Supply chains are intricate structures with numerous moving parts and components. In this discussion, I will outline the major components of a supply chain.
Many of the clients we collaborate with are overhauling or transforming their supply chains as an integral part of their business and digital transformation efforts. However, numerous organizations and project teams lack a comprehensive understanding of what a supply chain truly is and its major components. In this discussion, I will address the five major components of a supply chain and their relevance in the broader field of supply chain management.
The first major component of a supply chain is procurement. Procurement can be simply understood as the process of acquiring the necessary items to manage a supply chain. Procurement can be divided into two main categories: direct and indirect.
Direct procurement pertains to the acquisition of raw materials and other essential items needed to produce the product being sold to the market. For instance, if a company manufactures widgets, it would procure the raw materials required to produce those widgets.
Indirect procurement, on the other hand, is essential but not directly related to the production of a specific product. Instead, it supports the overall back-office functions and other aspects not tied to the direct product. For example, purchasing laptops for employees or acquiring copy machines and paper are examples of indirect procurement. These items are crucial for the operation of the business but are not directly connected to the production of the primary product.
Regardless of the procurement type, it plays a pivotal role as it greatly influences the costs of raw materials and other necessary items for business operations. Procurement departments are often evaluated based on their ability to minimize costs and optimize the value of acquisitions, balancing price and quality.
This emphasis on procurement is why many large manufacturing entities, and major organizations in general, maintain dedicated procurement teams. Their primary goal is to secure the best quality goods at the most competitive prices from the top vendors in the market.
A second critical function within supply chains is inventory management. While procurement focuses on the direct and indirect acquisition of raw materials and other items, managing these materials post-acquisition becomes vital. Once these materials are in-house, organizations must determine how to manage them effectively. This includes tracking their location, monitoring usage rates, and projecting when replenishments might be needed.
Inventory management oversees the physical location of materials and indicates when it's time to reorder supplies. The function encompasses methods like physical inventories, where every item in stock is counted. Another method is cycle counts, which involve counting high-value or high-volume items within the inventory. These procedures, along with specialized systems that monitor inventory levels and locations, are essential tools in inventory management.
The significance of inventory management stems from the substantial investments many large manufacturing organizations make in their inventory. With vast amounts of money tied up in inventory, it is viewed as a valuable asset in financial records, demanding careful management. Therefore, inventory management is a paramount function in both supply chain and supply chain management.
Warehouse management, while similar to inventory management, primarily concentrates on the physical warehouse's operations. It emphasizes where goods are stored and the processes governing their movement within and out of the warehouse. While inventory management broadly assesses overall inventory levels, ensuring appropriate reorder thresholds and timely material acquisitions, warehouse management is keenly attuned to the logistics within the storage facility.
This entails ensuring that when materials arrive, there is a designated space for them. For raw materials meant for the manufacturing floor, it encompasses the logistics of transporting these materials from the warehouse to the production area. Once the manufacturing process is complete, finished products are then transported back to the warehouse, especially if they are designated for a stock environment.
One of the pivotal business processes within warehouse management is the "pick, pack, and ship" procedure. This process involves fulfilling an incoming customer order by selecting the appropriate product from storage, packaging it, and ensuring its delivery to the customer.
In essence, warehouse management is a multifaceted operation. It involves monitoring the movement of raw materials, tracking finished products, and overseeing the fulfillment of customer orders. The intricacy of these operations underscores the importance of technology in streamlining and managing these business processes efficiently.
The fourth crucial component of supply chain management is manufacturing. While manufacturing is often viewed as a distinct entity with its unique set of business processes, it is integral to effective supply chain management, especially for manufacturers. Manufacturing operations encompass all activities on the shop floor where actual production occurs and interact closely with other supply chain components.
For instance, the procurement function sources raw materials, which are then stored by the warehouse management function. These materials are subsequently transferred from the warehouse to the manufacturing shop floor. But manufacturing operations don't just involve the movement of raw materials. They also include tracking inventory throughout the "work in progress" (WIP) phase. This process meticulously monitors each step, on every machine, during the entire manufacturing cycle.
The primary goal of manufacturing operations is to manage and, where possible, automate these production activities. Here, technology plays a pivotal role. It aids operators in tracking the WIP, identifying potential quality defects, gauging volume and throughput, and ultimately ensuring a quality finished product.
Upon completion of the manufacturing process, the finished products either transition back to the warehouse, overseen by the warehouse management function, or, in certain make-to-order scenarios, they may be directly dispatched to customers. In essence, manufacturing operations represent a core facet of supply chain management, ensuring that products are efficiently produced and aligned with other supply chain functions.
Logistics stands as a pivotal component within supply chain management. At its core, logistics pertains to the strategies and methods for transporting finished materials and products to the end customers. The methods employed in logistics vary based on several factors.
Shipping cargo via water is one method. If a product is manufactured in one country and intended for another, it might be transported across seas. This aspect of logistics manages the entire journey of the cargo, from the manufacturing facility to the ship and eventually to the end customer or the destination warehouse in another country.
Air transport offers another avenue for logistics. Products might be transported by air if they are smaller in size, or if a rush delivery is essential.
Moreover, road transportation, often seen as large commercial semi-trucks on highways, is among the most common logistic methods. Typically, these vehicles transport finished products either to the direct end customer or to the warehouse designated for the final customer.
Logistics deals with varying country regulations, multiple transportation modes, and the constant movement of finished goods and raw materials. Effective logistics management can bring immense benefits to an organization, which is why supply chain management technologies are crucial in refining these processes.
In summary, this overview offers insights into the five primary components of supply chain management.
I would enjoy brainstorming ideas with you if you are looking to strategize an upcoming transformation or are looking at selecting an ERP system, so please feel free to contact me at eric.kimberling@thirdstage-consulting.com. I am happy to be a sounding board as you continue your digital transformation journey.
