Supply Chain Management - Introduction

Supply Chain Management can be defined as the management of flow of products

and services, which begins from the origin of products and ends at the product’s
consumption. It also comprises movement and storage of raw materials that are
involved in work in progress, inventory and fully furnished goods.

The main objective of supply chain management is to monitor and relate

production, distribution, and shipment of products and services. This can be done
by companies with a very good and tight hold over internal inventories,
production, distribution, internal productions and sales.

In the above figure, we can see the flow of goods, services and information from
the producer to the consumer. The picture depicts the movement of a product from
the producer to the manufacturer, who forwards it to the distributor for shipment.
The distributor in turn ships it to the wholesaler or retailer, who further distributes
the products to various shops from where the customers can easily get the product.

Supply chain management basically merges the supply and demand management.
It uses different strategies and approaches to view the entire chain and work
efficiently at each and every step involved in the chain. Every unit that participates
in the process must aim to minimize the costs and help the companies to improve
their long term performance, while also creating value for its stakeholders and
customers. This process can also minimize the rates by eradicating the unnecessary
expenses, movements and handling.

Here we need to note that supply chain management and supply chain event
management are two different topics to consider. The Supply Chain Event
Management considers the factors that may interrupt the flow of an effective
supply chain; possible scenarios are considered and accordingly, solutions are
devised for them.

Supply Chain Management - Advantages

In this era of globalization where companies compete to provide the best quality
products to the customers and satisfy all their demands, supply chain management
plays a very important role. All the companies are highly dependent on effective
supply chain process.

Let’s take a look at the major advantages of supply chain. The key benefits of
supply chain management are as follows −

 Develops better customer relationship and service.

  Creates better delivery mechanisms for products and services in demand
with minimum delay.
 Improvises productivity and business functions.
 Minimizes warehouse and transportation costs.
 Minimizes direct and indirect costs.
 Assists in achieving shipping of right products to the right place at the right
time.
 Enhances inventory management, supporting the successful execution of
just-in-time stock models.
 Assists companies in adapting to the challenges of globalization, economic
upheaval, expanding consumer expectations, and related differences.
 Assists companies in minimizing waste, driving out costs, and achieving
efficiencies throughout the supply chain process.

These were some of the major advantages of supply chain management. After
taking a quick glance at the concept and advantages on supply chain management,
let us take a look at the main goals of this management.

Supply Chain Management - Goals

Every firm strives to match supply with demand in a timely fashion with the most
efficient use of resources. Here are some of the important goals of supply chain
management −

 Supply chain partners work collaboratively at different levels to maximize

resource productivity, construct standardized processes, remove duplicate
efforts and minimize inventory levels.
 Minimization of supply chain expenses is very essential, especially when
there are economic uncertainties in companies regarding their wish to
conserve capital.
 Cost efficient and cheap products are necessary, but supply chain managers
need to concentrate on value creation for their customers.
 Exceeding the customers’ expectations on a regular basis is the best way to
satisfy them.
 Increased expectations of clients for higher product variety, customized
goods, off-season availability of inventory and rapid fulfillment at a cost
comparable to in-store offerings should be matched.
 To meet consumer expectations, merchants need to leverage inventory as a
shared resource and utilize the distributed order management technology to
complete orders from the optimal node in the supply chain.

Lastly, supply chain management aims at contributing to the financial success of

an enterprise. In addition to all the points highlighted above, it aims at leading
enterprises using the supply chain to improve differentiation, increase sales, and
penetrate new markets. The objective is to drive competitive benefit and
shareholder value.

Objectives of Supply Chain Management

We have discussed some of the important objectives of SCM below.

 To maximize overall value generated

The higher the SCM profitability, the higher is the success for supply chain. The
Supply chain profitability is the difference between the amount paid by the
customer to purchase a product and the cost incurred by an organization to produce
and supply the product to the customer.

 Cost quality improvement

This is another essential objective of SCM. It looks to achieve cost quality balance
and optimization.

 To look for sources of Cost and Revenue

Customer is the only source of revenue. Therefore there should be appropriate
management of the flow of information, product or funds. It is a key to the success
of supply chain.

 Shortening the time to order

SCM aims to reduce the time required for ordering and fulfilling the same.

 Delivery optimization

The SCM aims to meet the demands of the customer for guaranteed delivery of
high quality and low cost with less lead time.

 Demand fulfilment

Managing the demand and supply is a key yet challenging task for a company or
management personnel. Its objective is to fulfil customer demand through efficient
resources.

 Flexibility

SCM aims for flexibility. A Well managed supply chain provides flexible planning
and better control mechanism.

 Better Distribution

SCM aims to ensure improved distribution. It can maximize the distribution side
efficiency. Marketer or distributor can achieve optimized level distribution by
using all resources that are available properly.

 Cost Reduction

It’s another objective of SCM to reduce the system wide cost of a company to meet
service level requirement.

There are several other sub-objectives that can be derived from these long term
objectives.

 Inventory reduction with the value chain;

 Reduction of warehousing costs;
 Acceleration of cash to cash cycle;
 Reduction in throughput times;
 Improvement in delivery reliability;
 Safeguarding the just-in-time supply.

Importance of Supply Chain Management

You all would know that SCM is an integral part of business and it’s essential to
company’s success and customer satisfaction. In this segment we shall look at the
importance or the significance of SCM.

 Boosts Customer Service

Customers expect the right product to be delivered and they expect it to be

available at the right location. They expect right delivery time and also right after
sale support. Customers expect products to be serviced quickly. Therefore
considering all of this, the significance of SCM is critically high.

 Reduces operating costs

Retailers depend on supply chains to deliver expensive products in order to avoid

holding costly inventories in stores any longer than it’s required. Manufacturers
rely on supply chain to deliver reliably deliver materials to avoid material
shortages.

 Improves financial position

Firms value supply chain managers as they help in controlling and reducing supply
chain costs. It not only saves costs but also dramatically increases firm’s profits.
Firms’ appreciate the added value SCM contributes to the speed of product flow to
customers.

 Momentum

SCM streamlines everything, from product flow to any unexpected natural

disasters. With effective SCM, organizations can diagnose any sort of problem
easily.

 Integrated and co-operative logistics

SCM is the necessity of foundation for all societies. Effective supply chain meets
the requirements of producers and consumers. It takes an integrated approach
towards management.

Functions of Supply Chain Management

The functions of SCM include the following:
  Purchasing

The first function of SCM is purchasing. During manufacturing process, raw

materials are needed. It is essential that these materials are procured and delivered
on time. Then only the production can begin. In order to make this happen,
coordination with suppliers and delivery companies is needed to avoid delays.

 Operations

Forecasting and demand planning is needed before materials are procured as the
demand market shall dictate how many units are to be produced and how much
material is needed for production. This function in SCM is vital as organizations
accurately forecast demand to avoid having too little or too much inventory that
would lead to revenue losses. Therefore, forecasting and demand planning should
be tied in with inventory management, production and shipping.

 Logistics
Logistics is a part of SCM that co-ordinates all planning aspects, purchasing,
production, and transportation aspects to ensure that products reach the end
consumer without hindrances. It is essential to have co-ordination with multiple
departments so that products are quickly shipped to customers.

 Resource Management

Resource management[1] ensures that right resources are allocated to the right
activities and that too in an optimized way. It ensures that optimized production
schedule is created to maximize operations efficiency.

 Information workflow

Sharing information and distribution is that what keeps all other functions
of supply chain management on track. If this information workflow and
communication is poor, it can hurt the entire chain.

Five Supply Chain Drivers

mhugosMarch 31, 2020

Supply chain capabilities are guided by the decisions you make regarding the five
supply chain drivers. Each of these drivers can be developed and managed to
emphasize responsiveness or efficiency depending on changing business
requirements. As you investigate how a supply chain works, you learn about the
demands it faces and the capabilities it needs to be successful. Adjust the supply
chain drivers as needed to get those capabilities.

The five drivers provide a useful framework for thinking about supply chain
capabilities. Decisions made about how each driver operates will determine the
blend of responsiveness and efficiency a supply chain is capable of achieving. The
five drivers are illustrated in the diagram below:
1. PRODUCTION
This driver can be made very responsive by building factories that have a lot of
excess capacity and use flexible manufacturing techniques to produce a wide range
of items. To be even more responsive, a company could do their production in
many smaller plants that are close to major groups of customers so delivery times
would be shorter. If efficiency is desirable, then a company can build factories
with very little excess capacity and have those factories optimized for producing a
limited range of items. Further efficiency can also be gained by centralizing
production in large central plants to get better economies of scale, even though
delivery times might be longer.

[Simulate decisions about production in SCM Globe by defining different

products and facilities in the supply chain, and select locations for the facilities
that make those products.]
2. INVENTORY
Responsiveness can be had by stocking high levels of inventory for a wide range of
products. Additional responsiveness can be gained by stocking products at many
locations so as to have the inventory close to customers and available to them
immediately. Efficiency in inventory management would call for reducing
inventory levels of all items and especially of items that do not sell as frequently.
Also, economies of scale and cost savings can be gotten by stocking inventory in
only a few central locations such as regional distribution centers (DCs).

[Decisions about inventory are simulated by setting production rates and delivery
schedules for products, and by defining on-hand amounts for different products at
facilities throughout the supply chain.]

3. LOCATION
A location decision that emphasizes responsiveness would be one where a
company establishes many locations that are close to its customer base. For
example, fast-food chains use location to be very responsive to their customers by
opening up lots of stores in high volume markets. Efficiency can be achieved by
operating from only a few locations and centralizing activities in common
locations. An example of this is the way e-commerce retailers serve large
geographical markets from only a few central locations that perform a wide range
of activities.

4. TRANSPORTATION
Responsiveness can be achieved by a transportation mode that is fast and flexible
such as trucks and airplanes. Many companies that sell products through catalogs
or on the Internet are able to provide high levels of responsiveness by using
transportation to deliver their products often within 48 hours or less. FedEx and
UPS are two companies that can provide very responsive transportation services.
And now Amazon is expanding and operating its own transportation services in
high volume markets to be more responsive to customer desires. Efficiency can be
emphasized by transporting products in larger batches and doing it less often. The
use of transportation modes such as ship, railroad, and pipelines can be very
efficient. Transportation can also be made more efficient if it is originated out of a
central hub facility or distribution center (DC) instead of from many separate
branch locations.

[Simulate transportation decisions in SCM Globe by the modes of transportation

(truck, railroad, ship, airplane) you use to move products between facilities, and
by the delivery routes and frequencies you define.]
5. INFORMATION
The power of this driver grows stronger every year as the technology for collecting
and sharing information becomes more wide spread, easier to use, and less
expensive. Information, much like money, is a very useful commodity because it
can be applied directly to enhance the performance of the other four supply chain
drivers. High levels of responsiveness can be achieved when companies collect
and share accurate and timely data generated by the operations of the other four
drivers. An example of this is the supply chains that serve the electronics market;
they are some of the most responsive in the world. Companies in these supply
chains, the manufacturers, distributors, and the big retailers all collect and share
data about customer demand, production schedules, and inventory levels. This
enables companies in these supply chains to respond quickly to situations and new
market demands in the high-change and unpredictable world of electronic devices
(smartphones, sensors, home entertainment and video game equipment, etc.).

[SCM Globe simulations generate daily performance data on operating costs and
inventory levels for all the facilities in the supply chain. As you run a simulation
you can see what is happening from end to end across your supply chain. At
present most companies don’t have access to this kind of data about the overall
status of the supply chains they participate in — but that will change as all
markets take on the high-change and unpredictable nature seen in the electronics
market.]

WHEN TO BE EFFICIENT AND WHEN TO BE RESPONSIVE

The table below summarizes what can be done to guide the five supply chain
drivers toward responsiveness or efficiency. Companies and supply chains
continually adjust their mix of responsiveness and efficiency as situations change.
Over the long run, the cost of one driver — Information — continues to drop
while the cost of the other four drivers continues to rise. Companies that make best
use of information to increase their internal efficiency, and increase their
responsiveness to external supply chain partners will gain the most customers and
be the most profitable.

Efficiency is good — In the 20th century, efficiency drove economic growth. The
push for efficiency increased productivity and lowered the prices of products from
automobiles to home appliances thus making them available to a wide segment of
the population. Yet efficiency requires two things that are becoming much harder
to find. The first thing is predictability. To efficiently plan and manage production
and distribution of products you need to know what the demand will be for those
products, and you need to know what the cost of raw materials will be and what the
selling prices will be for the products. Then you can optimize your operations to
produce the right amounts at the right prices and maximize profits.

Efficiency also requires one more thing — stability. You need to know that
demand and prices will remain relatively stable for some number of years (5 or 10
years or more). Because then you can build factories and stores and transportation
infrastructure to enable your efficient operating model. Efficiency is best when
producing relatively simple commodity products and services that sell in more
predictable and stable markets.
Responsiveness is better — In the 21st century, responsiveness drives the
economy. Responsiveness is what drives continuous innovation in products and
technology and continuous change in the ways we organize businesses and serve
customers. The big companies of the 20th century were efficient manufacturing
companies (Ford, GM, US Steel, Kodak, Whirlpool etc.), but the big companies of
the 21st century are responsive service and technology companies (Alibaba,
Amazon, Apple, Facebook, Google, Starbucks, Tencent, etc.). All these 21st
century companies certainly need to be efficient, but their success is based mostly
on their ability to sense and respond quickly to changing markets and evolving
customer desires. Lowest price is not always the deciding factor in purchasing
decisions. People want products and services that respond quickly and meet their
changing needs and desires.

Apple and Starbucks do not sell the lowest priced laptops or cups of coffee, nor
does Porsche or Tesla make the lowest priced automobiles, but as long as people
value the quality and innovation offered by those companies and others like them,
they will pay more for their products. Home delivery of everything from clothes to
groceries costs a bit more, but people value and pay for the responsiveness and
convenience of those services. Responsiveness is best when providing complex or
unique products and services that sell in continuously changing markets driven
by evolving technology and new customer needs and desires.
THE RIGHT MIX OF EFFICIENCY AND RESPONSIVENESS
Even within supply chains that emphasize responsiveness, there are segments of
those supply chains that should focus on efficiency. Efficiency is critical wherever
there are high volumes of predictable products moving between facilities. For
example, segments of supply chains that connect factories with warehouses or
distribution centers should be as efficient as possible. They should use the most
efficient transportation modes and delivery schedules, and those facilities should
automate their operations as much as possible.

However, segments of supply chains that connect distribution centers to end use
customers usually focus on responsiveness. These segments are known as “last
mile” deliveries. They use transportation modes and delivery schedules that
emphasize responsiveness because customers have come to expect fast delivery of
products. In every supply chain some operations will need to focus on efficiency,
and others on responsiveness. That mix continues to shift over time as customer
preferences, market conditions, and technologies change.

New technologies such as robots, drones, artificial intelligence and 3D printing are
making big impacts on how supply chains operate. And yet after all is said and
done, these new technologies can be employed to do one of two things: increase
efficiency; or increase responsiveness (or some blend of the two).

One company making good use of information and technology to manage their
supply chain is Zara Clothing Company. Zara’s supply chain is a big competitive
advantage (screenshot below shows a portion of Zara’s supply chain in Spain). It
sells unique clothing products in a constantly changing market shaped by popular
fashion and new customer desires

Zara Clothing Company Supply Chain

mhugosJanuary 4, 2020

CASE STUDY CONCEPT: The Zara supply chain drives its successful business
model. Run simulations of the Zara supply chain to see how it works, and how to
improve it.

Zara changes its clothing designs every two weeks on average, while competitors
change their designs every two or three months. It carries about 11,000 distinct
items per year in thousands of stores worldwide compared to competitors that carry
2,000 to 4,000 items per year in their stores. Zara’s highly responsive supply chain
is central to its business success. The heart of the Zara supply chain is a huge,
highly automated distribution center (DC) called “The Cube”. The screenshot
below shows a closeup satellite view of this facility.
The company was founded in Spain in 1974 by Amancio Ortega and his wife
Rosalía Mera. It is the flagship business unit of a holding company called Inditex
Corporation with headquarters in Arteixo, Galicia, a city in northwestern Spain
near where Mr. Ortega was born. In 2020 Zara was ranked as the 41st most
valuable brand in the world by Forbes (see bibliography below).

Company Business Model

Agents for the company are always scouting out new fashion trends at clubs and
social gatherings. When they see inspiring examples they quickly send design
sketches to the garment designers at the Cube. New items can be designed and out
to the stores in 4 – 6 weeks, and existing items can be modified in 2 weeks.

The company’s core market is women 24 – 35 years old. They reach this market by
locating their stores in town centers and places with high concentrations of women
in this age range. Short production runs create scarcity of given designs and that
generates a sense of urgency and reason to buy while supplies last. As a
consequence, Zara does not have lots of excess inventory, nor does it need to do
big mark-downs on its clothing items.

Zara has 12 inventory turns per year compared to 3 – 4 per year for competitors.
Stores place orders twice a week and this drives factory scheduling. Such short
term focused order cycles make forecasts very accurate, much more accurate than
competitors who may order every two weeks or every month.

Clothing items are priced based on market demand, not on cost of manufacture.
The short lead times for delivery of unique fashion items combined with short
production runs enable Zara to offer customers more styles and choices, and yet
still create a sense of urgency to buy because items often sell out quickly. And that
particular item or style may not be available again after it sells out. Zara sells 85
percent of its items at full price compared to the industry average of selling only 60
percent of items at full price. Annually there is 10 percent of inventory unsold
compared to industry averages of 17 – 20 percent.

In Spain customers visit Zara stores 17 times per year on average compared to 3
times per year for competitors. Because their clothing designs change often, it is
harder for people to see them clearly on the Internet and thus they are encouraged
to come into the stores instead and try on the unique fashions that Zara offers
(screenshot below shows people at a Zara store in Madrid, Spain).

Zara spends its money on opening new stores instead of spending a lot on ad
campaigns. Estimates vary on the number of Zara stores worldwide. An article in
the New York Times Magazine (November 2012, “How Zara Grew into the
World’s Largest Fashion Retailer” see reference in bibliography below), placed the
store count at around 5,900. An article in Forbes simply states there are “more
nearly 3,000 stores” (2020, “The World’s Most Valuable Brands – #41 Zara“, see
bibliography below). Annual sales for 2019 were estimated by Forbes to be $21.9
billion. The holding company, Inditex SA, is a public company and Inditex
provides annual statements, but it does not break out Zara sales from sales of the
other brands owned by Inditex (Pull&Bear, Massimo Dutti, Bershka, Stradivarius,
Oysho, Zara Home and Uterqüe). Zara also uses a flexible business model where
its stores can be owned, franchised, or co-owned with partners. So it is not always
possible to find exact numbers for Zara’s business operations and finances.

[Editor’s Note: Inditex, owner of Zara and other fashion brands plans to close
more than 1,000 stores worldwide in response to the Covid pandemic and increase
its focus on online sales – https://www.glamour.com/story/zara-store-closings-
coronavirus-online-shopping. Can you think of some ways this will change Zara’s
supply chain?]

Manufacturing and Supply Chain Operations Make Zara Unique

Zara buys large quantities of only a few types of fabric (just four or five types, but
they can change from year to year), and does the garment design and related
cutting and dyeing in-house. This way fabric manufacturers can make quick
deliveries of bulk quantities of fabric directly to the Zara DC – the Cube. The
company purchases raw fabric from suppliers in Italy, Spain, Portugal and Greece.
And those suppliers deliver within 5 days of orders being placed. Inbound logistics
from suppliers are mostly by truck.

The Cube is 464,500 square meters (5 million square feet), and highly automated
with underground monorail links to 11 Zara-owned clothing factories within a 16
km (10 mile ) radius of the Cube. All raw materials pass through the Cube on their
way to the clothing factories, and all finished goods also pass through on their way
out to the stores. The diagram below illustrates Zara’s supply chain model.
(click on diagram for larger image)

Zara’s factories can quickly increase and decrease production rates, so there is less
inventory in the supply chain and less need to finance that inventory with working
capital. They do only 50 – 60 percent of their manufacturing in advance versus the
80 – 90 percent done by competitors. Zara does not need to place big bets on
yearly fashion trends. They can make many smaller bets on short term trends that
are easier to call correctly.

The Zara factories are connected to the Cube by underground tunnels with high
speed monorails (about 200 kilometers or 124 miles of rails) to move cut fabric to
these factories for dyeing and assembly into clothing items. The monorail system
then returns finished products to the Cube for shipment to stores. Here are some
facts about the company’s manufacturing operations:

 Zara competes on flexibility and agility instead of low cost and cheap labor.
They employ about 3,000 workers in manufacturing operations in Spain at
an average cost of 11.00 euros per hour compared to average labor cost in
Asia of about 0.80 euros per hour.
 Zara factories in Spain use flexible manufacturing systems for quick change
over operations.
 50% of all items are manufactured in Spain
 26% in the rest of Europe
 24% in Asia and Africa

The screenshot below illustrates how the Zara supply chain is organized.
Manufacturing is centered in northwestern Spain where company headquarters and
the Cube are located. But for their main distribution and logistics hub they chose a
more centrally located facility. That facility is located in Zaragoza in a large
logistics hub developed by the Spanish government. Raw material is sent by
suppliers to Zara’s manufacturing center. Then finished garments leave the Cube
and are transported to the Zara logistics hub in Zaragoza. And from there they are
delivered to stores around the world by truck and by plane

Zara can deliver garments to stores worldwide in just a few days: China – 48 hrs;
Europe – 24 hrs; Japan – 72 hrs; United States – 48 hrs. It uses trucks to deliver to
stores in Europe and uses air freight to ship clothes to other markets. Zara can
afford this increased shipping cost because it does not need to do much discounting
of clothes and it also does not spend much money on advertising.

Zara’s Supply Chain is Lean and Agile

Stores take deliveries twice per week, and they can get ordered inventory often
within two days after placing their orders. Items are shipped and arrive at stores
already on hangers and with tags and prices on them. So items come off delivery
trucks and go directly onto the sales floor. This makes it possible for store
managers to order and receive the products customers want when they want them,
week by week.

Zara stores respond practically in real-time as styles and customer preferences

evolve. It is a great business model for success in the high-change and hard to
predict fashion industry. It means about half of the clothing the company sells,
which includes most of its high margin and unique fashion items (but not its lower
margin basic items), is manufactured based on highly accurate, short-term (2 – 6
week) demand forecasts. Because this business model tracks so closely to real
customer demand from one month to the next, it frees the company to a large
degree from getting caught in cyclical market ups and downs that ensnare its
competitors (those cycles are driven by boom-to-bust gyrations generated by
the bullwhip effect). Turbulence in the global economy since 2008 has hurt sales at
many competing fashion retailers, but Zara has seen steady, profitable growth
during this time.

A fast-moving and finely tuned supply chain like Zara’s requires constant attention
to keep it running smoothly. Supply chain planners and managers are always
watching customer demand and making adjustments to manufacturing and supply
chain operations. The screenshot below shows the result of one simulation using
the supply chain model outlined above. Continuous adjustments need to be made to
production rates, vehicles, and delivery routes and schedules to keep this supply
chain working well.

Zara is a clothing and fashion retailer that uses its supply chain to significantly
change the way it operates in a very traditional industry. No other competitor can
copy its business model until it first copies its supply chain. And since supply
chains are composed of people, process, and technology, even the latest and
greatest technology is not a competitive advantage all by itself. People must be
well trained, and processes must be put in place that enable people to apply their
training and their technology to best effect.

Buying technology similar to that used by Zara is easy. But for the technology to
be used effectively, competitors must learn about the mental models and the
operating procedures used by Zara. Good mental models enable people to
understand the potentials and see the opportunities that a real-time supply chain
offers. Effective operating procedures enable people to act on what they see and
capitalize on the competitive advantages their technology gives them.

Zara has spent more than 30 years building its unique real-time supply chain and
training its people. So competitors have a lot of learning to do to create the mental
models, and roll out the operating procedures needed to do what Zara does so well.

YOUR FIRST SUPPLY CHAIN CHALLENGE

Get this supply chain to run for 15+ days and keep inventory and operating costs
as low as you can.

Imagine you are in charge of Zara’s supply chain operations. This case study and
supply chain simulation will give you an appreciation of what that job is like. In
this exercise your mental model of Zara’s supply chain will expand and your
understanding of how this supply chain works will deepen. You will see the
continuous adjustments that need to be made to keep the supply chain working and
to keep operating expenses and inventory levels under control.

Load a copy of the Zara supply chain model from the online library into your
account. Then start running simulations to see how the supply chain works. Start
by doing whatever seems necessary to keep the supply chain running without
stock-outs or over-stocks for 15 days. When you run the first simulation you will
see a problem occurs on day 5. As with all cases, there are many possible ways to
respond to this problem. And depending on how you respond, other problems will
appear as you work toward getting your supply chain to run for 15 days. Do
whatever seems necessary to get the supply chain to run for 15 days. Then refine
your solutions to get the supply chain to run at lower costs in transportation,
facility operations and on-hand inventory across the supply chain.

Its agile and responsive supply chain enables Zara to work on a short sales and
operations planning (S&OP) cycle. Let’s assume Zara works on a 15 day cycle
where its competitors work on 30-day or even 60-day planning cycles. So you are
creating a 15-day supply plan to meet the 15-day demand plan which is already
entered into the model in the form of product demand at the different stores. To get
this supply chain to meet demand and run for 15+ days you need to make
adjustments to elements of your supply plan:

 Store delivery amounts and frequencies

 Delivery amounts and frequencies on air freight routes
 Product manufacturing rates at Zara clothing factories
 Movement of products between Zara Cube, Zara factories, and Logistics
Hub in Zaragoza
 Supplier delivery amounts and frequencies for delivering bulk fabric to the
Cube

How Supply Chain Management (SCM) Works

Supply chain management (SCM) represents an effort by suppliers to develop and
implement supply chains that are as efficient and economical as possible. Supply
chains cover everything from production to product development to the
information systems needed to direct these undertakings.

Typically, SCM attempts to centrally control or link the production, shipment,

and distribution of a product. By managing the supply chain, companies can cut
excess costs and deliver products to the consumer faster. This is done by keeping
tighter control of internal inventories, internal production, distribution, sales, and
the inventories of company vendors.

SCM is based on the idea that nearly every product that comes to market results
from the efforts of various organizations that make up a supply chain. Although
supply chains have existed for ages, most companies have only recently paid
attention to them as a value-add to their operations.

5 Parts of SCM
The supply chain manager tries to minimize shortages and keep costs down. The
job is not only about logistics and purchasing inventory. According to Salary.com,
supply chain managers “oversee and manage overall supply chain and logistic
operations to maximize efficiency and minimize the cost of organization's supply
chain."1

Productivity and efficiency improvements can go straight to the bottom line of a

company. Good supply chain management keeps companies out of the headlines
and away from expensive recalls and lawsuits. In SCM, the supply chain
managercoordinates the logistics of all aspects of the supply chain which consists
of the following five parts.
Planning
To get the best results from SCM, the process usually begins with planning to
match supply with customer and manufacturing demands. Firms must predict what
their future needs will be and act accordingly. This relates to raw materials needed
during each stage of manufacturing, equipment capacity and limitations, and
staffing needs along the SCM process. Large entities often rely on ERPsystem
modules to aggregate information and compile plans.

Sourcing
Efficient SCM processes rely very heavily on strong relationships with suppliers.
Sourcing entails working with vendors to supply the raw materials needed
throughout the manufacturing process. A company may be able to plan and work
with a supplier to source goods in advance. However, different industries will have
different sourcing requirements. In general, SCM sourcing includes ensuring:

 the raw materials meet the manufacturing specification needed for the
production of goods.
 the prices paid for the goods are in line with market expectations.
 the vendor has the flexibility to deliver emergency materials due to
unforeseen events.
 the vendor has a proven record of delivering goods on time and in good
quality.

Supply chain management is especially critical when manufacturers are working

with perishable goods. When sourcing goods, firms should be mindful of lead time
and how well a supplier can comply with those needs.

Manufacturing
At the heart of the supply chain management process, the company transforms raw
materials by using machinery, labor, or other external forces to make something
new. This final product is the ultimate goal of the manufacturing process, though it
is not the final stage of supply chain management.

The manufacturing process may be further divided into sub-tasks such as

assembly, testing, inspection, or packaging. During the manufacturing process, a
firm must be mindful of waste or other controllable factors that may cause
deviations from original plans. For example, if a company is using more raw
materials than planned and sourced for due to a lack of employee training, the firm
must rectify the issue or revisit the earlier stages in SCM.
Delivering
Once products are made and sales are finalized, a company must get the products
into the hands of its customers. The distribution process is often seen as a brand
image contributor, as up until this point, the customer has not yet interacted with
the product. In strong SCM processes, a company has robust logistic capabilities
and delivery channels to ensure timely, safe, and inexpensive delivery of products.

This includes having a backup or diversified distribution methods should one

method of transportation temporarily be unusable. For example, how might a
company's delivery process be impacted by record snowfall in distribution center
areas?

Returning
The supply chain management process concludes with support for the product and
customer returns. Its bad enough that a customer needs to return a product, and its
even worse if its due to an error on the company's part. This return process is often
called reverse logistics, and the company must ensure it has the capabilities to
receive returned products and correctly assign refunds for returns received.
Whether a company is performing a product recall or a customer is simply not
satisfied with the product, the transaction with the customer must be remedied.

Many consider customer returns as an interaction between the customer and the
company. However, a very important part of customer returns is the intercompany
communication to identify defective products, expired products, or non-
conforming goods. Without addressing the underlying cause of a customer return,
the supply chain management process will have failed, and future returns will
likely persist.

SCM vs. Supply Chains

A supply chain is the network of individuals, companies, resources, activities, and
technologies used to make and sell a product or service. A supply chain starts with
the delivery of raw materials from a supplier to a manufacturer and ends with the
delivery of the finished product or service to the end consumer.

SCM oversees each touchpoint of a company's product or service, from initial

creation to the final sale. With so many places along the supply chain that can add
value through efficiencies or lose value through increased expenses, proper SCM
can increase revenues, decrease costs, and impact a company's bottom line.

Types of Supply Chain Models

Supply chain management does not look the same for all companies. Each business
has its own goals, constraints, and strengths that shape what its SCM process looks
like. In general, there are often six different primary models a company can adopt
to guide its supply chain management processes.

 Continuous Flow Model: One of the more traditional supply chain

methods, this model is often best for mature industries. The continuous flow
model relies on a manufacturer producing the same good over and over and
expecting customer demand will little variation. (Example Pepsico)
 Agile Model: This model is best for companies with unpredictable demand
or customer-order products. This model prioritizes flexibility, as a company
may have a specific need at any given moment and must be prepared to
pivot accordingly. (Example: Amazon)
 Fast Model: This model emphasizes the quick turnover of a product with a
short life cycle. Using a fast chain model, a company strives to capitalize on
a trend, quickly produce goods, and ensure the product is fully sold before
the trend ends. (Example: Nike)
 Flexible Model: The flexible model works best for companies impacted
by seasonality. Some companies may have much higher demand
requirements during peak season and low volume requirements in others. A
flexible model of supply chain management makes sure production can
easily be ramped up or wound down. (Staples’ paper and writing utensils
products- Papers, pens, notebooks etc)
 Efficient Model: For companies competing in industries with very tight
profit margins, a company may strive to get an advantage by making their
supply chain management process the most efficient. This includes utilizing
equipment and machinery in the most ideal ways in addition to managing
inventory and processing orders most efficiently. (example: Amazon)
 Custom Model: If any model above doesn't suit a company's needs, it can
always turn towards a custom model. This is often the case for highly
specialized industries with high technical requirements such as an
automobile manufacturer. (example: Dell)

What Is a Supply Chain Management Example?

Supply chain management is the practice of coordinating the various activities
necessary to produce and deliver goods and services to a business’s customers.
Examples of supply chain activities can include designing, farming,
manufacturing, packaging, or transporting.

Why Is Supply Chain Management Important?

Supply chain management is important because it can help achieve several
business objectives. For instance, controlling manufacturing processes can improve
product quality, reducing the risk of recalls and lawsuits while helping to build a
strong consumer brand. At the same time, controls over shipping procedures can
improve customer service by avoiding costly shortages or periods of inventory
oversupply. Overall, supply chain management provides several opportunities for
companies to improve their profit margins and is especially important for
companies with large and international operations.

How Are Ethics and Supply Chain Management

Related?
Ethics has become an increasingly important aspect of supply chain management,
so much so that a set of principles called supply chain ethics was born. Consumers
and investors are invested in how companies produce their products, treat their
workforce, and protect the environment. As a result, companies respond by
instituting measures to reduce waste, improve working conditions, and lessen the
impact on the environment.

What Are the 5 Elements of Supply Chain

Management?
Supply chain management has five key elements—planning, sourcing raw
materials, manufacturing, delivery, and returns. The planning phase refers to
developing an overall strategy for the supply chain, while the other four elements
specialize in the key requirements for executing that plan. Companies must
develop expertise in all five elements to have an efficient supply chain and avoid
expensive bottlenecks.

What Element of the Marketing Mix Deals With

Supply Chain Management?
Place is the marketing mix element that deals with supply chain management as it
involves the processes that take goods and services from their raw beginnings to
the ultimate destination—the customer.

Supply Chain Management Strategy

Formulation

Supply chain management includes all activities involved in sourcing,

procurement, systems and logistics as well as the tools used in executing supply
chain transactions. We develop recommendations and plans enabling your
company to move from managing individual functions to integrating activities into
the overall company processes and aligning the supply chain strategy with the
overall strategy.

Based on your company’s mission, goals and objectives as well as the work we
have previously accomplished to generate cost reductions and savings, we develop
future recommendations. This three-year strategic purchasing plan will enable your
organization to continue its improvement process and generate ideas and
suggestions to create competitive differentiation in your marketplace.

Decision Making in SCM

The decision-making process for supply chain management is complex and involves multiple
people across multiple teams. When employers look for someone to oversee supply chain
management, effective decision-making is high on the list of desired qualifications. If you
want to advance your career as a manager in the global supply chain, it’s important to hone
your problem-solving skills.

An effective decision-making process is the best defense against the unknown for any
organization. Many companies look to their supply chain management professionals to
design and implement decision-making processes that will keep the organization one step
ahead in an ever-changing world.

Importance of decision-making skills in supply chain management

A supply chain manager has to make hard decisions, often quickly with real-time data. It is
crucial to have problem-solving skills to apply whenever your supply chain experiences a
glitch. A small manufacturing issue can turn into a much larger problem if your organization
doesn’t have effective decision-making procedures in place.
Managing a manufacturing and logistics operation that spans borders and continents
requires nimble and effective decision-making. In a world where tariffs and trade regulations
can and do change frequently, problem-solving skills that allow you to assess each new
situation and quickly implement solutions are essential.

As a supply chain management professional, your job is to create a buffer between your
supply chain and regulatory uncertainty. To do that, you need to stay on top of the latest
developments in international relations that could affect your operations in the global
supply chain. You have to be ready to change your supply chain management strategy
quickly when the situation demands it.

One element of the supply chain that can put your problem-solving skills to the test is
transportation logistics. When weather delays a shipment or puts a warehouse out of
commission, making decisions about whether and when to implement a backup plan is
crucial.

As a savvy supply chain manager, you may be able to find cost savings and reduce delays at
many points in the transportation portion of the supply chain. Your skill at making decisions
about every factor, from the mode of shipping, to the freight company, to the efficiency of
operations at the receiving dock, can contribute to a smooth-running supply chain.

Effective decision-making in supply chain management isn’t required only because of

challenges in manufacturing and logistics. Changes in consumer demand and perception can
also send ripples through your operations, sometimes almost overnight. One viral social
media post could drive a spike in demand for a product. It’s your job to solve how to shift
production and rearrange your supply chain to meet the new demand. Conversely, a factor
that drives a steep drop in demand, like a recall, forces you to make difficult decisions about
your supply chain. Is the drop temporary or permanent? If you cancel one segment of your
production, how hard will it be to reactivate it in the future? The problem-solving skills to
deal with these and other challenges are necessary to handle the responsibility of an
executive position.

What decision-making skills are critical for professionals overseeing a global supply chain?
There are a number of key decision-making skills that senior supply chain professionals need
to be successful. This checklist of thirteen skills provides guidance in the decision-making
process as a key stakeholder in the global supply chain.

The ability to identify problems in the supply chain

The best supply chain professionals can spot potential problems before they arise and take
action before they cause a major rupture in the supply chain. Since it’s not possible to see
every problem in advance, you also need to be able to define problems in real time, then
quickly formulate and implement solutions.

The ability to develop and communicate solutions

As a supply chain leader in your organization, you not only need to develop solutions to
problems that arise, but also communicate changes in supply chain operations to all parties
involved. That may mean informing and educating your team members on changes to the
process. It can also mean coordinating with outside suppliers in manufacturing,
transportation or warehousing. Your aptitude for clearly communicating your decisions is a
key asset to your role in supply chain management.

The ability to identify trends and opportunities for greater efficiency, quality and cost
savings
Supply chains are dynamic and your leadership and decision-making process should be as
well. Rather than waiting for a challenging situation to arise, keep an eye on trends in supply
chain management to make sure you’re aware of current best practices. If you can spot
opportunities to improve supply chain operations and create plans to take advantage of
those opportunities, your team can behave proactively rather than responding reactively.

The ability to leverage data and technology to analyze problems and opportunities in the
supply chain
Data is your friend in supply chain management. When your decision-making process is
based on good data, you’re able to make better choices. Supply chain leaders need to stay
abreast of the latest software innovations that can improve job performance and help
ensure that supply chains run seamlessly.

The ability to generate or source the data you need to make well-informed decisions
Data collection is a key asset for effective decision-making and for developing long-term
goals. You’ll want to set up systems that consistently collect and analyze data on the
performance of various elements in your supply chain. Accurate and up-to-date information
is crucial to the problem-solving process and effective allocation of team resources.

The ability to incorporate legal and regulatory considerations into your decision making
Supply chain management is affected by numerous factors outside your operations and
often outside your control. As a top supply chain management professional, part of your job
is to stay informed about potential and actual changes to the legal and regulatory
framework within which each supply chain function. Your long-term goals need to account
for actual and potential legal and regulatory developments so your operations are ready to
adapt to them.

The ability to synthesize ideas generated by a team and put them into action
Your team is a key asset to your decision-making process, if you know how to use it. The
leadership to elicit ideas from your team, to develop the best ideas into actionable plans,
and to get all team members on board with operational changes are high-level skills that will
be appreciated by your colleagues.

The ability to elicit collaboration from external elements in a supply chain

Your internal team members aren’t the only piece of the puzzle. As a supply chain
professional, your skill at effectively communicating and collaborating with manufacturers,
freight carriers, and fulfillment service providers is important to your success in
management. People at every stage of a supply chain can be resources to help you with
problem-solving and implementing your decisions. Leverage your experience with third-
party partners to create a more robust supply chain for your organization.
The ability to recognize the relative importance of competing priorities
Supply chain managers are called upon to address more problems than they have time to
resolve. That is why prioritizing is so essential to making decisions in supply chain
management. You’ll have to assign relative value to competing factors in your problem-
solving process. The expertise to juggle all the elements of a complex supply chain when you
are weighing the pros and cons of a decision is an essential skill as a leader.

The ability to leverage information from past successes and failures to guide future supply
chain management decisions
A clear-eyed assessment of past failures as well as successes will help you make better-
informed decisions about the future. It’s the key advantage of experience, and will serve
your team well the better you are able to draw from your professional history. But it’s
important to track problems at every level of the supply chain, even those that can be fixed
in the moment, so you can take steps to prevent the same issues from arising again.

The ability to be flexible to events

Thinking on your feet is a huge asset for effective decision-making. When problems arise,
nimble thinking and quick decisions may be the only way to avoid interruptions in your
operations that can cost money and time. Unpredictability is what makes supply chain
management jobs both exciting and challenging. The better you are at making decisions on
the fly, the better you can utilize the efforts of your staff and safeguard the goals of the
organization.

management decisions
A clear-eyed assessment of past failures as well as successes will help you make better-
informed decisions about the future. It’s the key advantage of experience, and will serve
your team well the better you are able to draw from your professional history. But it’s
important to track problems at every level of the supply chain, even those that can be fixed
in the moment, so you can take steps to prevent the same issues from arising again.

The ability to be flexible to events

Thinking on your feet is a huge asset for effective decision-making. When problems arise,
nimble thinking and quick decisions may be the only way to avoid interruptions in your
operations that can cost money and time. Unpredictability is what makes supply chain
management jobs both exciting and challenging. The better you are at making decisions on
the fly, the better you can utilize the efforts of your staff and safeguard the goals of the
organization.

Tools for effective decision-making in supply chain management

When practicing the skills above, there are also a number of decision-making tools and
strategies that supply chain professionals can use to weigh the pros and cons of each
situation that arises. These tools help you create processes for effective decision-making
that you can apply in different situations.

The rational decision-making model

In 2007, researchers at the University of Lund, Sweden, applied a modified version of the
rational decision-making process to a supply chain management case study.

The steps of the rational decision-making model are: 1. Identify the problem or opportunity.
2. Identify potential solutions. 3. Do a gap analysis to explore the work needed to bridge the
gap between where you are now and arrival at your desired solution. 4. Gather data and
explore alternative solutions. 5. Analyze possible outcomes. 6. Choose the best solution for
your situation. 7. Put your decision into action.

The rational decision-making process is an advanced process that can help develop both
long-term goals and solve short-term problems. It provides a defined set of steps to follow
to make sure you have considered all the options and ramifications of various choices.

Pareto analysis
The Pareto Principle, which essentially states that 20% of your clients account for 80% of
your profits, is named after the Italian economist Vilfredo Pareto. It is also known as the
80/20 rule. A Pareto analysis takes the 80/20 principle and applies it to decision-making.

The value of a Pareto analysis in supply chain management is that it allows you to separate
the important influences from the clutter. If multiple factors have led to a problem in the
manufacturing segment of your supply chain, for example, you would quantify the amount
that each factor contributes to the issue. You are likely to find that 20% of the factors cause
80% of the problem. This helps clarify your decision-making process, so you can focus on the
most important factors first. You spend your energy on fixing the issues that will do the
most to change the situation while you save the effort changing elements that would have
only a minor impact.

SWOT analysis
SWOT stands for Strengths, Weaknesses, Opportunities, Threats. A SWOT analysis is a
simple process for effective decision-making that helps you outline the pros and cons of the
situation.

To perform a SWOT analysis, create a chart with two columns and two rows. In the first
square, list your company’s strengths. In the second, list weaknesses. On the bottom row,
list opportunities and threats. By putting these factors down on paper in this simple format,
you can quickly spot pitfalls and opportunities to guide you in your problem-solving process.

PEST analysis
The PEST analysis is another tool that lends itself to visual mapping for decision-making. The
acronym stands for Political, Economic, Social, Technology. This tool can help you make
decisions about a supply chain based on external factors. Since most supply chains involve
external partners and many cross geo-political borders, the PEST analysis is particularly
useful for setting long-term goals in supply chain management.

Decision tree
Another visual mapping tool for decision-making, the decision tree, can be helpful in
predicting outcomes and weighing pros and cons. To create a decision tree, write the
situation at the top or the left side of a piece of paper. Then draw branches to represent
different factors relating to the situation and their effects. Each branch may lead to
additional branches representing different factors, decision points, or consequences. This is
a flexible and easy-to-use tool to help supply chain managers with the problem-solving
process.