# Understanding Supply Chain Management (SCM) and Its Importance

## What Is Supply Chain Management (SCM)?

Supply chain management (SCM) monitors and optimizes production and distribution to enhance efficiency and value. Effective SCM, by coordinating various processes from raw materials to the finished product, aims to reduce waste, maximize customer satisfaction, and secure a competitive edge.  

### Key Takeaways

*   Supply chain management (SCM) optimizes the production and distribution process, aiming to cut costs and deliver goods efficiently to enhance a company's competitive position.
*   Effective SCM involves centralizing the flow of goods, from planning through returns, to maximize efficiency and avoid waste.
*   Companies adopting SCM practices can improve product quality and customer service, reducing risks of recalls and costly shortages.
*   Various SCM models, such as the agile and efficient models, cater to different business needs depending on demand and industry constraints.
*   Ethical considerations in SCM encompass reducing waste, enhancing working conditions, and minimizing environmental impacts, aligning with modern investor priorities.

![Supply Chain Management (SCM) Definition](https://www.investopedia.com/thmb/vnaqLiASyVjo1zV-oRL8ABF9mlE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/scm.asp-ADD-SOURCE-08b7e84e41a34ce18703eaadf947e055.png)

*— Investopedia / Alex Dos Diaz*

## Understanding the Mechanics of Supply Chain Management

SCM is a continuous effort by companies to make their [supply chains](https://www.investopedia.com/terms/s/supplychain.asp) efficient and economical.

Typically, SCM attempts to centrally control or link the production, shipment, and [distribution of a product](https://www.investopedia.com/terms/d/distribution-management.asp). Managing the supply chain helps companies cut costs, eliminate unnecessary steps, and deliver products faster. This is done by keeping tighter control of internal [inventories](https://www.investopedia.com/terms/i/inventory.asp), internal production, [distribution](https://www.investopedia.com/terms/d/distribution.asp), sales, and the inventories of company vendors.

SCM is based on the idea that nearly every product that comes to market does so as the result of efforts by multiple organizations that make up a supply chain. Although supply chains have existed for ages, a lot of companies didn't pay attention to them as a value-add to their operations until recently.

## The Five Critical Phases of Supply Chain Management

A supply chain manager's role involves more than traditional [logistics](https://www.investopedia.com/terms/l/logistics.asp) and purchasing; they must enhance efficiency, reduce costs, avoid shortages, and prepare for unexpected issues. Typically, the SCM process consists of these five phases:

### 1\. Planning

To get the best results from SCM, the process usually begins with planning to match supply with customer and manufacturing demands. Companies must try to predict what their future needs will be and act accordingly. This involves considering the [raw materials](https://www.investopedia.com/terms/r/rawmaterials.asp) needed, equipment capacity, and staffing for each manufacturing stage.

Large businesses often rely on [enterprise resource planning (ERP)](https://www.investopedia.com/terms/e/erp.asp) software to help coordinate the process.

### 2\. Sourcing

Effective SCM processes rely very heavily on strong relationships with suppliers. Sourcing entails working with [vendors](https://www.investopedia.com/terms/v/vendor.asp) to supply the materials needed throughout the manufacturing process. Sourcing requirements vary across different industries. In general, SCM sourcing involves ensuring that:

*   The raw materials or components meet the manufacturing specifications needed for the production of the goods.
*   The prices paid to the vendor 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 of good quality.

SCM is especially critical when manufacturers are working with perishable goods.

> **Important**
>
> When sourcing goods, companies should be mindful of lead times and how well equipped a supplier is to meet their needs.

### 3\. Manufacturing

Using machinery and labor to transform the raw materials or components the company has received from its suppliers into something new is the heart of the supply chain management process. This final product is the ultimate goal of the manufacturing process, though it is not the final stage of SCM.

The manufacturing process includes sub-tasks like assembly, testing, inspection, and packaging. During the manufacturing process, companies must be mindful of waste or other factors that may cause deviations from their original plans. For example, if a company is using more raw materials than planned and sourced for due to inadequate employee training, it must rectify the issue or revisit the earlier stages in SCM.

### 4\. Delivery

After finalizing sales, companies must deliver products to customers. A company with effective SCM will have robust logistic capabilities and delivery channels to ensure timely, safe, and inexpensive delivery of its products.

This involves having backup or diverse distribution methods in case one transportation method fails. For example, how might a company's delivery process be impacted by record snowfall in distribution center areas?

### 5\. Returns

The SCM process concludes with support for the product and customer returns.

The 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 them. Whether a company is conducting a [product recall](https://www.investopedia.com/terms/p/product_recall.asp) or a customer is simply not satisfied with the product, the transaction with the customer must be remedied.

Returns offer valuable feedback, helping companies identify and rectify defective or poorly designed products. Without addressing the underlying cause of a customer return, the SCM process will have failed, and returns will likely persist into the future.

## Different Models of Supply Chain Management

Supply chain management does not look the same for all companies. Each business has its own goals, constraints, and strengths that will shape its SCM process. These are some of the models a company can adopt to guide its SCM efforts:

### Continuous Flow Model

The continuous flow model relies on a manufacturer producing the same good over and over and expecting customer demand will show little variation. One of the more traditional supply chain methods, this model is often best for mature industries.

### Agile Model

The agile model prioritizes flexibility, as a company may have a specific need at any given moment and must be prepared to pivot accordingly. This method works best for companies with unpredictable demand or custom-order products.

### 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.

### Flexible Model

The flexible model works best for companies affected by [seasonality](https://www.investopedia.com/terms/s/seasonality.asp). Some companies may have much higher demand requirements during peak season and low volume requirements in others. A flexible model of supply chain management ensures that production can easily be ramped up or wound down.

### Efficient Model

Companies competing in industries with very tight profit margins may strive to get an advantage by making their supply chain management process the most efficient. That could involve coming up with ways to do a better job of utilizing equipment and machinery, managing inventory, and processing orders.

### Custom Model

If any model above doesn't suit a company's needs, it can always apply a custom model. This is often necessary for highly specialized industries with high technical requirements, such as an automobile manufacturer.

## Practical Example: How Walgreens Implements Supply Chain Management

Understanding the importance of SCM to its business, Walgreens Boots Alliance Inc. decided to transform its supply chain by investing in technology to streamline the entire process. That included using [big data](https://www.investopedia.com/terms/b/big-data.asp), collected from its 9,000 stores and 20,000 suppliers, to help improve its forecasting capabilities and better manage sales and inventory. In 2019, it appointed its first-ever chief supply chain officer.

Walgreens Boots Alliance also incorporated SCM into its [environmental, social, and governance (ESG)](https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp) initiatives. For example, the company began asking suppliers to fill in an online survey that asks questions about their ESG practices, such as whether they have an emissions reduction target in place and the types of materials they use.

## 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, control over shipping procedures can improve customer service by avoiding costly shortages or periods of inventory oversupply. Overall, supply chain management provides multiple opportunities for companies to improve their profit margins and is especially important for businesses with large and international operations.

## How Are Ethics and Supply Chain Management Related?

Ethics has become an increasingly important aspect of supply chain management, even leading to the establishment of a set of principles called supply chain ethics. Many investors today want to know 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 their impact on the environment—all of which can involve SCM.

## How Much Do Supply Chain Management Jobs Pay?

Supply chain managers across the United States earn, as of May 28, 2024, average annual salaries in the range of $111,000 to $142,000, according to the website Salary.com.

## The Bottom Line

Supply chain management (SCM) is essential for optimizing the flow of goods and services from raw materials to finished products. By effectively managing the stages of planning, sourcing, manufacturing, delivery, and returns, companies can cut excess costs, enhance product quality, and improve customer satisfaction. Whether utilizing a continuous flow, agile, or other SCM models, businesses must tailor their approach to meet specific industry demands and constraints. A robust SCM strategy not only minimizes inefficiencies and adds value at each stage but also positions companies for competitive advantage, potentially increasing revenue and reducing costs.

> **Article Sources**
>
> 1.  Cision PR Newswire. "[Walgreens Transforms Supply Chain Management with Kyvos, Tableau, and Big Data](https://www.prnewswire.com/news-releases/walgreens-transforms-supply-chain-management-with-kyvos-tableau-and-big-data-300735882.html)."
>     
> 2.  Walgreens Boots Alliance. "[Walgreens Boots Alliance Announces Key Leadership Appointments Live](https://www.walgreensbootsalliance.com/news-media/press-releases/2019/walgreens-boots-alliance-announces-key-leadership-appointments-live)."
>     
> 3.  Walgreens Boots Alliance. "[Environmental, Social & Governance.](https://www.walgreensbootsalliance.com/environmental-social-governance)"
>     
> 4.  Walgreens Boots Alliance. "[Sustainable Marketplace](https://www.walgreensbootsalliance.com/environmental-social-governance/sustainable-marketplace)."
>     
> 5.  Salary.com. "[Supply Chain Manager Salary in the United States](https://www.salary.com/research/salary/benchmark/supply-chain-manager-salary)."