What is Supply Chain Management?
Since the term “supply chain” contains the word “supply”, many people naturally assume that supply chain must have something to do with suppliers (i.e. purchasing or procurement). While it is true that supply chain management does encompass the purchasing and procurement functions, supply chain management actually extends well beyond those areas. Supply chain management is the practice of manufacturing and distributing physical goods as efficiently as possible.
Supply chain management encompasses the entire process of manufacturing and distributing physical goods, from supplier’s supplier to customer’s customer. Business functions that are within the realm of supply chain management include: forecasting and planning, procurement and purchasing, manufacturing and assembly, warehousing and distribution, shipping and transportation, returns and refurbishment, inventory management and order management. Or, stated more simply, supply chain management includes the functions: plan, buy, make, store, move, sell and return.
For example, let’s look at [a very simplified version of] the processes that created the computer monitor upon which you are probably reading this text. The monitor was most likely assembled using components supplied by many companies in several different countries. The circuit boards and computer chips that control the monitor’s functions may have been manufactured in Singapore or Malaysia. The CRT may have been manufactured in Mexico. The plastic casing may have been injection-molded in China. And the final assembly of those components may have taken place in Texas. What if the Texas plant is ready to assemble 1,000 monitors, but the plastic casings didn’t arrive from China in time? And what if a computer company (e.g. Compaq) is waiting for those monitors so they can package them together with 1,000 computers? And what if a major customer of Compaq’s, such as Best Buy, has already run ads to promote those computer packages because Best Buy was counting on having them delivered tomorrow? In this scenario, the whole system just broke down, and is going to cause a lot of embarrassment, not to mention a lot of money, to Compaq and Best Buy, and is going to leave a lot of end consumers very disappointed, just because a little injection molding company in China didn’t deliver some components in time.
“Couldn’t the monitor assembler in Texas just buy a lot of plastic casings ahead of time and store them in a warehouse until they’re needed?” Yes, but inventory costs money; a lot of money. And what if that Texas assembler also bought all of the other components well ahead of time and stored them in warehouses until they’re needed? Now we need to add the cost of extra warehousing space to the equation, which actually is paltry in comparison to the cost of all that inventory just sitting in warehouses collecting dust and becoming obsolete. And what if each of the component manufacturers also adopted the same philosophy and stored raw materials in warehouses close to their facilities in Singapore, Mexico, etc.? With that methodology of inventory management, the cost of manufacturing that monitor could easily double, which means that the price the end consumer has to pay at Best Buy would double.
But, with good supply chain management, the Texas assembler can be assured of having the right components available in the right place at the right time without the need for storing massive quantities of expensive “safety stock” inventory. Supply chain management is all about making that process, from sourcing those components to delivering the finished goods to the customer, more efficient (i.e. lower cost) and reliable.
What is Logistics?
Logistics is the portion of supply chain management that encompasses distribution, transportation and inventory management. To put it in context with the simplified description given above regarding the supply chain management functions of plan, buy, make, store, move, sell and return, logistics is the “store” and “move” functions.
It is not unusual for transportation costs alone to be more than 10% of revenue. For many companies, transportation is the single largest cost element on their financial statements. Transportation costs are often double the expense of warehousing and inventory carrying costs (which means that warehousing and inventory costs can be 5% of revenue, which is no small matter). And every dollar saved in transportation costs goes straight to the bottom line. So, why don’t corporations focus more attention on streamlining logistics to reduce costs?