Supply chain management

Supply chain management is the coordination of all entities involved in the creation and distribution of a product. When properly managed, the supply chain should be able to efficiently create products and deliver them to customers. A company is more likely to engage in supply chain management after it has created significant efficiency improvements within its own boundaries, and realizes that it must coordinate its activities with its business partners in order to wring further improvements from the system. The following issues are dealt with during supply chain management:

  • Partner selection. The company engaging in supply chain management must evaluate suppliers and distributors to determine which ones mesh best with its concept of a supply chain that can deliver goods to customers at the right price, quality, and delivery specifications.
  • Network configuration. The cluster of businesses comprising the supply chain must be appropriately configured, so that raw materials are provided from the most cost-effective locations to the most efficient factories, and forwarded to the customer through the most efficient configuration of warehouses and transportation systems. The configuration may vary by customer, depending on their locations and what they order.
  • Information configuration. There must be an information sharing system in place that makes product and order information available to those businesses in the network that need it. This may require extensive linking of the computer systems of the companies involved in the supply chain, possibly with shared access to a central database.
  • Forecasting system. There should be a shared forecasting system in place that breaks down customer demand information into the component parts needed by each member of the supply chain. This system not only shares forecasting information with them, but also provides real-time updates as the forecast inevitably changes.
  • Tax efficiency. Because of differences in local tax rates, a supply chain can be configured to recognize income in the lowest-tax regions, and avoid them in high-tax regions. This is a secondary consideration when few or none of the members of a supply chain are owned by a common entity, but is a serious issue when the supply chain is largely vertically integrated under common ownership.

Supply chain management is an extremely important function for those companies that use just-in-time manufacturing systems, which operate with very small inventory reserves (if any), and so depend on the timely arrival of components at the exact times and in the exact amounts needed by the production process. It is also necessary when a company outsources a large part of its production to distant suppliers, so that the proper monitoring of lengthy supply lines becomes a critical aspect of corporate survival. An additional scenario calling for extensive supply chain management is when a company outsources many of its functions; for example, a supplier may design a company's products, while another supplier manufactures them, and yet another supplier performs after-market servicing.