What is a Supply Chain? 

The supply chain is the process of creating products for customers. Supply chains span from raw materials, to manufacturing, distribution, transportation, warehousing, and product sales. As you can imagine, when the number of resources, operations, and functions increase, managing this supply chain can become very complex. 

An entire supply chain could exist within a single company. For instance, 3M has identified more than 30 unique supply chains operating within its enterprise! Or a supply chain can span multiple enterprises before it reaches a customer. While other terms like demand chain and value chain are used today, they usually mean the same thing -- managing a portfolio of assets and relationships to transform raw material into finished goods for consumers in the most efficient manner.

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What is Supply Chain Management ?

Shortened product life cycles, increased competition, and heightened expectations of customers have forced many leading edge companies to move from physical logistic management towards more advanced supply chain management. Additionally, in recent years it has become clear that many companies have reduced their manufacturing costs as much as it is practically possible. Therefore, in many cases, the only possible way to further reduce costs and lead times is with effective supply chain management.

In addition to cost reduction, the supply chain management approach also facilitates customer service improvements. It enables the management of inventories, transportation systems and whole distribution networks so that organizations are able meet or even exceed their customers' expectations.

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What does a supply chain do? 

Given the complexity of a typical supply chain, supply chain planning systems (also known as Advanced Planning Systems) enable companies to intelligently manage the activities of the supply chain. Every company must perform five basic activities or processes within a supply chain: buy, make, move, store and sell. Within each of these processes, there are short-term decisions (which product should be put on the truck?) and long-term decisions (do we need a new factory to meet demand?). 

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What can SCM do? 

A good SCM initiative gives visibility to all the players in the supply chain so that they are able to react to the order. The moment a retailer receives an order, the retailer’s supplier also sees it. The supplier checks inventory. If inventory is low, a manufacturer — also with access to the system — produces more product and ships it to the supplier via a distributor that is also connected to the system. 

Meanwhile the supplier has sent the product to the retail for shipment to the customer. The customer, in turn, can track the shipment of the order and perhaps even check inventory to make sure an item is in stock before ordering. 

With Web technology, all the players in the chain simultaneously manage inventory, control manufacturing schedules and deliver an order on time to a customer. 

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What else can SCM do?

Supply chain management projects should also rethink the chain. Most businesses establish their supply chains around product lines. But today, customer orders touch multiple product lines and multiple channels of distribution. Modern supply chains focus on the customer — and on delivering one order at a time rather than moving one product line at a time. 

The focus has to be on filling, delivering and managing inventory for every order that a customer places. Every order should penetrate the same system that manages inventory and connects to suppliers and distributors. 

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What do you have to be careful of with a SCM project? 

When rolling out a project, companies must decide which customers and suppliers should use it first. That decision can be based on several factors. Here the salesman’s “80/20” rule can apply: 20 percent of customers place 80 percent of orders, so companies should consider offering Web capability to that 20 percent of customers first. 

Consider the IT capabilities of partners and customers. Simplicity is the key: applications that are easy to use and easy to connect will be the most popular with members of the supply chain. 

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What is Supply Chain Optimization? 

Simply stated, it is about managing your supply chain to increase profitability, or "put the least money in to get the most money out." One of the most common measures of profitability used by businesses is Return On Assets (ROA). Let’s look at what makes up ROA: 

ROA = (Revenues) - (Expenses) / (Assets) 

To increase ROA, you can increase revenues, decrease your expenses, and keep the asset base required to do this as small as possible. Here are some examples of each: 

Increasing Revenues: This can be done by increasing customer satisfaction (which creates more demand) and increasing the production rate of sellable goods. (The term sellable is important because, believe it or not, there are businesses out there that build products that no one ends up buying.) Companies that can react faster to customer demand tend to produce the goods customers want, when they want them. 

Decreasing Expenses: Identifying inefficiencies in the supply chain allows companies to reduce costs like labor, raw materials and marketing. Cost improvements are not just "cutbacks," improvements are often made through communication. For instance, many companies have to ship "premium freight" in order to get an order to a customer on time. With proper planning, this cost can be avoided. 

Improving Asset Utilization: The amount of assets the enterprise has captive in the supply chain affects the potential profitability of the company directly. Compare a $1000 investment with a $2500 return to a $2000 investment with the same return, and the meaning of asset utilization is clear. Reducing the amount of inventory and capital in the supply chain means a company becomes profitable faster.

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What is the Future of Supply Chain Optimization? 

At i2 Technologies, we talk about the convergence of supply chain management with the entire value chain of customers and business partners. This methodology is called Value Chain Management or VCM. While the term may seem new, it is really about making better decisions at high velocity -- and is rooted in the principles that made SCM work for business. 

Companies are beginning to move from optimizing within the four walls of the enterprise to optimizing the entire value chain. The end game is not just to support an integrated business process that connects the customer’s customer to the supplier’s supplier, but enable this virtual enterprise or value chain to operate at extreme velocity. i2, along with customers like Dell and 3M, are truly blazing new trails in taking the current level of competition to a new level of performance. 

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How Will this Affect the Consumer? 

As companies optimize their supply chains, they will be able to increase profitability with less waste, and ultimately maintain affordable prices for customers. At the same time, customer service will improve, as customers will get exactly what they want, when they want it. Is all of this possible through better planning? Companies are already generating billions of dollars in value today using these processes. 

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How has technology changed the way supply chains work? 

The Internet has transformed this archaic process into something closer to an exact science. 

An Internet-enabled supply chain may have just-in-time delivery, precise inventory visibility and to-the-minute distribution-tracking capabilities. With technology advances, supply chains have moved from the paper-heavy adventure noted earlier to a strategic weapon that can help avoid disasters, lower costs and make money. 

That potential, so central to the operations of any business, has executives scrambling to find and fix the weak links in their supply chains. And it’s not easy. Automating a supply chain requires careful planning, and must start with an excellent understanding of relationships with partners and customers. 

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What is the Difference Between an ERP System and a Supply Chain Planning (SCP) System? 

Today’s Enterprise Resource Planning (ERP) systems offer little in terms of planning or decision support functionality. What ERP has traditionally excelled at is "voucher processing" or recording transactions, i.e., the ability to manage administrative activities like payroll, financials inventory and order processing. An ERP system has the functionality to process an order, but it provides little or no information about the profitability of the order or the best way to deliver it to the customer -- all it does is process the transaction. The difference in how ERP and SCP approach the planning problem represents a fundamental mindshift -- the question becomes "Should I take your order?" instead of "Can I take your order?" 

The reports generated by ERP systems gave planners statistics about what already happened in the company: the costs, the financial performance. Today, the planning systems within ERP are rudimentary. Reports from ERP systems provide a snapshot of time, but they do not support the continuous planning exercise that is central to an SCP system -- one that continues to refine and enhance the plan as changes and events occur up to the very last minute before executing the plan. Attempting to come up with an optimal plan using ERP-based systems has been compared to steering a car by looking in the rear-view mirror. 

Thus, supply chain planning (SCP) systems have emerged as a new layer as well as a complement to existing ERP systems to provide intelligent decision support capabilities. An SCP system is designed to overlay existing systems, and pull data from every step of the supply chain, providing a clear, global picture of where the enterprise is heading. Creating a plan from an SCP system allows companies to quickly assess the impact of their actions on the entire supply chain, including customer demand. 

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