Be more competitive: Understanding Supply Chain Management

People might have heard before what supply management is. However, it is highly likely that they ignore its importance in the corporate world.

Experts like David Kiger have come up with a really self-explanatory exemplification of the term:

Imagine a simple product, anything available at a groceries store, now, one of the most common customer misconceptions is believing that the product cost is equal to the materials cost. And that is a huge mistake because in the business world people don’t have the luxury of thinking only as consumers: it is time to think like a business executive. Any product available at any store has a large process behind, all its components — the product itself, its package, its label, etc. —  are the things that keep companies from profiting off of their products as much as they would like to. That is why people cannot expect to earn 1 USD out of a product costing 1.50 USD. Instead, it is important to acknowledge what it took for that product to get into the customer’s hands. Supply Chain Management refers to how the supply chain manager manages to develop the most cost-effective way to acquire and negotiate all the things necessary for a specific product to be on a store shelf.

First, the supply chain manager needs to negotiate the purchase of the packages — including caps, cartons, bottles, etc. —, then he needs to have someone transport the packages to the facility —  but before he needs to consolidate the packages, have someone put them into a truck, hire a driver, acquire an insurance and pay for the gas —, he must then also purchase the labels for that specific product — which means having someone design them, print them, and ship them to the plant —. Besides, the supply chain manager cannot disregard all the costs associated with production — energy, employees, internal processes, etc. — and the costs associated with transportation: once the product is ready, the supply chain manager is responsible for hiring another truck, another driver, acquiring another insurance to get the goods to the warehouses and then to the stores. Companies always face challenges and obstacles when they produce and buy things to properly operate, thus, understanding and managing the supply chain is what allows companies to produce the most cost-effective way and offer their goods at reasonable prices, and last but not least, manage to make profit.

Although the term itself might sound vague and tumultuous — and even scary — it all comes down, and refers to the management of the chain of supplies: Understanding that is the way how companies can reduce costs and make a profit.

Just-In-Time purchasing_david kiger
Image courtesy of wistechcolleges at Flickr.com

Every supply chain manager must be aware of the success factors associated with the supply chain:

Understanding the company: Every company is different and the different logistic solutions that exist might not be applicable to a certain type of company. The supply chain manager must assess what is best for that specific type of business by taking a look at the main competitors and that specific market segment.

Understanding the market segment: What are the company’s goals? What do they want to achieve in terms of that specific segment? Understanding where is the company aiming at will help the supply chain manager to develop the necessary processes associated with logistic solutions and customer care.

Having solid information: Regarding the market, the company, the solutions, the suppliers, the customers and the internal processes of the company.

Having well-designed processes: So those goals can be achieved in both the short and the long run.

If these factors work together, and the supply chain strives to properly fill the needs in terms of costs, service, and stock, the likelihood of reducing operational costs and increasing the gross margin increases. Nowadays, technology is at the service of the supply chain manager: there are fast and effective ways to track, develop, communicate, and transfer information across the same platform.

Remember: the only way companies can gain value is through a healthy supply chain management. Value is often conceived as what customers are willing to pay for a specific good. Those in charge of the supply chain must constantly analyze their processes so that more value is generated and transferred to the customers as a result of an ongoing assessment. Establish the necessary Key Performance Indicators to quantitatively analyze how the essential internal processes perform in relation to the desired goals. Whether reducing costs, reducing times, increasing productivity, etc. the supply chain manager should strive to clearly identify those costs associated with logistics — both direct and indirect — as well as opportunity costs — those associated with investments and stock.

Every activity must strive to improve the current processes so that, as a result, the value associated with every activity results in value added and transferred.

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