How Effective Supply Chain Management Works (2024)

From the everyday essentials you pick up at the grocery store to the latest tech gadgets, every consumer product relies on a complex network known as the supply chain. These goods start as raw materials before they end up transformed or packed inside factories, are shipped worldwide, and are sold to end users, both online and in physical stores.

The logistics behind these processes are often thorny and complex. That’s where supply chain management (SCM) comes in. Supply chain managers can unify an eclectic global mix of suppliers, shippers, and warehousers, all working together to bring desired goods to customers. Learn how intricate supply chains bring products to our stores and doorsteps.

What is supply chain management?

Supply chain management (SCM) is the coordination and management of the sprawling network that delivers a product from suppliers to customers. As materials move through supply chains—starting as raw components and ending up as finished products—supply chain management professionals oversee their journeys.

Supply chain management encompasses the planning and direction of all activities that affect sourcing, procurement, and logistics. Crucially, supply chain professionals must manage supplier relationships. They coordinate with supply chain partners—suppliers, factories, warehouses, distribution centers, intermediaries, and third-party service providers—to keep a steady stream of goods flowing to customers.

Effective supply chain management can improve efficiency, maximize productivity, reduce costs, and ensure the timely delivery of goods and services while maintaining high quality for the end consumer, making supply chain management important to businesses worldwide.

The importance of supply chain management

SCM matters to large conglomerates and boutique companies—like premium canned seafood brand Fishwife. Cofounder and CEO Becca Millstein emphasizes that finding the right supply chain partners can be tricky. “You really have to scrap it together,” she says on the Shopify Masters podcast. “In terms of supply chain, you really have to dive into the internet. You really have to use any possible connection you can to find your manufacturing partner.”

Becca’s supply chain management journey involved building a personal connection to her suppliers. In the case of the seafood industry, she explains, “most co-packers have MOQs, minimum order quantities. So originally, when I was speaking to canneries in Europe, I was hearing, ‘We have a 200,000-unit MOQ.’ For someone that does not have a bunch of cash lying around to buy tens of thousands of cans of fish, that was very intimidating.” 

She tackled her problem by working with smaller suppliers that could grow along with her business. “The way that I ended up hacking around that was working with micro-canneries in the US that had lower MOQs,” she says. “Then we scaled up those canneries by partnering with them and supporting them in purchasing new machinery that we were going to use and that they could use to make their own operations efficient.”

Becca’s hands-on, personal approach to SCM helped her cultivate strong relationships with her suppliers, letting them grow and thrive together.

How does supply chain management work?

1. Planning
2. Sourcing
3. Manufacturing
4. Delivery
5. Returns

Each component of supply chain management plays a role in a retailer’s core business functions because managing inventory is essential in retail. Here are the five main activities that a supply chain manager must oversee:

1. Planning

In the demand planning phase, companies develop a business strategy to balance supply and customer demand. Supply chain managers work with inventory managers to forecast demand, using historical data and market analysis. They also collaborate on inventory management, which determines the optimal levels of inventory to meet demand without overstocking or stockouts.

There’s also production planning, which schedules the production of goods to meet demand forecasts while controlling costs. Meanwhile, capacity planning ensures that the company has the necessary resources, such as equipment, labor, and facilities, to meet production needs. In these processes, companies rely on accurate forecasting.

2. Sourcing

Sourcing involves selecting vendors that provide goods to supply chain networks. Supply chain managers choose suppliers based on criteria such as cost, quality, reliability, and service. Strategic sourcing requires building and maintaining good relationships with suppliers, giving you reliable access to materials and services from within your supply network. The sourcing phase may include contract negotiations to establish terms and conditions for supplying goods and services.

3. Manufacturing

The manufacturing process involves turning raw materials into finished products. This link in the supply chain includes production operations such as assembly, fabrication, and testing. Quality control confirms the goods meet production standards and specifications, maintenance keeps manufacturing equipment in good working order to prevent downtime, and workforce management ascertains that skilled labor is available. These manufacturing processes work in concert to keep goods flowing through the supply chain network, meeting market demand as it ebbs and flows.

4. Delivery

In modern supply chains, delivery starts with order processing, which manages the receipt, processing, and fulfillment of customer orders. It includes warehouse management because many retailers keep a significant stock of goods on hand to quickly meet market demand. There’s also transportation management, which oversees the physical movement of goods from warehouses to customers, including selecting carriers and routes. Finally, distribution management oversees deliveries, ensuring they end up in the right place, at the right time, and in working condition.

5. Returns

Supply chain evolution includes the growing need to manage returns. This is particularly true in ecommerce, where customers often buy goods before they’ve had a chance to hold them in their hands. The National Retail Federation estimates that customers return one out of every seven purchases.

The returns category includes reverse logistics, which manages moving returned products from the customer back to the company. It also includes returns processing, where workers inspect returned products, determine the reason for the return, and decide on the appropriate action, including repair, replacement, recycling, and disposal. There’s also a financial component to this stage, as businesses must issue refunds or credit for returned goods.

Types of supply chain models

Contemporary supply chain solutions can follow several different models, which vary based on the nature of a company’s business processes and supply chain activities. Here are four well-known and effective supply chain models business uses:

Continuous flow model

The continuous flow model is suitable for businesses with stable and predictable demand for their products. With a steady flow of goods and materials throughout the entire process, this method emphasizes efficiency and consistency in the supply chain activities.

This model requires precise inventory management and inventory control mechanisms. Many supply chain managers use enterprise resource planning (ERP) systems to integrate everything from strategic sourcing and inventory planning to distribution center operations.

Continuous flow operations managers may choose to audit their operations with periodic quality testing, including use of emerging technologies like machine learning (ML) for data analysis and demand forecasting. This helps them anticipate market trends and root out problems in advance, so there’s always enough supply for their customer base.

Agile model

The agile model is optimal for companies that operate in unpredictable environments or produce customized products such as high-end electronics or custom furniture. Incorporating this inventory planning model into your supply chain helps ensure a focus on flexibility and responsiveness to specific customer needs and market changes.

In the agile model, supply chain sourcing can cope with global sourcing, in which managers develop strong supplier relationships and open lines of communication. When market demands call for production surges, these relationships can help spur suppliers to spring into action and provide the goods that companies need to keep their customers happy.

Efficient chain model

Here, the focus is on maximizing profit margins in highly competitive industries. Think global sourcing for clothing or consumer electronics. Advanced technology and data analysis play a key role in optimizing every step, from strategic sourcing and supplier relationships to logistics and distribution. As with other models, enterprise resource planning (ERP) systems integrate all the processes involved, ensuring smooth information flow and cost control. 

Although this model excels at competitiveness, it may require a larger upfront investment in technology and skilled labor. For instance, you may need workers with advanced degrees in operations management or supply chain management. You may also need top-of-the line logistics providers to give you a competitive advantage in data analysis and inventory planning.

Fast chain model

The fast chain model prioritizes speed. Supply chain managers use this model for turning raw materials into a final product in as little time as possible and then quickly getting that product to end consumers. This model lets you capitalize on hot trends, bring new products to market faster, and win business for high-demand items.

This approach may utilize just-in-time (JIT) inventory practices, reducing costs by minimizing inventory levels and guaranteeing materials arrive just as you need them in the manufacturing process. Logistics providers and distribution centers must be highly efficient to support rapid delivery times.

There are trade-offs to a fast chain model. Maintaining quality can be challenging. What’s more, the focus on speed sometimes leads to higher costs and greater risk of overproduction if forecasts are inaccurate. On the other side of the coin, if even one supplier goes offline or delivers an inadequate product, it can disrupt the entire supply chain and temporarily shut down operations. For this reason, the fast chain model may not be ideal for companies concerned with risk management.