Supply Chain Management for Beginners
- History of the Supply Chain
- What is Supply Chain Management?
- What is Logistics?
- Supply Chain Design
- Collaboration & Commitment
- Inventory Levels & Safety Stock
- Lowering Stock Levels
- Decreasing Other Supply Chain Costs
- Vendor-Managed Inventory Systems
History of Supply Chain
The term “supply chain” was coined during the 1980s. Until that time, the raw material supplier, producer, distributor, and customer relationships often remained at arm’s length, at best, with only minimal communication.
Customers would issue purchase orders that would set off a chain reaction from one level to the next to produce and ship, sometimes requiring the order be placed several days or even weeks before delivery to the ultimate destination.
Frequently, buyers would play one supplier against another to achieve a pricing advantage, yet would lose that advantage by having to deal with longer lead times and even variable quality.
Given that the primary objective of a purchasing or procurement manager was never to run out of inventory, the traditional solution was to carry very costly and excessive “safety stocks.”
What is Supply Chain Management?
Supply chain management is the coordination of all processes involved in the flow of goods from their raw materials to the end users. Through effective electronic communications and transparency, every “link” in the chain can anticipate the demand requirements of the next level and plan for fulfilling each need in the shortest possible time.
In the end, the key driver of supply chain management is the quality and competitiveness of the final product, benefits that reward each link of the supply chain.
What is Logistics?
Logistics is the glue that combines each element of the supply chain. Logistics determines how and when goods are produced, transported, stored, and delivered at each level. Logistics elements include production, freight management, warehousing, and distribution. The term “3PL” stands for “3rd Party Logistics“.
Supply Chain Design
Product velocity and turnover that matches sales and forecasts are the catalysts of a supply chain. Making sure the right amount of product is in the right place at the right time is the essential objective for each link of the supply chain. An important first step is to design sales and forecasting systems that can be transmitted back to each level of the supply chain in the form that is useful for them.
For example, consider a complete supply chain for brass doorknobs sold by a 40-unit retail chain. When real-time inventory drawdown or actual sales of doorknobs is transmitted to the distributor from all 40 outlets, the distributor can anticipate the timing, quantity, and location of the next deliveries.
Similarly, in a different form, the door knob manufacturer can plan production and schedule the next shipment to the distributor by viewing those inventory levels and current demand at the distributor warehouse.
Moreover, at the next level, the brass supplier may be able to evaluate and anticipate the needs of the manufacturer and schedule shipments of new brass in time for the next production.
In this way, all links of the supply chain are harmonized with information to assure continuity of supply. Every logistical element of production, freight, warehousing, and delivery are aligned to anticipate end-user demand.
At times, the demand for products varies due to seasonal or promotional influences. In a harmonized supply chain, the retailer would advise the distributor/supplier group of anticipated demand expectations so that the supply chain can respond appropriately to ensure the higher demand is satisfied.
Collaboration and Commitment
Creating a well-coordinated supply chain and logistics system requires several essential elements. These include
- Shared Objectives: all members of the supply chain should recognize that the financial success and growth of their customer is a critical commitment. When the entire chain is successful in producing and transporting quality products on time, each link benefits.
- Communication: A commitment to clear and accurate communications between the links is essential. Whether electronic or verbal, open communication and confidentiality of internal information are crucial.
- Transparency: For each link to anticipate what is coming, they must be able to clearly “see” what is happening at their customer location. Such information as inventory drawdown and real-time sales are necessary to be able to respond appropriately to expectations.
- Effective Forecasting: Factors such as seasonal or weather events and promotional activities, when not anticipated, can create problems. Accurate and ongoing forecasting is essential to maintaining the proper inventory at each level.
Inventory Levels and Safety Stock
System inventory is a key measure and important cost driver of an efficient supply chain. When every component of a supply chain operates independently without advance communication, forecasting and preliminary notice are limited.
As a result of uncertainty, each member of the supply chain will tend to carry excessive inventories in the form of safety stock. Safety stock is the minimum quantity of material or finished product inventory that should be maintained to ensure that you will never run out. The cost of running out of inventory can be significant because of emergency production scheduling, last minute freight solutions, and, perhaps the most costly, lost sales.
So what determines the right level of safety stock? There are three factors that a logistics manager must consider to determine the proper amount of finished inventory to maintain at any time.
- Lead Time: Lead time is the amount of time between order placement and delivery. Whether the supply source is global or local, reducing the elapsed transit time is important.
- Lead Time Variability: Continual variation in lead time impacts the amount of safety stock to be maintained to ensure there will be no stock-outs. Wide variations create uncertainty that leads to more insurance.
- Demand Variability: Wide, unexpected swings in sales tend to result in higher average inventories as well.
Lowering Stock Levels with Effective Supply Chain and Logistics Management
In a coordinated supply chain in which all parties can anticipate demand for production, shipping, and delivery, the levels of safety stock can be reduced substantially. As a result, lead times are reduced, lead time variability is minimized, and demand variability is anticipated at each level.
Decreasing Other Supply Chain Costs through Effective Logistics Management
Keeping extra stock on hand at every level of the supply chain or, worse yet, running out of products are expensive propositions. A better solution is a dedicated and transparent supply chain that operates in a coordinated fashion to ensure the right material is in the right places… at all times.
For example, proper forecasting and communication reduce supply chain costs by fostering:
- Efficient production scheduling
- Economical freight management
- Improved raw material sourcing – opens door for global sourcing
- Right-sized inventories at every link of the supply chain
Vendor-Managed Inventory Systems
A higher level of sophistication in supply chain management is vendor-managed inventory (VMI). In this case, companies like Proctor & Gamble and others have developed systems to view their product sales at each retail outlet and anticipate production and delivery accordingly.
In this way, the vendor is responsible for assuring that the retail store is always adequately stocked without the retailer having to invest in procurement assets to manage the in-store inventories.
As a result, the retailer gains notable cost benefits and may focus their assets on retailing rather than supply issues.
About BR Williams:
With humble beginnings back in 1958, BR Williams has grown into an award-winning supply chain management company servicing all 48 contiguous states and Canada. With facilities in Mobile AL; Piedmont, AL; Tallahassee, FL; Anniston, AL (two facilities); Eastaboga, AL; and Oxford, AL, B.R. Williams’ distribution network supports over 50 customers and another 2,550 in the Trucking and Logistics divisions. Industries served include the following: automotive, defense, home improvement, education, food raw materials, textiles, chemical, industrial packaging, metals (finished goods), highway safety and more.