What Is Supply Chain Management?

By Indeed Editorial Team

Updated March 9, 2021 | Published February 25, 2020

Updated March 9, 2021

Published February 25, 2020

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

If products and services must go through a path of production and supply, then there must be a careful design of this path in order to ensure the products get to the end-users and the companies enjoy benefits and profits from the process. In this article, we show you what supply chain management is and how it works.

What is supply chain management?

Supply chain management is the process that ensures the efficient flow of goods and services, beginning with the storage of raw materials and production of goods right through the movement of the finished goods to the point of consumption.

The process of supply chain management helps to coordinate all the parts of the supply chain in order to minimize the total cost of production, marketing and distribution. When the supply chain is properly monitored and coordinated, it helps to resolve the existing conflicts among the chain partners or players.

For example, companies with an effective supply chain process in place will be able to harmonize the working relationship between the sales department and the warehouse. The sales department needs a high inventory level in order to fulfill the demands of the customers, while the warehouse needs a low inventory level of products in order to reduce the holding costs.

Supply chain management offers the following benefits:

  • It handles the entire production flow of goods and services.

  • It handles the delivery of products and services to ensure customers have a good experience.

  • It ensures the company's profitability.

Related: Learn About Being a Supply Chain Manager

What are physical flows?

Physical flows are the physical change raw materials pass through to become finished products and the storage and movement of the goods and services to the end-users. The physical flows are the most visible part of the supply chain for a company.

What are informational flows?

Informational flows involve the process whereby the different supply chain players coordinate and organize their long-term plans in order to control the daily flow of goods and materials throughout the supply chain. They are important in supply chain management for the following reasons:

  • They help the performance of the supply chain.

  • They provide the basis on which the supply chain partners make informed decisions.

How does supply chain management work?

Supply chain management works by producing an effective cross-functional and well-designed method that consists of the management of the movement of raw materials into a company or an organization. The production aspects of the inside processing of the raw materials into finished goods then lead to the movement of finished goods out of the organization and toward the end consumer. It touches professionally all the parts of the supply chain that get the products to the customers.

Organizations that want to focus more on the essential parts of their business operations and become more flexible usually decrease their possession and control of sourcing raw materials and the distribution channels. These important functions are outsourced to other companies that specialize in handling them better and more effectively in terms of cost.

Due to this development, more companies, as well as individuals, are involved in the process of getting the finished goods to the end-users. This also reduces administrative control of the day-to-day logistics operations of the company.

The effect is to increase the number of organizations involved in satisfying customer demand while reducing administrative control of day-to-day logistics operations by the company. Less control and more supply chain partners lead to the creation of the concept of supply chain management. The purpose of supply chain management is to increase trust and partnership among supply chain partners thereby improving inventory prominence and the speed of inventory movement.

Supply chain management steps

Supply chain management involves many parts that work together to achieve a single purpose. The following are the five basic steps to a successful, efficient and cost-effective supply chain management:

1. The planning step

The first stage of the supply chain procedure is the planning stage. A good plan must be developed to determine or address how the products and services are going to satisfy the demands of the end-users. At the planning stage, the main focus should be the design of a strategy that produces maximum profit.

In order to effectively use all the resources required for the design of the products and the provision of services, a method has to be designed by the organization to handle this process effectively. The planning stage sets in motion the success of the supply chain process.

2. The development step (source)

The next stage after planning is the development stage which involves the sourcing of the raw materials that are required for production. At this stage, a company's main focus is on building a strong relationship with raw materials suppliers, identifying dependable suppliers and determining varying planning strategies for shipping, delivery and payment of the raw materials.

3. The making or manufacturing step

The third step in the supply chain management process involves the manufacturing or making of products as demanded by the customers. In this stage, the products are designed, manufactured, verified, packed and coordinated for delivery to the customers.

The supply chain manager then schedules all the activities needed for production, testing, packaging and preparation for delivery. This stage presents the most metric-intensive component of the supply chain, where organizations can measure the quality levels, output and worker productivity.

4. The delivery step

At the delivery stage, the products are delivered to the end-users at the designated location by the supplier. This is basically the logistics stage, where customer orders are accepted and delivery of the products is planned.

The delivery stage is often referred to as logistics, where companies work together for the delivery of orders from customers and launch a network of warehouses. There is also the selection of pick carriers to deliver products to the end-users and the setting up of an invoicing system to accept payments.

5. The return step

The last and concluding stage of supply chain management is the return stage. At this stage, damaged products are returned to the supplier by the customers. This stage allows companies to deal with customer queries and to respond to their complaints.

This final stage can be a very difficult stage of the supply chain for most organizations. The supply chain managers must plan a responsive and flexible network for accepting damaged and extra products back from customers.

Related: Learn About Being a Logistics Manager

What are supply chains?

Supply chains are the processes that involve putting in place a system that makes people, resources, information, activities and organizations to work together to move products and services from suppliers to customers. This process is usually employed by businesses, companies and organizations.

The first step in supply chain activities transforms natural resources and raw materials into finished products. The final step ensures the finished products are delivered or transported to the end-users.

Many companies are usually involved in the supply chain system with the sole aim of protecting their own business interests and do not necessarily care about the interest of others and that of the customers. Due to this, there is, therefore, the need for large companies to integrate corporate guidelines into their work cultures and systems of management. This way, companies involved in the supply chain system will be able to carry out their activities according to acceptable standards.

Example of a supply chain

A practical example of a supply chain is called the generic supply chain. The generic supply chain starts with the derivation and extraction of the required raw materials for production. Through logistics, the raw materials are transported to the raw materials suppliers who are also called wholesalers.

This type of supply chain continues with the movement of the raw materials through logistics to the manufacturers. The manufacturers produce finished products using raw materials.

Afterward, the finished products are taken to the wholesalers and they deliver the products in stores to the retailers. The retailers sell the products to the consumers who are the end-users. The cycle is completed when the consumers buy the products.

The demand for the products by the consumers will determine how the manufacturers go back to start the production again. When production commences, the cycle starts all over again.

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