What is Supply Chain Management (SCM), and Why is it Relevant to Your Business?
While most new entrepreneurs know that "supply chain" is important, many don't fully understand what the term means and, more importantly, why effective supply chain management is integral to cost management and ultimately to the success of a company.
Definitions vary, but some good ones include:
"The system they [businesses] employ to get their products to end consumers; this is from obtaining raw materials till delivering the final product" (Megan Batchelor, CEOWorld Magazine). SCM "essentially means increasing the speed of getting a product from production to market" (Megan Batchelor, as paraphrased by Leon Teeboom, Houston Chronicle).
SCM "consists of a set of approaches to efficiently integrate the flow of materials, finances, and information from suppliers, manufacturers, wholesalers, distributors, retailers to the final customer, and back again" (University of Kansas).
In my own 30+ years of experience as a Buyer, Merchandise Manager, Commodity Manager, and Strategic Sourcing Manager for a discount retailer, hardware wholesaler, and Fortune 200 financial services provider, I've seen the evolution of SCM from just another administrative function (formerly known in some organizations as Contract Administration) to a strategically critical division with key visibility into the executive suite.
However, even in a small company, best practices in SCM will pay dividends in a number of ways including:
- Improving customer service by delivering products quickly and on time, which increases customer satisfaction as well as the likelihood of repeat business.
- Reducing operating costs by decreasing the costs of goods and production, which creates positive cash flow and profits.
- Improving your bottom line by reducing SCM costs, which helps when gaining new sales is tough (e.g. during an economic downturn).
So How Do You Build an Effective and Impactful SCM Team at Your Company?
5 Tips for You:
- Carefully choose your suppliers. Take time to thoroughly vet your supply base by providing them with your requirements, specifications, timelines, and other parameters. Be sure that your suppliers understand your business needs, produce consistent quality, and are the right size for your company.
- Identify/Utilize multiple suppliers. We've all been taught to have backup plans, so never rely on a sole source for a product. Supply chain disruptions are common, so having multiple suppliers can mitigate this risk to your organization. However, suppliers naturally devote more attention to larger customers, so don't spread your relatively small purchases among too many suppliers. It's a careful balancing act for your company to become important enough to a supplier to gain optimal pricing and service without putting all your eggs in a single basket.
- Communicate on a consistent basis with your suppliers. When possible, include your key suppliers in your planning meetings so that they are aware of future strategies, projects, and promotions. You'll build trust with them, and this trust may help when you need a favor or quick shipping on products. Trust can also help during negotiations and position your company for better deals.
- Measure your supplier's performance and let them know how they are doing. If they're not meeting expectations, you'll need to replace them.
- Conduct a sourcing exercise every 2-3 years. This will identify other potential suppliers and you'll learn about innovations in the industry. Certainly, include your current suppliers in the RFQ/RFP process so that your incumbents have a chance to retain the business.
It takes effort and time to build your SCM skills and develop best practices, but if you do, you'll enjoy a competitive advantage versus the rest of the market. And from personal experience, I can tell you that supply chain management, when done effectively, is both rewarding and fun.
The Duquesne University SBDC provides free business consulting for entrepreneurs in the Greater Pittsburgh area. Click here to request free consulting, or contact the SBDC for additional help and information.
Paul Bucciarelli is a part-time business consultant with the Duquesne University SBDC and serves in the New Castle/Lawrence County Area. He recently retired from the PNC Financial Services Group after 19 years as a VP - Supply Chain Manager. Paul holds a Master's in Business Administration from Youngstown State University and a Bachelor's degree in Advertising and Journalism from Penn State. He is a part-time faculty member for the Penn State Shenango Campus, and he also serves on the Advisory Board for PSU - Shenango.