What Is Supply Chain Management and Why Is It Important?

Updated November 14, 2023

A person checks an online listing with two small boxes stacked on the desk in a stockroom. Another person fills small bags in the background to fulfill supply and demand.

Supply chain management is an essential part of business success. The journey from idea creation to end product is a complicated process with many moving parts. How well a company manages this process can directly translate into increased revenues.

In this article, we discuss supply chain management, why it’s so important and how this process can save your business money.

What is supply chain management?

Supply chain management (SCM) oversees how goods and services evolve from idea creation and raw materials into a finished consumer product. It includes moving and storing the materials used to produce goods, storing the finished products until they sell and tracking where sold products go so that you can use that information to drive future sales.

The process of SCM involves every aspect of business operations, including logistics, purchasing and information technology. It integrates materials, finances, suppliers, manufacturing facilities, wholesalers, retailers and consumers into a seamless system.

Here are some of the steps involved in establishing a system of supply chain management:

Design and plan the supply chain when the business is established.
Carry out the plan and carefully control the variables.
Monitor the performance of each part of the supply chain.
Communicate regularly with supply chain partners and ensure their participation in the plan.

Supply chain management seeks to streamline every part of the chain and the processes involved. By doing so, profits are maximized and product defects are minimized.

Why is supply chain management important?

A well-managed supply chain can significantly reduce a company’s operating expenses, driving profits. This efficiency can be reflected in every aspect of the chain, from idea creation to the final product marketing.

How does supply chain management work?

Supply chain management coordinates procurement, suppliers, manufacturing facilities, retailers, distributors and customers as they move together through the production, sales and buying cycles. The supply chain requires active management because it is affected by many factors outside the control of the business, such as gas prices and environmental conditions. When a company is acutely aware of those factors, it can manage them more effectively. With effective SCM, inventory, production, distribution, sales and vendor inventory are all tightly controlled.

SCM means managing costs at every step and delivering goods to consumers as quickly as possible. It assumes that every product for sale exists because of the various participants in the supply chain.

What does a supply chain manager do?

A supply chain manager is a trained professional responsible for five essential components of the chain:

The carefully researched and developed strategy of the supply chain.
The source of the materials used to make the goods to sell.
The efficient production of the manufacturing process in getting the goods ready for the market.
The delivery mechanisms and logistics move the products to the consumers and distributors.
The system for managing the return of defective or unwanted products.

The manager works to prevent shortages and reduce costs through these five elements, which directly impact profits.

What are the benefits of supply chain management?

When done effectively, supply chain management helps a business gain a competitive advantage by delivering products more quickly to customers. Here are a few ways in which SCM accomplishes this without requiring the company to lower prices:

SCM lowers the cost of doing business. This is accomplished by reducing purchasing and production expenses. For example, if you own a grocery store and buy tomatoes directly from the farmer, you eliminate the expense of having a third party buy products for you. Purchasing directly from the source saves you money and places the food on your shelves more quickly.
SCM builds partnerships that can support future growth. If you, as the grocery store owner, develop strategic partnerships with farmers early in your business operation, then the farmers can grow their operations as you grow yours.
SCM helps balance the supply of products with market demand. Using the grocery store example, if you buy tomatoes directly from the farmer, you can better negotiate and adjust how many tomatoes you buy each season.
SCM allows for more efficient and effective customer service. This occurs because customers receive their products quickly and as promised. For example, if the farmer brings the tomatoes directly to your grocery store, then the product will likely be fresher and less damaged than if it traveled through a third-party supplier before arriving on your shelves.

The ultimate goal of effective supply chain management is higher profits through improved customer satisfaction and a lower cost of doing business. Profits are healthier when costs are controlled and reduced wherever possible. Operating costs go down when raw materials and production costs go down.

An example of supply chain management

Here is an example of two companies that take different approaches to supply chain management, resulting in differing profits:

Viewpoint Tech closely examines every step in the supply chain and determines that approximately 90% of its expenses are related to the supply chain. The management team focuses on improving its efficiency, resulting in a high-performing supply chain, which allows it to negotiate better pricing with vendors for the raw materials needed to produce goods. Since it can produce the goods for less, Viewpoint Tech makes more profit off its goods, allowing it to grow revenue at a rate that beats the average for the industry without lowering prices.

Conversely, New Image Tech is a business that gives very little attention to its supply chain, resulting in lower effectiveness. Without understanding the power of the supply chain and its effect on operations, New Image Tech is less likely to be able to negotiate cheaper pricing and less likely able to compete with Viewpoint Tech.

Viewpoint Tech and New Image Tech could be small sole proprietors or international corporations and the outcome would be the same. The importance of the supply chain to business success tends to remain consistent across companies, large and small.