Supply Chain Management 101

Understanding a supply chain may seem challenging at first, but the concept is actually quite simple. Companies that sell products to customers manufactured from parts purchased from suppliers are effectively running a supply chain. The operation of the supply chain becomes more complex depending on the size of the company and how many products it manufactures.

The Unique Elements of a Supply Chain

A supply chain is set into motion when a customer contacts a company to place an order. A representative from the sales department enters a sales order and establishes a delivery date. If the product still needs to be manufactured, the salesperson includes instructions for the production facility. It’s now time for the planning department to take over. Members of the department create a production plan that combines the customer’s order with other orders.

The purchasing department becomes involved at this point. After receiving a list of raw materials from the planning department, they create purchase orders and send them to suppliers. The suppliers agree to deliver raw materials by the order due date. Once the materials come in, the inventory team checks them in and moves them into the warehouse. They remain there until the production department is ready to start its work.

Once production gets underway, the supply chain is nearing its final phase. Members of this team create the customer’s final product using the raw materials received from inventory. All products go through a quality control process before being returned to the warehouse in preparation for shipment to the customer. For the last step, the shipping department determines the fastest and most economical method to transport goods to the customer. The billing department then sends the customer an invoice for payment.

Demand Planning

Running an effective supply chain requires accurate forecasting when it comes to demand planning. That is because a clear understanding of the demand for a product is necessary to avoid financial losses as well as keep up with the demand for it. Sales and operation planning is an important aspect of demand planning. This involves leaders from the sales and marketing teams interacting with the finance department and supply chain management. These meetings provide important insight into the following:

• Seasonal customer demand
• Current and future product promotions
• Product performance expectations
• Clear understanding of factory capacity utilization and material requirements

Supply chain managers typically create a short-term plan to meet customer needs in the next 90 days and a long-term plan for the next one to two years.

Supply Planning

Without effective demand planning, companies end up with excess inventory, more overhead, and reduced profit margins. This makes inventory planning much more challenging. Newer supply chain management software programs enable organizations to automatically assign priority codes to inventory as well as to customers. This makes it easier to tweak inventory planning strategies as factors such as cost of raw goods and shipping options change. These software programs have built-in flexibility to account for seasonal demands, material shortages, warehouse space, and other important variables.

Perhaps the biggest benefit of using supply chain management software is that it allows for the input of various what-if scenarios. Seeing the potential outcome of a decision before implementing it saves time and money as well as increases productivity and morale.