Why is Supply Chain Management Important for Your Business

Supply chain management (SCM) is a big deal. After all, a well-managed supply chain enables you to maintain a competitive advantage, tackle complex challenges, and capture new opportunities.

It’s also an expansive, complex strategy spanning everything from procurement and shipping to manufacturing, inventory, and supplier relations. 

In this article, we’ll explain what SCM is, why it matters, and what effective supply chain management looks like in practice.

What is Supply Chain Management?

Supply Chain Management (SCM) encompasses the strategic orchestration of people, processes, and resources throughout the entire production lifecycle. From sourcing raw materials to delivering finished products, SCM involves meticulous planning, coordination, and control to optimize efficiency, minimize costs, and meet customer demands. This holistic approach includes managing supplier relationships, inventory levels, production schedules, and adapting to dynamic market conditions to ensure seamless operations and maximum value creation.

Key Components of Supply Chain Management

While there’s no real consensus, SCM typically breaks down into the following five components:

1. Planning. Here, the goal is matching supply with customer demand and determining how, exactly, to get the right products to the right place, at the right time. Historically, planners relied on past experience, gut feelings, and manual analysis. 

Now, they use advanced analytics and AI to track and manage resources, control inventory, and monitor manufacturing processes. They rely on algorithms to guide and support day-to-day decisions. And, increasingly, supply chain leaders are embracing things like digital twins and predictive forecasting to ID and fix problems and plan for future unknowns.

2. Sourcing. Sourcing involves identifying and selecting the right suppliers, monitoring their performance, and managing relationships. Typical activities include ordering raw materials, receiving goods, managing inventory, and paying vendors. 

Based on the way SCM is evolving, procurement pros will need to sharpen collaborative and analytical skills and embrace an agile mindset. Meaning — they’ll need to get comfortable using digital tech to solve problems and improve sourcing practices. And, they’ll need to think critically about building supplier ecosystems that shield them from potential threats and align with strategic goals, ethics, and sustainability practices. 

3. Manufacturing & Inventory.  Manufacturing and inventory covers all activities involved in making or assembling the final product. Think — receiving raw materials, production, assembly, quality testing, packaging, and storage. Big data, AI, and machine learning are redefining factory management. Managers can tap into a wealth of insights from IoT sensors embedded across entire fleets and facilities. But — success hinges on their ability to use that data to make profitable decisions, and proactively solve problems, improve business models, and ID opportunities to generate value. 

4. Transportation & Logistics. This step involves coordinating orders, scheduling deliveries, dispatching fleets, optimizing routes, as well as invoicing customers and receiving payments. As you can see, managing logistics requires deep integration across the entire operation — finance, accounting, CRM, warehousing, third-party logistics providers, individual delivery drivers & customers, etc. 

Cloud computing, AI, and machine learning have transformed distribution — offering real-time visibility, automation capabilities, and enhanced decision-making — enabling more efficient movement between each link in the supply chain.   

5. Returns. Finally, SCM must address customer returns. You’ll need clearly-defined policies and processes for dealing with faulty products, as well as goods that don’t meet customer expectations (i.e. clothing that’s the wrong size or a product that doesn’t work as expected). This step might also include things like repurposing or recycling materials or components and incorporating them back into the supply chain.

According to Accenture, “engineering” and “service management” belong on this list, too. Either way, it’s a basic framework for building a comprehensive strategy that reflects your own supply chain operation.

Why is Supply Chain Management Important?

Broadly speaking, supply chain management is important because it directly drives customer satisfaction, growth, and, of course, long-term profitability.

SCM allows manufacturers to meet market demand and deliver products on-time and per customer expectations. It also prevents companies from running into problems caused by things like excess inventory, process inefficiencies, and poor visibility.

The term “supply chain management” was coined in the early 1980s, but really started gaining traction sometime during the early 2000s when the internet went fully mainstream. 

Now, in 2023, SCM has taken on even greater significance. Orgs are grappling with a new wave of challenges — inflation, supply disruptions, climate change, war, AI bots, misinformation —  on top of all the old ones. Meanwhile, they’re drowning in data — a problem that becomes exponentially more complex and costly with time. 

Given the current situation, it’s not surprising that SCM has evolved into a tech-driven practice.  

Done right, SCM helps supply chain organizations achieve high-level gains through many, coordinated small-scale improvements. 

A few general examples: 

• Effective planning and procurement practices allow you to avoid shortages, excess inventory, and supplier-related disruptions.  
• Greater control of shipping processes improves customer satisfaction by ensuring that products arrive within the expected timeframe.
• Tracking supplier inventories against internal stock and incoming sales can help you meet customer demand and get orders out faster. That means, customers are more likely to have positive experiences and return for future purchases.
• Supply chain analytics help orgs allocate resources and schedule work — drawing on a combination of historical data, sales forecasts, incoming orders, inventory, and ETAs for raw materials. They also make it easier to predict demand for seasonal or perishable goods so that orgs aren’t forced to toss unsold inventory or sell it at a loss. 
• Many SCM solutions can also dynamically adjust prices based on demand and what people are willing to spend. But, you can also set custom rules to prevent discounts from gobbling up your profit margins.
• Things like data governance, quality standards, and compliance requirements can be applied across the entire business. This, in turn, saves time, enforces consistency, and cuts cost by reducing waste. 
• Real-time visibility into operating processes can improve product quality, efficiency, and help you avoid problems that could tank your reputation and your entire business. Think —  safety recalls and class action lawsuits.
• Optimizing the flow of goods and information within the supply chain allows orgs to proactively eliminate waste and boost process efficiency — resulting in cost savings and bigger profit margins. 

The list goes on, but the point is, SCM helps companies boost profit margins, avoid overspending, and mitigate risk. 

What Does Effective Supply Chain Management Look Like?

“Effective” supply chain management is hard to define. It’s subjective and, really, quite personal, as every organization has its own aspirations, norms, and definition of success. 

The reality is, supply chain models and SCM solutions are only “effective” if they align with the specific needs and requirements of the business. 

Modern SCM solutions consolidate all supply chain operations —sourcing, production, inventory, distribution, and everything else — across multiple locations, portfolio brands, teams, and partnerships — into one system (let’s be real, it’s definitely an ERP).  

That ERP (and all apps and services connected to it) act as a “central command center,” enabling orgs to control the entire supply chain (and everything else) from a single dashboard view. 

According to IBM, simplifying digital supplier networks is a game-changer for automotive businesses. Auto manufacturers now manage these super complex ecosystems that quickly become overwhelmed by manual processes and disparate systems. 

Modern SCM solutions allow auto makers to build and manage robust supplier ecosystems, automate vetting and onboarding, and build resiliency in the face of uncertainty. 

We helped Burkett, a restaurant equipment supplier, implement NetSuite to improve efficiency and support long-term growth. 

The company was struggling with integration challenges and poor visibility — hindering growth and preventing the leadership team from making informed decisions. 

The NetSuite ERP enabled real-time reporting, which made it possible for Burkett to eliminate inefficiencies, standardize best practices, and refine its processes for reconditioning and selling used restaurant equipment. 

For Peets Coffee, modernizing the supply chain  looked a lot different.  In early 2020, the coffee chain was already in the process of implementing D365 Finance and Supply Chain Management. Then COVID hit, forcing Peets to pivot to meet pandemic-era needs, while also moving forward with implementation.

This is huge, as the craft coffee supply chain is uniquely complex. You’ve got a dedicated team working directly with global suppliers to source the beans — which involves ensuring that growers adhere to transparent, socially responsible supply chain practices and maintain certain quality standards. 

Then, there’s the issue of freshness and quality. For Peets, supply chain agility is everything. The company follows a roast-to-order process where coffee is shipped to shops and sold within 21 days of roasting. 

And, of course, there’s also the various channels — brick-and-mortar coffee shops, grocery stores, e-commerce — where customers can get the product.

What’s remarkable about this particular case is that Peets was only just beginning their “digital transformation journey.” 

Because they took those initial steps to unify and digitize supply chain operations, the company was able to respond to the same pandemic disruptions that killed off countless businesses and transformed the way we live, work, and communicate — probably forever. 

Final Thoughts

Many organizations still rely on legacy tech and manual processes to manage supply chain operations. Others simply think too “small” and focus on optimizing individual parts of the supply chain, without looking at the bigger picture. 

In order to compete in 2023 and beyond, supply chain orgs need to modernize all aspects of their business. 

Today’s supply chains must be intelligent, connected, and equipped with cutting edge tech like IoT sensors and real-time predictive analytics. That means, today’s supply chain leaders must have the skills, strategies, and support they need to unlock the full potential of those technologies —  and emerging and future solutions that might benefit them later on.

Velosio offers a range of supply chain solutions and advisory services, designed to boost supply chain resilience and agility, so you can quickly adapt to new business models and evolving customer expectations.