What is Supply Chain Management?
Supply chain management can be defined as a set of activities relating to the planning and control of all procurement, manufacturing, and logistical operations required to turn raw materials into finished products. It involves the flow of materials, information, and money and is critical for any company hoping to deliver products and services efficiently.
This guide to supply chain management will cover:
- History of Supply Chain Management
- Supply Chain Management Theory
- Supply Chain Management Strategy
- Implementation of Supply Chain Management Principles
- Future Trends in Supply Chain Management
The History of Supply Chain Management
The history of supply chain management could be considered one and the same with the history of commerce. Supply chain management, like commerce itself, has always been in existence, as supplies, information and money have always flowed between entities. Rather, the history of supply chain management is the evolution of the terminology to better describe the evolution of the operations of firms and governments as technology has progressed throughout time. We have listed some of the main events in the history of supply chain management below.
1760-1820: The first industrial revolution introduces steam powered machines that dramatically increase factory output. Supply chains must supply more materials to meet these increases in output.
1870-1914: The second industrial revolution introduces electricity into the factory, which further increases output.
1950s: Supply chain management as a concept did not exist, and logistics management terminology existed but was typically only used within the context of the military. However, beginning in the 1950s, Logistics management terminology and practices began to be adopted by private industry.
1980-2010: The third industrial revolution, also known as the digital revolution, introduces personal computers and the internet into the factory. Mechanical and electromechanical functions can increasingly be digitized.
1980: introduction of the PC allows for more advanced and complex planning. New software applications are introduced into the market to help manage these increasingly complex global logistics networks.
1990s: Enterprise resource planning systems are introduced to help integrate materials requirement planning systems with the rest of the business. Increased globalization creates the need for, but is also enabled by, improvements in the personal computer and the internet.
2005: Council of logistics management officially changes its name to the Council of Supply Chain Management.
Supply Chain Management Theory
The supply chain operations reference (SCOR) model describes an organization’s activities that it uses to fulfill a customer’s demand using 6 distinct processes: plan, source, make, deliver, return. Planning refers the internal and external communication done between nodes in the supply chain to optimize supply and demand. Sourcing refers to the contracting and negotiation with external suppliers to provide the raw material necessary for the make process. Make is the production system utilized to transform the raw inputs from the suppliers into finished goods. Deliver is the transportation and logistics management used to transport finished goods from the company to its customer. Returns refers to the management of reverse flows that occur when a customer returns a finished good that was previously provided during the deliver process.
Just in Time (JIT)
JIT manufacturing, also known as lean manufacturing or the Toyota production system, is a production system pioneered by Toyota with the goal of eliminating waste created through quality defects, excess inventory, and part shortages. In theory, a true JIT manufacturing system has zero inventory, zero lead time for components, zero quality defects, and zero delays. In practice, this is impossible because organizations require inventory to make their products, but they can still benefit from endeavoring to reduce their inventories and quality defects. It requires a deep partnership with the organization’s suppliers as deliveries must occur frequently and be precisely on-time and on-spec. The benefits of JIT include improvements in cash management, better space efficiency, less scrap, and reduction in handling equipment and personnel.
Value Chain Model
The value chain model describes the process by which companies change inputs to outputs in such a way that the outputs have greater value than the cost of creating the inputs. There are primary value chain activities and support activities, both of which are important for firms to deliver their value proposition. Primary activities include the most essential value chain functions, namely, selling, manufacturing and delivering. Support activities, such as infrastructure, HR, engineering and purchasing are essential functions that facilitate the actions of the primary functions with the goal being to maximize the value created and minimize the costs incurred.
Theory of Constraints
Theory of constraints (TOC) is focused on improvement efforts taken to identify and eliminate constraints in a process to improve the performance of the whole system. The central idea behind TOC is that a system can only work as fast as the bottleneck, so resources must be devoted to eliminating or reducing the bottleneck. The constraint must first be identified, and then avenues must be explored to make the constraint as efficient as possible. Next all other aspects of the system must be devoted to helping improve the weakest link. If output is still inadequate, more resources must be acquired to further mitigate the constraint.
Supply Chain Management Strategy
Supply chain management strategy is driven by the overall corporate strategy and involves how the organization will structure its resources to help the organization achieve its corporate strategy. There are several factors affecting supply chain design including which competitive priorities the organization needs to focus on to satisfy its customers. Competitive priorities for supply chain management includes cost, speed, flexibility, and quality. The competitive priorities that firms chose to focus on can vary by industry (i.e. fast fashion versus aerospace) or they can vary from firm to firm. For example, apple phones come at a higher cost than other phone companies but offer higher perceived quality than its competitors.
To support a supply chain management strategy, several corporate functions must be integrated, not just the supply chain management organization. Marketing and engineering for instance must be on board with the strategy. The product branding and technical designs of the products must all be in line to support he chosen competitive priorities of the firm.
Challenges affecting supply chain management strategy include the need for mass customization, shorter product lifecycles, faster innovation, extended global supply networks, and high levels of service. Consumers increasingly expect more and more from firms. Companies that cannot offer products at the same level of service, time, cost, or quality as competitors will lose sales and customers.
Implementing Supply Chain Management Principles
Often, there is a gap between the ideal doctrine laid out in theory and what can actually be accomplished in practice. Supply chain management is no different; there is much that is outlined in theory that is impossible or infeasible to implement in practice. So, how can firms successfully implement supply chain management theories and strategies in practice?
Procurement refers to the contracting and negotiation with external vendors to deliver inputs for the firm to make their products. There are several decisions that involve the procurement department including make/buy, sourcing strategy, standardization, and new product development.
Make/buy decisions are made in conjunction with input from manufacturing as well as other functions, but generally includes the following considerations: technical knowledge of the firm and the suppliers on how to make the product, strategic importance of the manufacturing the product in-house, cost, and capacity constraints. For example, Nike focuses on branding and marketing, but the actual manufacturing of its shoes is not a core competency and is relatively simple, so it outsources manufacturing. In contrast, Boeing and Airbus, the airplane manufacturers, manufacture all their airplanes in house. This is because airplane manufacturing is extremely difficult, it is a core competency of the firm, and they can manufacture the airplanes better than a contract manufacturer could.
Strategic sourcing refers to who the firm decides will supply their required inputs and it naturally follows the supply chain management strategy. For example, with highly complex products that require a high level of quality, but are not necessarily as cost sensitive, sole sourcing is typically used as it allows a single strategic supplier partner to accelerate up the learning curve faster and achieve higher levels of technical knowledge on how to make the product. In contrast, simple products that are competing heavily on cost, should be competitively bid and awarded to the lowest bidder.
The concept of standardization, as it relates to procurement boils down to the tenet of buying in bulk to achieve a better unit price. If a company can utilize the same components across product lines and the procurement department can leverage this spend across the company, then a better price per unit can be achieved.
New Product Development
Another key function of procurement is to interface with external suppliers to help obtain industry knowledge and technical expertise when developing new products. The new product development stage is the ideal stage to introduce new manufacturing techniques and technologiesas the design team can start with a “blank sheet of paper” and fully integrate the new technology into the value stream.
Manufacturing refers to the transformation of raw inputs into finished goods that can be sold to the customer. It involves the efficient design of workflows, mistake proof processes, and elimination of waste.
Manufacturing workflows should be designed to reduce the number of bottlenecks, with all manufacturing cells producing at the same throughput rate. Lean manufacturing outlines the creation of manufacturing cells, whereby each cell specializes in a certain task, thereby making that specific cell an expert on that component. This increases speed and quality of output.
Poka-yoke or “mistake proofing” is the concept of creating processes that minimize, prevent, detect, or eliminate the possibility of human error. An example could be an automation of a process or rules within a system that will not allow an operator to make a mistake or will make it easier to detect.
Waste could be considered as extra process steps, inventory, transportation, or time. Efficient manufacturing systems should be set up to eliminate unnecessary steps by an operator. For example, moving all the machines an operator will need for a task into a cell to prevent the need for the operator to walk across the shop to different machines to perform an operation.
Logistics refers to the inbound and outbound transportation of inputs and outputs to connect the nodes of the supply chain between the customers, the firm and the suppliers. Logistics includes decisions such as the location of factories and distribution centers in relation to customers, warehouse management, and order fulfillment.
Location of Value Chain Activities
The location of value chain activities matters a great deal when determining the level of customer service that must be provided. Low cost countries may offer a lot of savings for manufacturing, but if customers cannot handle the longer lead times, then sales will decline.
Warehouse management refers to the process by which firms schedule their picking and packing. Amazon comes to mind as they utilize sophisticated algorithms and software to determine the optimal location to store a product and the optimal route that a worker will take to pick a series of items.
Order fulfillment overlaps with some of warehousing and location decisions as the order fulfillment requirements will drive location decisions and warehousing decisions. Considerations for order fulfillment should be how to most efficiently store, pull, pick and pack orders and which transportation methods to use to deliver products to customers.
Future Trends in Supply Chain Management
As was the case with the first three industrial revolutions, improvements in technology will drive further changes in supply chain management. A few major trends in supply chain management are:
Industry 4.0 refers to the fourth industrial revolution or the addition of automation, robotics, artificial intelligence, quantum computing, blockchain, 5G wireless technology, and additive manufacturing into the factory. Whereas the 3rd industrial revolution dealt with the digitization and use of software to increase economic output, the fourth industrial revolution unleashes the possibility of fully autonomous systems working and communicating together across many entities.
Internet of Things
Internet of things (IOT), as it relates to supply chain management, is the concept of linking everything on the value chain to the internet. This could include robots, machines, transportation, and many other pieces of the production system linked together on superfast wireless and fiber optic networks to rapidly communicate with other entities “things” along the value chain.
Increased automation along the supply chain is inevitable as robotics and automation software continue to become more mature and cost effective. The elimination humans from conducting repetitive tasks is already occurring and will become more widespread as the capabilities of autonomous systems and artificial intelligence improve. Jobs requiring a lower amount of creativity and cognitive abilities will be replaced by higher level engineering jobs to design, implement, and maintain these systems.
Additive manufacturing, otherwise known as 3D printing, could have a profound effect on supply chain management. Current globalization trends have created complex global logistics networks. Additive manufacturing can enable an on-demand manufacturing solution, whereby products are produced just-in-time, closer to the customer. This could create a scenario whereby offshore manufacturing could soon be near-sourced to provide a higher level of service to the customer and better lead times. On-demand manufacturing with 3D printing also enables companies to run a lean production system with very little inventory.
3D printing also enables firms to provide better aftermarket support. Typically, when a customer requires a replacement part, the company sells the replacement part at a much higher price than the firm sold the production part. This is because there are costs associated with holding inventory for a period after the initial production run, or to run a small batch production run. With 3D printing, the part can be held as a digital file, rather than as a physical product, and then be printed on-demand.
Consumers prefer products that are personalized and customized for their specific purpose, however, it is very expensive to offer mass customization for physical products. Mass customization is currently a challenge for supply chain management, but the solution could be 3D printing. 3D printing can manufacture many unique units at the same time; all that is required is a unique 3D model with the customization in the digital design.
Small batch manufacturing is also a major benefit of 3D printing. Typically, when firms produce a product they must produce thousands of units to amortize the fixed costs of tooling and setup. 3D printing can produce products in small batches economically, with no tooling, and a high degree of customization to what the consumer wants.
As the world population grows and raw material resources become more scarce, reverse logistics will become an even more critical function of supply chain management. 3D printing is an excellent technology to enable better reverse logistics as the raw materials of previously 3D printed parts can easily be melted back down and reused to make new products.
Learn more about Supply Chain Management and Additive Manufacturing
Interested in learning more about how 3D printing can already help improve your supply chain? ZABFAB Manufacturing offers small batch manufacturing, prototyping, mass customization, aftermarket support, and 3D printing design services. Contact us to start improving your supply chain with additive manufacturing!