What Is Supply Chain Management (SCM)?

Supply chain management is the management of the flow of goods and services and includes all processes that transform raw materials into final products. It involves the active streamlining of a business's supply-side activities to maximize customer value and gain a competitive advantage in the marketplace.

Key Takeaways

  • Supply chain management (SCM) is the centralized management of the flow of goods and services and includes all processes that transform raw materials into final products.
  • By managing the supply chain, companies can cut excess costs and deliver products to the consumer faster.
  • Good supply chain management keeps companies out of the headlines and away from expensive recalls and lawsuits. 
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Explaining Supply Chain Management (SCM)

How Supply Chain Management (SCM) Works

Supply chain management (SCM) represents an effort by suppliers to develop and implement supply chains that are as efficient and economical as possible. Supply chains cover everything from production to product development to the information systems needed to direct these undertakings.

Typically, SCM attempts to centrally control or link the production, shipment, and distribution of a product. By managing the supply chain, companies can cut excess costs and deliver products to the consumer faster. This is done by keeping tighter control of internal inventories, internal production, distribution, sales, and the inventories of company vendors.

SCM is based on the idea that nearly every product that comes to market results from the efforts of various organizations that make up a supply chain. Although supply chains have existed for ages, most companies have only recently paid attention to them as a value-add to their operations.

Five Parts of SCM

In SCM, the supply chain manager coordinates the logistics of all aspects of the supply chain which consists of five parts:

  • The plan or strategy
  • The source (of raw materials or services)
  • Manufacturing (focused on productivity and efficiency)
  • Delivery and logistics
  • The return system (for defective or unwanted products)

The supply chain manager tries to minimize shortages and keep costs down. The job is not only about logistics and purchasing inventory. According to Salary.com, supply chain managers “oversee and manage overall supply chain and logistic operations to maximize efficiency and minimize cost of organization's supply chain."

Productivity and efficiency improvements can go straight to the bottom line of a company. Good supply chain management keeps companies out of the headlines and away from expensive recalls and lawsuits.

SCM vs. Supply Chains

A supply chain is the network of individuals, companies, resources, activities, and technologies used to make and sell a product or service. A supply chain starts with the delivery of raw materials from a supplier to a manufacturer and ends with the delivery of the finished product or service to the end consumer.

SCM oversees each touchpoint of a company's product or service, from initial creation to the final sale. With so many places along the supply chain that can add value through efficiencies or lose value through increased expenses, proper SCM can increase revenues, decrease costs, and impact a company's bottom line.

Example of SCM

Understanding the importance of SCM to its business, Walgreens Boots Alliance Inc. decided to transform its supply chain by investing in technology to streamline the entire process. For several years the company has been investing and revamping its supply chain management process. Walgreens was able to use big data to help improve its forecasting capabilities and better manage the sales and inventory management processes.

This includes the 2019 addition of of its first ever Chief Supply Chain Officer, Colin Nelson. His role is to boost customer satisfaction as the company increases its digital presence. Beyond that, in 2021, it announced it would be offering free two-hour same day delivery for 24,000 products in its stores.

What is a supply chain management example?

Supply chain management is the practice of coordinating the various activities necessary to produce and deliver goods and services to a business’s customers. Examples of supply chain activities can include designing, farming, manufacturing, packaging, or transporting.

Why is supply chain management important?

Supply chain management is important because it can help achieve several business objectives. For instance, controlling manufacturing processes can improve product quality, reducing the risk of recalls and lawsuits while helping to build a strong consumer brand. At the same time, controls over shipping procedures can improve customer service by avoiding costly shortages or periods of inventory oversupply. Overall, supply chain management provides several opportunities for companies to improve their profit margins and is especially important for companies with large and international operations.

What are the five elements of supply chain management?

Supply chain management has five key elements—planning, sourcing raw materials, manufacturing, delivery, and returns. The planning phase refers to developing an overall strategy for the supply chain, while the other four elements specialize in the key requirements for executing that plan. Companies must develop expertise in all five elements to have an efficient supply chain and avoid expensive bottlenecks.