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Defining Supply Chain Management

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In spite of the current hype, supply chains aren’t really that new. Entrepreneurs have been buying things from suppliers and selling products to customers for almost as long as people have inhabited the earth. Supply chain management is new, however. In fact, the basic principles of supply chain management began to take shape in the 1980s, at about the same time that personal computers came onto the business scene. You can see the trend clearly by using Google’s N-Gram Viewer, shown in Figure 1-1, which illustrates how often the term supply chain has been used in book titles.


FIGURE 1-1: Frequency of supply chain in book titles.

Supply chain management is the planning and coordination of all the people, processes, and technology involved in creating value for a company. Managing a supply chain effectively involves aligning all the work inside your company with the things that are happening outside your company. In other words, it means looking at your business as a single link in a long, end-to-end chain that supplies something of value to a customer.

The word value shows up a lot when people talk about supply chain management. Basically, value means money. If a customer is willing to pay for something, it has value.

Negotiating prices, scheduling manufacturing, and managing logistics all affect the value equation for a company, and they’re critical to a supply chain, but because they’re so interdependent, it’s a bad idea to manage them separately, in silos. As companies grow larger, supply chains get longer, and the pace of business gets faster, making it more important to align the various functions in a supply chain. Ironically, many of the strategies and metrics that businesses relied on in the past, and that managers have been taught to use, can actually drive the wrong behaviors. A sales rep might hit her quota by landing a huge deal with a customer, for example, but the deal might be unprofitable for the company because of the costs it will drive to the logistics and manufacturing functions. Sales, logistics, manufacturing, procurement, and all your other functions need to be aligned to ensure that the business is pursuing profitable deals.

The difference between the amount of money your company brings in (revenue) and the amount of money it spends (costs) is your profit. In other words, your profit is the amount of value that you have captured from your supply chain.

On the other hand, companies that do a good job of managing their supply chain are better able to take advantage of value-creation opportunities that their competitors might miss. By implementing lean manufacturing, for example, companies can reduce inventories. By being responsive to customer needs, they can build stronger relationships with their customers and grow their sales. By collaborating closely with their suppliers, they can get access to the materials they need, when they need them, and at a reasonable cost.

Part 4 of this book is all about ways you can use supply chain management to create more value.

Keeping all the parts of the supply chain aligned is key to ensuring that revenue is greater than costs and running any business successfully. That’s why supply chain management has become so important so quickly.

Supply Chain Management For Dummies

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