The Importance of Supply Chain Management
It is well known that supply chain management is an integral part of most businesses and is essential to company success and customer satisfaction.
Boost Customer Service
- Customers expect the correct product assortment and quantity to be delivered.
- Customers expect products to be available at the right location. (i.e., customer satisfaction diminishes if an auto repair shop does not have the necessary parts in stock and can’t fix your car for an extra day or two).
- Right Delivery Time – Customers expect products to be delivered on time (i.e., customer satisfaction diminishes if pizza delivery is two hours late or Christmas presents are delivered on December 26).
- Right After Sale Support – Customers expect products to be serviced quickly. (i.e., customer satisfaction diminishes when a home furnace stops operating in the winter and repairs can’t be made for days)
Reduce Operating Costs
- Decreases Purchasing Cost – Retailers depend on supply chains to quickly deliver expensive products to avoid holding costly inventories in stores any longer than necessary. For example, electronics stores require fast delivery of 60” flat-panel plasma HDTV’s to avoid high inventory costs.
- Decreases Production Cost – Manufacturers depend on supply chains to reliably deliver materials to assembly plants to avoid material shortages that would shutdown production. For example, an unexpected parts shipment delay that causes an auto assembly plant shutdown can cost $20,000 per minute and millions of dollars per day in lost wages.
- Decreases Total Supply Chain Cost – Manufacturers and retailers depend on supply chain managers to design networks that meet customer service goals at the least total cost. Efficient supply chains enable a firm to be more competitive in the market place. For example, Dell’s revolutionary computer supply chain approach involved making each computer based on a specific customer order, then shipping the computer directly to the customer. As a result, Dell was able to avoid having large computer inventories sitting in warehouses and retail stores which saved millions of dollars. Also, Dell avoided carrying computer inventories that could become technologically obsolete as computer technology changed rapidly.
Improve Financial Position
- Increases Profit Leverage – Firms value supply chain managers because they help control and reduce supply chain costs. This can result in dramatic increases in firm profits. For instance, U.S. consumers eat 2.7 billion packages of cereal annually, so decreasing U.S. cereal supply chain costs just one cent per cereal box would result in $13 million dollars saved industry-wide as 13 billion boxes of cereal flowed through the improved supply chain over a five year period.
- Decreases Fixed Assets – Firms value supply chain managers because they decrease the use of large fixed assets such as plants, warehouses and transportation vehicles in the supply chain. If supply chain experts can redesign the network to properly serve U.S. customers from six warehouses rather than ten, the firm will avoid building four very expensive buildings.
- Increases Cash Flow – Firms value supply chain managers because they speed up product flows to customers. For example, if a firm can make and deliver a product to a customer in 10 days rather than 70 days, it can invoice the customer 60 days sooner.
Lesser known, is how supply chain management also plays a critical role in society. SCM knowledge and capabilities can be used to support medical missions, conduct disaster relief operations, and handle other types of emergencies.
Whether dealing with day-to-day product flows or dealing with an unexpected natural disaster, supply chain experts roll up their sleeves and get busy. They diagnose problems, creatively work around disruptions, and figure out how to move essential products to people in need as efficiently as possible.
Societal Roles of SCM
Ensure Human Survival
- SCM Helps Sustains Human Life – Humans depend on supply chains to deliver basic necessities such as food and water. Any breakdown of these delivery pipelines quickly threatens human life. For example, in 2005, Hurricane Katrina flooded New Orleans, LA leaving the residents without a way to get food or clean water. As a result, a massive rescue of the inhabitants had to be made. During the first weekend of the rescue effort, 1.9 million meals and 6.7 million liters of water were delivered.
- SCM Improves Human Healthcare – Humans depend on supply chains to deliver medicines and healthcare. During a medical emergency, supply chain performance can be the difference between life and death. For example, medical rescue helicopters can save lives by quickly transporting accident victims to hospitals for emergency medical treatment. In addition, the medicines and equipment necessary for treatment will be available at the hospital as a result of excellent supply chain execution
- SCM Protects Humans from Climate Extremes – Humans depend on an energy supply chain to deliver electrical energy to homes and businesses for light, heat, refrigeration and air conditioning. Logistical failure (a power blackout) can quickly result in a threat to human life. For example, during a massive East Coast ice storm in January 1998, 80,000 miles of electrical power lines fell resulting in no electricity for 3,200,000 Montreal, Quebec residents. Due to extreme cold, 30 died and 25% of all Quebec residents left home to seek heated shelter. In addition, economic costs included $3 billion in lost business, $1 billion in home damage and $1 billion in government expenditures.
Improve Quality of Life
- Foundation for Economic Growth – Societies with a highly developed supply chain infrastructure (modern interstate highway system, vast railroad network, numerous modern ports and airports) are able to exchange many goods between businesses and consumers quickly and at low cost. As a result, the economy grows. In fact, the one thing that most poor nations have in common is no or a very poorly developed supply chain infrastructure.
- Improves Standard of Living – Societies with a highly developed supply chain infrastructure (modern interstate highway system, vast railroad network, numerous modern ports and airports) are able to exchange many goods between businesses and consumers quickly and at low cost. As a result, consumers can afford to buy more products with their income thereby raising the standard of living in the society. For instance, it is estimated that supply chain costs make up 20% of a product’s cost in the U.S. but 40% of a product’s cost in China. If transport damage is added in, these costs make up 60% of a product’s cost in China. The high Chinese supply chain cost is a major impediment to improving the standard of living for Chinese citizens. Consequently, China has embarked on a massive effort to develop its infrastructure.
- Job Creation – Supply chain professionals design and operate all of the supply chains in a society and manage transportation, warehousing, inventory management, packaging and logistics information. As a result, there are many jobs in the supply chain field. For example, in the U.S., logistics activities represent 9.9% of all dollars spent on goods and services in 2006. This translates into 10,000,000 U.S. logistics jobs.
- Opportunity to Decrease Pollution – Supply chain activities require packaging and product transportation. As a by-product of these activities, some unwanted environmental pollutants such as cardboard waste and carbon dioxide fuel emissions are generated. For example, paper and paperboard accounted for 34% of U.S. landfill waste in 2005. Only 50% of the 84 million tons of paper and paperboard waste were recycled. Also, carbon dioxide emissions from transportation accounted for 33% of total U.S. CO2 emissions in 2005. As designers of the network, supply chain professionals are in a key position to develop more sustainable processes and methods.
- Opportunity to Decrease Energy Use – Supply chain activities involve both human and product transportation. As a by-product of these activities, scarce energy is depleted. For example, currently transportation accounts for 30% of world energy use and 95% of global oil consumption. As designers of the network, supply chain professionals have the role of developing energy-efficient supply chains that use fewer resources.
Protect Cultural Freedom and Development
- Defending Human Freedom – Citizens of a country depend on military logistics to defend their way of life from those who seek to end it. Military logisticians strategically locate aircraft, ships, tanks, missiles and other weapons in positions that provide maximum security to soldiers and other citizens. Also, superior logistics performance yields military victory. For example, the B-2 Stealth Bomber is able to deliver bombs to target without being detected by enemy radar.
- Protects Delivery of Necessities – Citizens of a country depend on supply chain managers to design and operate food, medicine and water supply chains that protect products from tampering. Sophisticated packaging techniques, state of the art surveillance cameras, global positioning systems and RFID inventory tracking are some of the methods used to deter terrorists from accessing these vital logistics systems.