Supply chain management – (system-supported) optimization of supply chains

January 8, 2022
Posted in Blogs
January 8, 2022 Chin Lu

In times of global competitive pressure and low margins, smooth processes along the entire supply chain are a key success criterion. Those who succeed in optimizing the flow of materials and information gain competitive advantages. This is precisely the goal of supply chain management (SCM). But what is behind this widespread management approach in detail? What role does SCM play in the various supply chain stages, and what does optimal software support look like? What methods are used, and what skills are required? This comprehensive wiki sheds light on all the important aspects.

Key questions about supply chain management

First, we would like to address some fundamental questions about supply chain management by defining the most important terms and taking a closer look at the goals of SCM. We will also clarify the critical challenges associated with managing supply chains. This basic knowledge is fundamental if you are learning about supply chain management for the first time.

What is supply chain management?

The term Supply Chain Management, or SCM for short, describes an approach to setting up and managing complete logistics chains. The entire value creation process is included, which begins with the extraction of raw materials, encompasses all refinement, production, and trade stages, and ultimately ends with the end consumer. In addition to physical goods, information and money also flow along the value chain. Supply Chain Management is not only about the flow of goods, but in particular about the smooth cooperation of all those involved in the process and an optimal flow of information.

Modern supply chain management is characterized by the paperless exchange of information, with which planning, procurement, and production can be flexibly coordinated and adapted to changes at short notice. From a technical point of view, the in-depth networking of IT systems of supply chain partners that is necessary for this requires interfaces or platforms for data exchange. In addition, a relationship of trust is required between the company, its suppliers, and customers, as far-reaching insights into the partners’ internal processes are possible.

Explanation of supply chain management

The distinction between SCM and logistics

At first glance, logistics and SCM are very similar. In detail, however, there are significant differences. Logistics includes all transports of goods, whereby it is irrelevant whether these are arranged in the context of procurement, distribution, or in between. Furthermore, logistics also includes all processes of storing goods. On the other hand, supply chain management is concerned with logistical factors and goes much further. It looks at all the procedures surrounding a product right up to the final delivery. SCM records all processes and analyzes them for potential improvements and errors. All individual steps and sub-areas of the product creation process are included. In other words, supply chain management is a qualitatively enhanced form of logistics with new methods.

What are the goals of supply chain management?

The overriding goal of supply chain management is to optimize logistics chains to reduce costs. To this end, the entire value chain is aligned with customer demand. This goes hand in hand with flexible, demand-oriented production. On this basis, SCM also synchronizes the supply of necessary raw materials, components, and products. It therefore closely involves suppliers in the demand-driven manufacture of products.

The sub-goals of supply chain management include reducing storage costs, reducing inventories along the value chain, flexible supply (up to “just in time”), reliable delivery processes, close ties between suppliers and customers, and shorter overall costs throughput times.

What challenges does supply chain management bring with it?

Especially in complex supply chains, SCM can come with some challenges. First, supply chain companies become part of a complex internationally operating production and logistics networks system. These cross-company networks result in high demands on cooperation and coordination between the parties involved. The management of corresponding systems requires modern IT solutions that make it possible to combine real-time data of different origins and structures in an overall process. This now extends to the inclusion of end customers via e-commerce channels.

In addition to the technical challenges, coordinating all process participants is an organizationally tricky task for the supply chain manager. Although details can be regulated in contracts, this does not mean that all links in the supply chain will adhere to the agreements. The minor disruptions, missing specifications, and lack of agreements can lead to errors with enormous consequences despite a fundamentally well-thought-out supply chain management. Fear of misuse of shared information or a lack of competence among the partners involved can also jeopardize the success of SCM projects.

There is now a separate course of study in “Supply Chain Management” alongside business studies that underline how complex the subject is. Only experienced supply chain managers can use their skills to manage the chain professionally.

SCM in the individual stages of the supply chain

Supply chain management encompasses all steps of the value creation process and affects several company areas. Initial measures already take effect during product development. Procurement, production, and distribution are also considered in the context of SCM. Let’s look below at which tasks are significant in the individual areas.

Supply chain management in product development

Already in the product development phase, the SCM takes over important tasks. It is responsible for evaluating suitable suppliers and designing a flexible procurement process. The company’s quality requirements and values play a vital role here. Early involvement of the supply chain in product development can shorten the time to market for products and reduce costs.

Supply chain management in the procurement area

The central goal of procurement is the optimal material supply of a company. At the same time, procurement and warehousing costs should be kept as low as possible. In this context, supply chain management has the task of ensuring an uninterrupted supply of materials and devising suitable warehousing concepts. In close contact with purchasing, logistics, and controlling, SCM’s complex procurement and supply processes are centralized. Supply Chain Management is also in contact with suppliers to create organizational conditions.

Supply chain management in production

SCM also deals with internal value creation. Its task is to optimize production processes by analyzing resources used, such as materials, equipment, and tools. Employee qualification is also examined within this framework. Packaging concepts also fall within this subarea.

Supply chain management in the distribution sector

In the distribution area, supply chain management deals with the use of means of transport, their capacities and utilization, and the optimization of transport routes. In this area, well-thought-out warehousing concepts also make an essential contribution to a functioning supply chain.

What phases can supply chain management be divided into?

SCM can be divided into three phases, differing in their temporal orientation. At the beginning is the long-term strategic supply chain management. It is followed by a tactical phase, which ultimately leads to the operational implementation of supply chain management.

Overview of supply chain management phases

Phase 1: Strategic supply chain management

In this phase, decisions with long-term implications are made that serve the cost-effective design and layout of the logistics network and individual logistics systems. Typical examples are the following aspects:

Site selection for warehouses and factories

Production and storage capacities

Investments

Supplier selection

Make-or-buy decisions (in-house production vs. outsourcing)

Distribution strategies

It is important to define a concept for a resilient supply chain strategy that meets market and product requirements in this phase.

Phase 2: Tactical supply chain management

The measures decided in this phase are implemented operationally in the medium term (a quarter and a year). Based on the supply chain design developed in the previous strategy phase, decisions are made here, for example, about production quantities, production resources, inventories, transports, shipping strategies, working hours, and employees. Since the phase also includes creating production plans, it is sometimes called the supply chain planning phase.

Phase 3: Operational supply chain management

Operational SCM deals with business decisions that are implemented within days or a few weeks. Based on the specifications from the previous two phases, incoming orders from customers are now handled. The classic decisions of the operational phase concern sequencing, loading, pick lists, and order processing. In addition, relationships between inventories and orders are considered. The goal of this “process execution phase” is, among other things, to manage the dynamic complexity of multiple customer relationships in a way that directly results in improved customer satisfaction.

Supply Chain Management Software

Supply chain management software is a collective term for systems that support SCM implementation as a concept. To this end, they use an open data model to create cross-company information transparency on SCM-relevant aspects such as inventories, requirements, and capacities along the entire supply chain. In other words, the aim is to bring together data from suppliers, manufacturers, retailers, and end customers and use it jointly. Another task is the consideration of different scenarios, which also include several companies. Last but not least, modern supply chain management software includes algorithms that can be used to precisely plan and forecast inventories and capacities along the supply chain. This type of software is often referred to as Advanced Planning & Scheduling Systems, or APS for short.

SCM software is offered either as part of ERP solutions, an add-on, or a stand-alone system. While classic ERP software tends to focus on internal processes, supply chain management software expands the focus to cross-company relationships. In particular, sophisticated on-premise systems are currently competing with web-based SCM solutions.

What are the requirements for supply chain management systems?

First of all, SCM software should be able to map industry-specific processes. Furthermore, business processes change continuously, so SCM systems should be flexibly adaptable and expandable. Last but not least, the openness of the software plays an important role. The architecture must enable all partners along the supply chain to network with each other without great effort. Today, this can essentially be solved by online platforms or intelligent interfaces.

What types of SCM software are there?

SCM software can be divided into design, planning, and execution software. Partly, SCM systems include all of these three levels. However, the essential component is the design and planning level. The executing functionalities are often also covered by ERP or PPS systems. Let’s look below at what supply chain management software does within each functional level.

Design level of SCM software

The design component of supply chain management software provides all necessary basic information for the planning and execution level. The core task is to translate the developed strategy into optimal production and logistics structures. This is often supported by visualization options with which the supply chain can be displayed and planned. Ultimately, the software makes it possible to create a realistic, cross-system representation of the complete logistics network with all its dependencies and relationships. Essential components of this modeling are all partners’ different warehouse and production locations. Detailed planning can then be carried out based on this model.

Planning level of SCM Software

At this level, SCM software ensures that all resources (material, personnel, machinery, and equipment) along the supply chain are optimally planned. The various SCM phases (strategic, tactical, and operational – see above) are considered. In concrete terms, this means that the planning spectrum ranges from cross-company and cross-system network planning to operational production planning. For this to take place, several systems and modules usually have to be networked together.

The planning methods of supply chain management software differ significantly from the tools of conventional ERP solutions. Above all, SCM software has more extensive, more modern optimization and simulation methods. They also have a higher planning speed, which requires powerful storage technologies (caching).

In detail, the planning components of SCM systems deal with the following aspects:

Strategic planning

Network planning

Sales and demand planning

Production planning

Inventory planning

Distribution planning

Transportation planning

Strategic planning

This is about the long-term design of supply chain networks. In this area, SCM software provides the basis for developing significant management decisions, including investments, location issues, or supplier selection.

Network planning

In this framework, rough planning is created tactical, including all critical supply chain elements. For example, cross-functional consideration and planning of production, purchasing, distribution, and internal and cross-partner transportation occur.

Sales and demand planning

In sales planning, SCM software should answer the question of which quantity of products will be sold in which areas in the future. Technically, this requires a reliable database. Usually, sales figures from history, statistics on special promotions, and market research data are combined. These are large volumes of data from various sources, which is why special technologies are required for combining, storing, and evaluating them.

Production planning

Production planning is also part of a supply chain management system. Based on sales planning, i.e., customer requirements, the software in this area must create production orders and carry out precise scheduling. All resources (material, personnel, and equipment) are taken into account during simultaneous planning. The necessary data is often drawn from ERP systems. The main goals are short lead times, minimal costs, low inventories, and optimal delivery readiness. Modern SCM software uses mathematical optimization methods, algorithms, and heuristic functions.

Inventory planning

Inventory planning is closely related to demand and distribution planning. The objective is to establish a cross-company inventory management system in which inventory and replenishment can be optimally planned for all storage locations. This goes hand in hand with intensive inventory controlling and dynamically changeable stock levels (e.g., reorder and safety stocks).

Distribution planning

This component involves planning the storage, picking, and distribution of products, taking into account customer and market requirements and operational influences (e.g., inventories, orders, production, and logistics). There is a clear difference in SCM systems compared to conventional distribution planning: inventories and replenishment are not controlled by the manufacturer but in the customer’s warehouse.

Transportation planning

In transportation planning, transportation requirements are determined along the entire supply chain to plan transportation processes on this basis optimally. The aim is to ensure that each product is available in the correct version, at the right time, in the right quantity, and at optimum cost. Planning between the partners takes place simultaneously and includes several functions. These include shipment scheduling, selection of carriers, determination of means of transportation, the definition of routes and delivery schedules, and calculation of transportation costs.

What is the purpose of order simulation in SCM systems?

SCM software usually offers functions that can be used to simulate orders. Here, the possible effects of incoming customer orders on the supply chain are displayed in real-time, from which optimized procedures can be derived. Order simulation can also be seen as an interface between the planning and execution levels.

ATP applications (Available to Promise)

CTP applications (Capable to Promise)

ATP applications check whether the delivery date requested by the customer for an order is feasible. If it turns out that the deadline cannot be met, the system proposes alternatives, taking into account current inventory levels and production capacity utilization. As a result, the customer receives information about the earliest possible delivery date.

CTP applications support the planning supply chainer by checking whether rush orders from customers with defined delivery dates can be squeezed in during ongoing production. The information can be forwarded to the business units concerned in a second step, thus avoiding resource conflicts. In some cases, this check is now so fast that customers can be informed of the feasibility during a telephone call.

Execution level of SCM software (incl. controlling)

The execution level of SCM software also called “supply chain execution”, includes all functions for the operational control of the entire supply chain. Within a short period, extensive data of different origins is processed to make quick decisions in the ongoing business. The main functions are order and warehouse control, transport, and warehouse management. In addition, the execution level includes processes for SCM controlling. Defined key figures are often used here.

Further questions about SCM / Supply Chain Management

Finally, let’s look at individual questions that are frequently asked in connection with supply chain management. First, we look at the so-called bullwhip effect, which describes communication and coordination problems in supply chains. Then, in this section, we will also look at the topic of sustainability (sustainable supply chain management).

What is the bullwhip effect?

The bullwhip effect is a verifiable phenomenon when demand fluctuates in multi-stage supply chains. The resulting fluctuations intensify as one moves away from the end customer in the supply chain. A misinterpretation of certain signals triggers the bullwhip effect.

A concrete example best illustrates the effects: deviating from the previous ordering behavior, there is a slight increase in end-customer demand. The upstream chain links (e.g., retailers) react by increasing their order quantities to avoid bottlenecks. The next stage in the supply chain (e.g., wholesalers) increases their order quantities because they also do not want to risk supply bottlenecks. This whip effect becomes more and more pronounced within supply chains and extends to the manufacturer, who ultimately responds with a significantly higher production quantity. All links in the supply chain also inevitably increase their inventories, leading to rising costs overall.

In practice, the bullwhip effect is often reinforced by these factors:

(significant) price reductions

Granting volume discounts

Bundling of orders on the customer side

Bullwhip effects can only be reduced to a minimum if there is intensive and smooth communication between all partners in the supply chain. In particular, fluctuations in demand must be identified as early as possible and communicated immediately to all supply chain stages. In addition, the bullwhip effect can be minimized by shorter delivery intervals, as in this case, retailers can react more flexibly to fluctuations in demand despite low inventories. Furthermore, promotional measures that are accompanied by high demand due to low prices should be announced and taken into account at an early stage so that all partners can adjust to increased demand.

What is Sustainable Supply Chain Management?

Sustainable Supply Chain Management (SSCM for short) is an approach that has evolved from classic supply chain management. The crucial difference is described by adding the word “sustainable”. SSCM thus deals with the sustainable design of conventional supply chains. In addition to the economy, ecological and socio-political aspects are also taken into account. The origin of raw materials and products plays just as important a role as their use and disposal.

SSCM is implemented in companies for various reasons. On the one hand, stakeholders are increasingly demanding ecologically and socially responsible behavior; on the other hand, companies must inevitably adapt to changing environmental conditions. Last but not least, sustainability can be a competitive advantage today. Legal regulations on environmental protection exert particularly strong pressure. But working conditions, especially in developing and emerging countries, are also an issue that is increasingly being critically scrutinized. Consumers are also increasingly making their purchasing decisions based on whether a product has been manufactured in an environmentally and socially responsible manner.

The introduction of Sustainable Supply Chain Management causes an enormous organizational effort – especially when complex, global supply chains are involved. Many companies, therefore, ask themselves whether the costs and benefits are in balance. Often, therefore, SSCM is only implemented under pressure.

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