel of goods distribution, which starts with the supplier of raw materials or components, moves through an operational process to the distributor and retailer, and finally to the consumer.”
These two terms and their relationship can be illustrated as follows:
The 5 Components of Supply Chain Management
Management of the entire supply chain is an arduous task; however, it can be partitioned into five major parts which we are going to examine below.
Component 1: Planning
One of the biggest questions procurement teams need to ask is whether the organization plans to manufacture goods themselves or they will buy ready-made goods.
In the event that the company manufactures finished products, the next question that arises is where will raw materials be sourced? Will it be from local, regional, or international suppliers?
This question is also posed if the company is purchasing ready-made products and passing them to the consumer in a finished state. From where will these products be obtained?
Component 2: Sourcing
Following on the heels of the first component is the second step which involves sourcing.
This step is one of the most critical of the entire supply chain as it is at this stage that the biggest cost savings can be achieved.
Choose the right vendor offering the ideal price and who has the capacity to deliver required volumes in a timely fashion and you’ve struck gold.
Select an incompetent supplier and this will affect operations along the entire supply chain.
This process will also include the need to not only find vendors but evaluate and qualify them.
Component 3: Inventory
Having several suppliers so you can secure enough raw materials and or products so you can remain fully stocked up is extremely important. There are numerous lessons to be derived by examining purchasing and supply chain management in 2020.
2020 demonstrated the importance of getting this component correct. According to RetailNext, 28% of surveyed businesses suffered severe shortages and even went out-of-stock of certain key items. 56% of these enterprises had to renegotiate contracts.
The ability to carefully manage inventory and ensure that manufacturing schedules are in alignment with consumer demand is as much a skill as it is an art.
Component 4: Production and Transportation
The next important component in supply chain management is production, warehouse, and transportation.
This element of the supply chain takes a look at what is needed to ensure that the organization is producing the correct volume of products and that product quality meets established standards.
This component also factors in where the products will be kept i.e. storage in warehouses as well as transportation from said depots to stores that will retain the products.
Component 5: Return of Goods
What do you do when a customer returns a product that’s faulty? What is the protocol to handle such an incident?
These questions are answered in the final component of the supply chain ‘Return of Goods’. Because customer satisfaction is extremely important, it is imperative that there be a clearly defined protocol surrounding the returns process.
The more efficient the return of faulty product processes the higher your customer satisfaction ratings.
Conclusion
Knowing these five components of supply chain management makes it possible to develop effective strategies to manage your activities more efficiently.
Supply chain management is so critical in any organization’s bottom line. And being able to see how each link fits in the chain – how each stakeholder and supplier plays a pivotal role in the overall chain – will give you the necessary insight to make decisions that benefit everyone involved.
One of the first steps to improving supplier relationships is through the integration of innovative supplier management software such as that provided by ProcurePort.
ProcurePort is a trusted procurement solutions provider whose clients include UNOPS, HUD.GOV, and conEdison.
To discuss procurement software with a consultant or to schedule a demo of our solutions, contact us today.