Components of Supply Chain Management (SCM)
Components of Supply Chain Management (SCM)
The main elements of a supply chain include purchasing, operations, distribution, and integration. The supply chain begins with purchasing. Purchasing managers or buyers are typically responsible for determining which products their company will sell, sourcing product suppliers and vendors, and procuring products from vendors at prices and terms that meets profitability goals.
Supply chain operations focus on demand planning, forecasting, and inventory management. Forecasts estimate customer demand for a particular product during a specific period of time based on historical data, external drivers such as upcoming sales and promotions, and any changes in trends or competition. Using demand planning to develop accurate forecasts is critical to effective inventory management. Forecasts are compared to inventory levels to ensure that distribution centers have enough, but not too much, inventory to supply stores with a sufficient amount of product to meet demand. This allows companies to reduce inventory carrying costs while still meeting customer needs.
Moving the product from warehouses or manufacturing plants to stores and ultimately to customers is the distribution function of the supply chain.
Supply chain integration refers to the practice of developing a collaborative workflow among all departments and components involved in the supply chain to maximize efficiencies and build a lean supply chain.
2 Walmart’s Method of Managing the Supply Chain
Walmart has been able to assume market leadership position primarily due to its efficient integration of suppliers, manufacturing, warehousing, and distribution to stores. Its supply chain strategy has four key components: vendor partnerships, cross docking and distribution management, technology, and integration. Walmart’s supply chain begins with strategic sourcing to find products at the best price from suppliers who are in a position to ensure they can meet demand. Walmart establishes strategic partnerships with most of their vendors, offering them the potential for long-term and high volume purchases in exchange for the lowest possible prices.
Suppliers then ship product to Walmart’s distribution centers where the product is cross docked and then delivered to Walmart stores. Cross docking, distribution management, and transportation management keep inventory and transportation costs down, reducing transportation time and eliminating inefficiencies.
Technology plays a key role in Walmart’s supply chain, serving as the foundation of their supply chain. Walmart has the largest information technology infrastructure of any private company in the world. Its state-of-the-art technology and network design allow Walmart to accurately forecast demand, track and predict inventory levels, create highly efficient transportation routes, and manage customer relationships and service response logistics.
3 Benefits of Efficient Supply Chain Management
Wal-Mart’s supply chain management strategy has provided the company with several sustainable competitive advantages, including lower product costs, reduced inventory carrying costs, improved in-store variety and selection, and highly competitive pricing for the consumer. This strategy has helped Walmart become a dominant force in a competitive global market. As technology evolves, Walmart continues to focus on innovative processes and systems to improve its supply chain and achieve greater efficiency.
How to Manage the Bullwhip Effect on Your Supply Chain
The goal of any supply chain is to get the right selection of goods and services to customers in the most efficient way possible. To meet this goal, each link along the supply chain must not only function as efficiently as possible; it must also coordinate and integrate with links both upstream and downstream in the chain. The keystone for a lean supply chain is accuracy in demand planning. Unforeseen spikes in demand or overestimations of demand stimulate the supply end of the chain to respond with changes in production. Production and supply issues then impact the consumer end of the supply chain and the effects ripple up and down the chain. This is often referred to as the bullwhip effect.
1 What Causes the Bullwhip Effect?
Supply chain management is a complex process. There are several issues that can lead to the bullwhip effect and those issues can be exacerbated by delays in transmitting information, and a lack of coordination up and down the supply chain. Some causes of the bullwhip effect include: Consumer demand swings
Natural disasters that disrupt the flow of goods and services
Overcompensation when addressing inventory issues
Ordering processes, such as order batching, can also contribute to thebullwhip effect. Organizations may accumulate larger orders before processing them in an effort to reduce costs and create transportation economics. They may also wait to place larger orders to benefit from lower prices offered during a promotion. Demand forecasting manipulation is another cause. By padding the forecast to compensate for possible errors, the organization loses sight of true customer demand. Customers can also contribute to the bullwhip effect by engaging in shortage gaming during periods of short supply by purchasing more than they need. Additionally, customers taking advantage of liberal return policies can create problems with developing accurate demand forecasts.
2 How to Minimize the Bullwhip Effect
The first step in minimizing the bullwhip effect is to understand what drives customer demand planning and inventory consumption. Lack of demand visibility can be addressed by providing all key players in the supply chain with access to point of sale (POS) data. Suppliers and customers must then work collaboratively to improve both the quality and frequency of information communication throughout the supply chain. They may also choose to share information through an arrangement such as vendor-managed inventory (VMI). Eliminating practices that introduce spikes in demand, such as order batching, can also help. The higher order cost associated with smaller or more frequent orders can be offset with Electronic Data Interchange (EDI) and computer aided ordering (CAO).
Pricing strategies and policies can also help reduce the bullwhip effect. Eliminating incentives that cause customers to delay orders, such as volume transportation discounts, and addressing the causes of order cancellations or reductions can help create smoother ordering patterns. Offering products at stable and fair prices can prevent buying surges triggered by temporary promotional discounts. Special purchase contracts can be implemented to encourage ordering at regular intervals to better synchronize delivery and purchase.
3 Adopting Supply Chain Management Best Practices
Using sound chain management processes and systems will result in the efficient flow of goods from a raw stage to the consumer while enhancing ROI for the company. Reviewing case studies and other resources detailing best practices can suggest opportunities for improvement. Adopting successful practices such as Walmart’s use of cross docking, or Dell’s process of bypassing the middle man by offering made-to-order computers directly to customers, can contribute to a lean supply chain and minimize the bullwhip effect. Reducing the bullwhip effect requires a thorough evaluation of organizational policies, measurements, systems, and practices. Based on the positive implications an efficient supply chain can have on costs, sales, profits and customer satisfaction, it’s an undertaking well worth the investment and effort.
Subject: Supply chain,
University/College: University of Chicago
Type of paper: Thesis/Dissertation Chapter
Date: 23 October 2016
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