Supply chain management has recently become a mainstream buzzword with celebrities, world leaders, and a variety of digital media influencers or thought leaders referencing our current global supply chain crisis.
Though pretty much every single consumer has experienced some layer of the supply chain disruptions, the average person still might not grasp how critical a supply chain is to an organization.
In order to truly understand its influence in the marketplace, we need to unpack those terms and definitions that affect the process and make these new cool-factor buzzwords more approachable.
Let’s take a closer look at some main terms that make up a supply chain.
Procurement is one of the first important terms to understand when you think about supply chains. In essence, it is the way that you purchase or acquire raw materials and other things that you need to run your organization. There are really two major types of procurement. You have direct and indirect procurement.
Direct Procurement: The acquisition of raw materials that are going to be used in producing your finished product. It could also be the procurement of semi-finished goods or any sort of work in progress that you're going to finish the assembly on within your own operations. It is whatever your product of services or anything that's related directly to the production.
Indirect Procurement: Is when you acquire things like office supplies, something that's not going to be critical or directly related to your end good or material, but it is something that's essential to running your business.
Another important concept with supply chain management is supplier management. Procurement is related to what you buy from suppliers or vendors. This whole concept of managing your supplier base, understanding who your suppliers are, and who your vendors are, is extremely important. Especially for more complex supply chains that have hundreds or thousands of different parts or raw materials that go into a finished good.
When you think about supplier management, there's a few different dimensions. One important one is understanding who the suppliers are for all the different raw materials and components you might be using for your product. Each raw material that you acquire or procure in your processes might have multiple vendors, which leads me to another important dimension of supplier management.
Organizations can proactively hedge risk of having any sort of disruption within the supply chain by diversifying your vendor network. This whole supplier management concept is full focused on ensuring you know who your vendors are for all your different raw materials and components, and also what their quality and cost ratings are.
Now, procuring raw materials and products from vendors and suppliers are just one part of the process. Once you have procured the products, then you have to figure out what you're going to do to manage that inventory. Whether it's raw material, finished goods, or indirect procurement, it’s critical to track and manage your inventory. Simply put its understanding what materials you have, where they are, and when you might need to order more.
Inventory management also has to do with your warehouse and how you manage where you place and store materials within your warehouse. In general, inventory management is focused on what products do you have, what's your inventory level, where the material is located when you need it, and ultimately, how are you going to get it to your end customer? These are important to think about when it comes to supply chain management.
To communicate with vendors and suppliers, and even customers, organizations will typically use something called EDI or electronic data interface. Essentially this is an electronic way to communicate with your vendors and suppliers and your customers. If your customer places an order with you, they may place that order through EDI. When you place your order with your suppliers, you may be placing that order via EDI as well.
Most organizations have moved to this EDI model, or they use EDI tools as part of their core enterprise technology. This whole concept of EDI is an important way to manage and communicate with different players throughout your supply chain.
Moving your products, whether it's your raw materials or your end products, throughout the entire supply chain is a very important part of your overall supply chain management function. When you think about where you order your raw materials from, it's a matter of understanding how your raw materials are going to get from the manufacturer or the producer to your facilities.
An organization needs to have visibility and awareness from the time a raw material order is placed, shipment from the vendor supplier, then ultimately how it gets to the warehouse.
Next, how you are going to get the finished good to your customer? Whether it be through trucks or maybe you're going to ship it out through another port to a different distributor. You want to make sure you completely comprehend how things are moving throughout your supply chain. This whole concept of freight and transportation is a critical part and an essential component of any supply chain management function.
There are a variety of items and processes floating through a supply chain at any given time. Interpreting these various touchpoints is oftentimes referred to as logistics management.
Organizations will have specific departments or functions focused on logistics management. They're the ones that ensure that they are managing the whole process of shipments. Overseeing that entire process from the time the product leaves your supplier's warehouse until it gets on the container, is another important factor in the supply chain. That whole process must be managed via logistics management.
It's a very complex function, especially if you're dealing with multiple countries and multiple ports. You have things like tariffs and customs to deal along with all those different international trade sorts of dynamics are an important part of logistics management. Organizations will use technologies like enterprise resource management, ERP systems, or supply chain management systems to help manage some of this logistics management.
Once you get your raw materials into your warehouse, you then have to figure out how you're going to produce the product, which means you've got to pull those materials back out of your warehouse. This is looking at your warehouse management. This whole concept of producing the product, using materials in your warehouse, putting the finished product back in your warehouse, and then ultimately shipping from the warehouse to your end customer is multifaceted.
This requires a lot of good information, data, systems, and processes to manage it. Warehouse management is the whole function of managing that entire warehouse.
When you trigger reorder quantities for any sort of raw material or finished good that might be dropping below a certain minimum threshold you may have defined. The whole pick, pack, and ship process from the time you get a customer order is something that needs to be managed well to get things done on time. You've got to then go find the product in the warehouse, pack it, ship it and get it out the door to your customer.
In today's age of high customer expectations and the whole affect that Amazon hyper-fast distribution model. Global organizations are under a tremendous amount of pressure to get products produced and shipped as quickly as possible, and ultimately get it to their customers as quickly as possible. Oftentimes this requires that you bypass the traditional warehouse management function.
In other words, it may be that instead of storing items in your warehouse or acquiring a product from a vendor, you might bypass that warehouse management function by using the drop shipment process.
One of the simplest examples or ways to understand this on a basic consumer level is when you think about either Amazon or Alibaba. Oftentimes you're buying from third parties or other people that are outside the Amazon ecosystem of warehouses, and they're going to ship directly from their own warehouse. They're going to produce the product or acquire the product and they're going to ship it directly to you rather than going through Amazon's warehouse before it gets to you. This is a real simple consumer example, but organizations, even in B2B situations, they'll do that same thing. Now, of course, this only works with finished products.
If you're talking about raw materials or semi-finished goods, it's going to have to come to your location most likely to then be produced or finished before it can be shipped out to your customers. In the end, oftentimes drop shipments are a way to speed up the whole supply chain.
When you're trying to get raw materials, components, or even finished goods within your supply chain, you find that the vendor supplier or suppliers you're dealing with can't get it to you right when you need it. This triggers what is known as a back order. That means that you have back order or a backlog of orders that the vendor needs to catch up on.
One note about back orders is that when you run into situations where a certain vendor is getting backlogs or delays in getting product to you, that's where supplier management becomes so important. Ideally, you would have a backup vendor or another partner that you can fall back on and presumably deliver faster and cheaper than what the other one might be able to at that moment in time.
Supplier management can be a good way to mitigate against the risk of back orders.
When you're looking at the cost of your overall supply chain and ultimately the cost of your individual products that you're producing for your customers, you want to understand what the total landed costs are. For example, you're outsourcing manufacturing and you're acquiring a product from, let's just say China, and let's just say it's an iPhone. You're going to produce a thousand iPhones from China. It may be that each individual iPhone costs $100 for you to buy each iPhone from that vendor or that supplier.
When you add on things like freight costs, customs, and other costs that go along with international trade and shipments, it may be that instead of $100, it's $130. This concept is known as landed cost. It helps to recognize where you might be able to optimize costs. If your freight costs are high because you're relying on air freight, for example, it may be that you look at shipping via water, which is typically less expensive on a per unit basis.
This is just one example of how you can use this whole concept of landed cost to fully understand your total cost of your supply chain at individual product levels so that you can enhance those costs and ultimately it should affect your pricing as well.
I hope this has provided you with a few examples of terms to be aware of in your quest to understand supply chains during these trying times. I invite you to check out our 2021 Digital Transformation Report which includes supply chain management and digital transformation resources.
Also, please don’t hesitate to reach out to me directly if you have any questions regarding the supply chain crisis. I am happy to be an informal sounding board and adviser as you move through your digital transformation journey.