Introduction to Supply Chain Management

Supply Chain Management Touches Almost Every Function at Your Company

Supply Chain Management
Supply Chain Management. Getty Images

If your company sells a thing to a customer, your company most likely has a supply chain. And that supply chain impacts almost every other business function.  

How can Sales sell without Supply Chain supplying products?

How can Finance calculate the cost of goods (and your profitability) without Supply Chain managing supplier and manufacturing costs?

How can Research and Develop research and develop new products without Supply Chain sourcing new components?

I could go on and on.  

But what are supply chain and supply chain management? Supply chain management isn't just the management of products — it's also the management of information, time and money.

Let's start at the far end of the chain and work our way forward, shall we?

Tier II Suppliers

Supply chain management doesn't start when you order a product from your suppliers. You should be managing your product supply when your suppliers are sourcing their suppliers. That's called Tier II supplier management.

If your suppliers aren't practicing supply chain management with its suppliers, your own supply chain performance will suffer. That's why so many in the supply chain management field practice Tier II supplier management.

How can you influence your Tier II suppliers?

The answer takes us back to what supply chain management is. It's the management of product flow, information, time and money.

And for Tier II supplier management, "information" is one of the key performance drivers.

The information your Tier II suppliers need is the demand information that you've provided to your suppliers — whether that's forecasts are firm orders. Your Tier II suppliers can use that information to do its own capacity planning and raw materials buys (i.e. practice its own supply chain management).

By ensuring your Tier II suppliers have what they need in order to deliver on-time and cost effectively to your suppliers, you are on your way to optimizing your supply chain.

Supplier Management

Supplier management is what most people perceive supply chain management to mean. And, truly, this is where a lot of supply chain managers spend their time.

The arena of supplier management includes the cost of goods negotiations, on-time delivery management, quality audits and management, new product development — to name a few areas of focus.

Your supply chain team will work with your suppliers' customer service teams, engineering teams, quality teams and even supply chain teams. 

Just like your customers probably measure your performance, it's important that you and your suppliers work together to determine the right metrics to measure their performance. On-time delivery is the most common metric that's measured, but make sure that you and your suppliers understand the precise definition of on-time delivery that you'll be measuring.

On-time delivery isn't has black-and-white as some might think. There are original promised delivery dates that can (and often) change during an order's lifetime.

So are you measuring on-time delivery performance against the original promise date or subsequent revised promise dates? Make sure you and your suppliers are aligned.

Also, are you measuring the dock date or the ship date? Oftentimes that will depend on the payment terms you've negotiated with your supplier. If your payment terms are FOB Plant, for instance, that means you're responsible for the shipping method once the product leaves your supplier's plant. In that case, your on-time delivery metric would likely be based on the ship date.

However, if your payment terms are CIF, i.e. your supplier pays for the cost, insurance and freight to deliver it to you — then your on-time metrics would likely be based on date the shipment arrives at your dock.

Logistics

Logistics and supply chain aren't the same things.

Logistics is the management of the movement of goods whereas supply chain management covers the many other areas we're discussing here.

But logistics is a part of supply chain and that means whoever manages your supply chain will be responsible for managing freight forwarders, shipping companies, parcel delivery companies (like Fedex and UPS), customs brokers and third party logistics providers (3PL).

Logistics providers should be managed in the same way that you manage your suppliers. Costs and contracts can be negotiated. You can source freight forwarders the same way you would source suppliers of the products you need.

Shipping and warehousing costs can be one of the largest expenses in your supply chain and its critical that your logistics providers are measured and managed to control those costs.

Inventory

And speaking of one of the largest expenses in your supply chain, we now come to inventory. The difference between paying for logistics and paying for inventory is that when you incur the expense for logistics — you've received that benefit. A logistics provider ships something to you and you pay them. You've incurred the expense for a service rendered.

But inventory is a double-edged sword. Often, you'll pay your suppliers for your inventory and you'll have the product you just paid for — but you haven't received the benefit of that product. That benefit comes when you sell it.

And that's where the inventory management aspect of supply chain management becomes critical.

The supply chain management conundrum: You need product to sell to your customers but you won't have those products until you incur the expense of acquiring that product.

You need to have enough inventory on hand to supply your customers what they want, when they want it — but you can't have too much inventory on hand or you will have paid (possibly) too much money out of pocket.

There's the added risk that you can build too much inventory. Because your suppliers might have minimum order quantities (MOQ) or because you thought you would sell more than you did or because something changed in the marketplace — you might end up paying for inventory that you can never sell.

Let's say you sell cases for smart phones. And, not long ago, you acquired 100,000 pc of an iPhone 5 case that you planned to sell to Apple, Verizon and the other iPhone accessory retailers. And after you sold 10,000 of them, Apple launched the iPhone 6. And suddenly there was no market for your iPhone 5 cases. Too much inventory. Money you spent that will never be recouped.

Inventory is a terrible balancing act. You need enough, but not too much,— and you have to make the decision on how much to acquire based on unreliable information. Leave it to the supply chain management professionals.

Purchasing

The other guy: "Hi, welcome to the company. What do you do?"

Me: "I'm our new supply chain director."

The other guy: "Oh, you're the purchasing guy."

I didn't respond. The other guy walked off.

Although it's common to believe that supply chain is purchasing, that's not accurate. Purchasing is a part of supply chain management, but it's not the totality of all that supply chain management is (see Logistics, above). It's like saying that American football is sports. While American football is a subset of all sports, sports is so much more.

I use the football analogy because purchasing is a lot of blocking and tackling. While some purchasing teams are giving sourcing and negotiating responsibility, most of what a purchasing team does is transactional.

Issuing an RFQ, choosing the lowest priced supplier and cutting a purchase order does not constitute strategic supply chain management — although it's important for the day-to-day operations of your company.

By the way, I didn't respond to the other guy when he said, "Oh, you're the purchasing guy" because my explanation of why supply chain isn't just purchasing could fill several internets.

Buyers and purchasing managers can grow into supply chain professionals, but it takes an understanding that the transactional activity of purchasing is only a small slice of what supply chain management is.

Customer Service

In some companies, customer service isn't considered part of supply chain. However, if you look at the scope of supply chain management's definition in the toilet paper industry — "From stump to rump" — you can see that the supply chain isn't complete until your product reaches the end user (pun intended).

The "stump" in toilet paper manufacturing's supply chain represents Tier II suppliers — i.e. the trees that make the pulp that make the paper. And the "rump" — well, you get it. And while your supply chain may not reach all the way to a consumer, it should include what it takes to deliver product out your door and to your customer's dock.

Customer service functions as the voice of the customer at your company. What shipping method does your customer want? What size boxes do you need to pack your product in and how many units per pack? Those answers can be driven by your customer, especially if your customer is a big box retailer.

There is not better team positioned to drive your company to deliver what your customers want, when your customers want it — than your customer service team. And since on-time delivery — both inbound and outbound — is one of the primary functions of supply chain management, customer service belongs in supply chain.

Costs

Managing the cost of your company's products, the value of your overall inventory and logistics expenses — that's all your CFO is going to want to know your supply chain leadership is managing. Supply chain management is uniquely situated to be the cost monitor at your company.

Accuracy

Of course, none of the cost analyses or metrics are any good if they are not accurate. Supply chain management needs to make sure the underlying data that drive on-time delivery reports and other supplier performance data is accurate. That requires audits of your internal processes and audits at your suppliers.

Inventory accuracy is one of the most critical elements of valuing a company. Your supply chain management team should be driving daily cycle counts of your inventory. Then — at least once per year — you should be conducting a 100 percent physical inventory of everything on your books. If you have more than a 1 percent variance between what your system tells you and what your physical count tells you — that means you have work to do to get to 100 percent inventory accuracy. Take a look at your cycle counting practices. Audit and refine them.

At the end of the day, supply chain management is optimized when you are delivering what your customers want, when they want it — and doing that by spending as little money as possible. Cost of goods management, inventory control — and managing your entire supply chain from your Tier II suppliers to your customers will get you on the right track.