What is the Supply Chain Management?
The modern enterprise is no longer a self-contained institution onto itself; it has evolved into a complex web of collaborating companies. Outsourcing of business processes, supply sources and services creates a complex network of an extended enterprise. Business activity monitoring reaches beyond internal flows to external inflows, sometimes spread across the world. Enterprises have to ensure that the manufacturing and transportation of supplies from their collaborating group of companies is so synchronized that consumers receive the products in quantities, types and times they need. Companies have to learn to optimally select their sources of supply and then coordinate with them till products reach their destination.
The management of supply from the extended enterprise entails several different challenges. Companies have to be able to place orders well ahead of time so that they reach in time to be sold. Also, the company placing the order has to be able to communicate with their vendors information on seasonal fluctuations of demand, changes in preference and geographical variations in demand so that they can plan their production schedules. Ideally, the purchasing company wants to minimize the time it has to stock the product.
Increasingly, companies are changing their strategy towards the management of their supply chain, hitherto seen as an adjunct function, to a more demand-driven approach. They use forecasting tools available with business intelligence software to determine their needs and to place their orders with the vendors. The buyer shares information on a common business intelligence platform. Business intelligence tools help to monitor the replenishment needs of companies as they compare the flow of demand and supply. They are also able to manage their logistics in real-time as they receive information from the vehicles bringing the supplies.
The magnitude of the benefits can be gauged from the experience of IBM which has one of the most complex supply chains in the world. It had expected cost savings of $2 billion when it set out to lower its supply chain management costs of $40 billion in 2002. By 2003, the company cut its supply chain costs by $7 billion from lower inventory costs alone. Additional benefits from efficient management of the supply chain are higher turnover, stocks moving faster so that outstanding sales have been reduced by an average of four days, reduction in overheads such as warehouses and trucks which IBM does not need to own any longer, contract negotiation takes less time as both parties have the same information and lower costs of managing account receivables and payables.
When companies are able to anticipate and communicate changes in demand, they can save the expense of procuring goods from higher cost vendors. TruServ, a member-owned hardware cooperative of 7,000 or so independent retail stores, found a wrought-iron park bench at a bargain from China. Initially, the stores placed orders for 17,000 of them while the buyer for the co-operative decided to buy 40,000 of them. Eventually, the sales touched 92,000 and Truserv had to procure many of them in the USA, at a high cost, to meet the entire demand. Despite the unexpected bonanza of sales growth, Truserv was able to just about break-even on the order.
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