Supply chain management: definition, participants, and complexity

supply chain management concept
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This article is part of SCM Knowledge educational resource.

First off, let us define the difference between supply chain and supply chain management to get us a clear understanding of terms and how these relate to each other.

What is supply chain?

The supply chain is a series or chain of activities or processes within the supply network to deliver a product or service from single or multiple sources to the end user.

We will look at how your shirt gets to the retail shelf and ultimately to you as the end user.

Typical supply chain of a shirt.

The figure above shows that it took several steps to move one material to the next until a shirt becomes available in the retail shelf for the customer to buy. Simply put, a shirt travels from different levels of processes and players within the supply chain network. Supplier tier 2 has its supply chain so as tier 1, the manufacturer and so on. Each of them manages its activities adding value to the creation of a shirt. That illustration unlocks basic understanding about the supply chain.

Process view of the supply chain

Learning the process stages of the supply chain will help you better understand the sequence of activities in fulfilling customer need for a product. Every stage has its supply chain and collectively work together to satisfy customer demand. The synchronization of all stages forms a supply chain network needed to ensure an uninterrupted flow of product, information, and money.

process view of the supply chain
Source: Adapted from Chopra, S., Meindl, P., Kalra, D.V. (2016). Supply chain management: Strategy, planning, and operation. New York, NY: Pearson Education, Inc

Pull and push systems in the supply chain process view are presented in the above figure. These systems determine as to when to respond to customer order with minimal supply chain cost. Processes in a pull system are executed when a customer order arrives at the retailer. The retailer then fulfills the order based on actual demand. In basic terms, a customer pulls inventory from the retailer’s shelf. While the push system does the opposite. Processes are executed in response to forecast and speculation based on demand signal. Push system enables the supplier to push inventory closer to the customer to compensate for demand variability.

Pull system is suited for make-to-order or engineer-to-order products because customers are willing to wait to get the goods. The company may not have to stock inventory because it responds to actual demand rather than the forecast. Pull system is usually applied to lean operations. On the contrary, the push system works well with make-to-stock products because the manufacturer needs to maintain the required service level in response to demand fluctuation. The service level is achieved through on-hand inventory as it protects customers from experiencing stockouts. While inventory is necessary, it must be optimized within the desired service level. Push system is appropriate for mass manufacturing where demand is uncertain.

What is supply chain management?

Supply chain and supply chain management are two different terms, though they are frequently used interchangeably. As defined previously, the supply chain is a network model or framework of how materials or information moves through the value chain to produce a product or service to meet a customer requirement.

The supply chain management (SCM) involves management skills and technology in delivering a product or service to the end consumer at maximum efficiency in terms of cost, speed, quality, and customer service.

APICS defined supply chain management as;

“The design, planning, execution, control, and monitoring of supply chain activities, with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand, and measuring performance globally.

Going back to the shirt’s supply chain, each activity within the supply network requires strategies and timely execution to satisfy customer demand. Their activities complement each other – from supplier tier 2 to manufacturer to retail – to ensure a customer requirement is met.

Managing a less complex supply chain would be easy – like shirts. But when your product needs components from foreign suppliers, compliance from multiple authorities, adherence to customer specifications, that is when the process gets large and complex. Now, you must deal with different stakeholders and cultures. Welcome to the global supply chain.

Players in the supply chain

Referencing our shirt’s supply chain, there are organizations involved in the creation of the product. These firms are the primary members of the simple, basic supply chain as follows;

–  Supplier
–  Manufacturer
–  Distributor
–  Retailer
–  Customer

However, given the complexities in today’s supply chain, players above need to be enabled with additional capabilities to survive. The chain must extend to accommodate other supply chain participants. The extended supply chain is where supplier’s suppliers are added in the upstream side and customer’s customers on the downstream supply chain. The pressure to compete successfully in the market causes the existence of service providers for logistics, IT, marketing, etc.

These providers help the company’s supply chain more secure and agile. They provide a range of needed solutions to all participants in the supply chain. For instance, an IT company provides an ERP system to the business extending its capability from real-time information sharing to global compliance to customer analytics.

In summary, expanded supply chain constitutes;

–  Supplier’s suppliers (tier 2, tier 3,…)
–  Manufacturer (including sub-contractors)
–  Distributor
–  Retailer
–  Customer’s customers
–  Service providers

Why is supply chain complex?

The supply chain consists of multiple organizations located globally working together in fulfilling customer requirements. It needs a supply chain design infrastructure that enables collaboration across processes. The complexity starts when a company begins to deal with various entities to make the product. The task to manage these interactions, processes, and activities within the required level of efficiency build complexity in execution.

The global supply chain of Boeing 787. Source: U.S. Chamber of Commerce website.

You get the idea of how intricate and critical the supply chain for Boeing. Almost every part of the plane has different suppliers from different countries. That means that if you are the supply chain director of Boeing, you must deal with each one of them effectively to ensure components they supply meet Boeing’s standards and specifications.

Boeing’s supply chain is the perfect example of supply chain complexity because it sourced materials globally, requires a high degree of performance precision, and complies rigorous regulations. As a result, Boeing is vulnerable to risks including exposure to currency fluctuation, inventory visibility, resource scarcity, changing regulations, economic uncertainty, and several others directly or indirectly impacting the supply chain.

Your company may not be Boeing’s, but for sure you resemble the same supply chain structure. The moment you begin to source components from multiple vendors, that is when you feel the pressure of managing many moving elements in the supply chain.

Research from APICS and Michigan State University showed that there were three sources of supply chain complexity. They are;

–  Customer accommodation
–  Globalization
–  Supplier network expansion

Being able to understand and determine the source of complexity will help you solve issues to improve your operations.

 

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About the author

Marvin Bunyag, CPIM

Founder, ExploreSCM

Marvin is an APICS – CPIM professional bringing 6+ years of international experience in supply chain logistics, technology, and manufacturing operations in the USA and the Philippines. Marvin served in several supply chain roles for companies including Kohler, Hood Packaging Corporation, and Unifrutti Philippines. He received his MS in Operations and Supply Management from the University of Wisconsin in USA and a BS in Commerce at the University of the Immaculate Conception in the Philippines.

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