Supply Chain: definition, what it is for and why is it important to manage

    More frequently we hear about the Supply Chain, especially in this period characterized by pandemics, geopolitical conflicts and the difficulty of acquire raw materials, which inevitably has a huge impact on the entire chain and its production and possible delays in the delivery of goods. 

    In recent years, analysts have repeatedly focused on the supply chain due to numerous events that have disrupted global economies. 2020 and 2021 were two particularly difficult years for the global supply chain. This is also confirmed by the Supply Chain Pressure Index (SCPI), a stress indicator developed by the Federal Reserve Bank of New York, which considers 27 indices, pertaining to the national and international situation, to indicate the level of pressure on the entire Supply Chain globally. The higher the value reached by this index, the higher the level of congestion in the supply chain. 

    The worst period was recorded last October and November, during which peaks of 4.5 points were also reached. At the beginning of 2022, the situation seemed to be turning for the better, but the conflicts between Ukraine and Russia and the stringent lockdowns imposed by the Chinese government again effected the SCPI, which again showed signs of fatigue.  

    In an extremely shifting context such as this, characterized by sudden and unexpected variations in demand, it is necessary for companies, in order to gain a competitive advantage, to equip themselves with management methodologies and software capable of increasing the efficiency of the entire supply chain, streamlining production processes and reducing costs and waste. Let us therefore see what the definition of the Supply Chain is, what it is for and why it is so important to manage it correctly. 

    What is the Supply Chian: definition

    Providing an exhaustive definition of a Supply Chain is by no means simple given the complexity of its structure, however, it can be seen as a network of organizations, resources, activities and technologies involved in the creation and sale of a product. A supply chain that covers everything from the delivery of basic materials in the manufacturer supplier relationship to the delivery to the end user.

    Given the complexity of this chain companies need to be able to have the right amount of raw materials, labor and machinery on hand at all times to ensure that production can meet the market demand, which as we know is influenced by a large number of factors and varies rapidly and often unexpectedly. Companies, however, cannot afford to over-stock their warehouses, as this would place an excessive burden on the company’s costs. Hence the need for careful planning of the entire supply chain, capable of ensuring the arrival and departure of products on time, without producing excesses.

    CCH tagetik Supply Chain

    Are Supply Chain and logistics the same thing?

    Before delving into the definition of Supply Chain, it is necessary to make a small premise: Supply Chain and logistics cannot be used as synonyms.

    Logistics, in fact, is only one piece of the puzzle that makes up the entire Supply Chain process. To be more precise, logistics can be understood as a part of the entire production cycle that concerns the organization and management of the purchasing, storage and distribution of products or raw materials needed to produce them. Basically, logistics refers to all operations that involve the transport of products or goods from one place to another, including timing and costs. However, this transport is not only limited to moving a product from the factory to the shop, but also includes the acquisition of raw materials, their storage and the management of warehouses and supplies to production departments.

    The Supply Chain, on the other hand, as mentioned earlier, is a broader set of elements involving several organizations, activities and resources required for the production and sale of a product. The process by which these elements are controlled is called Supply Chain Management (or SCM).

    Supply Chain Management: definition and why it is important

    The Supply Chain Management is a complex set of all processes, systems and strategies involved in supply chain optimization. The main purpose of this process is to control the company’s performance in such a way that its efficiency can be optimized, ensuring that demand is always satisfied but without producing waste or additional costs.

    Through skillfully optimized Supply Chain Management, companies are able to become more competitive in the marketplace and at the same time increase customer satisfaction. Of course, for this to happen, it is necessary for companies to analyze large amounts of data in real time, making quick changes to the chain where needed, reshaping it according to the countless business variables. Hence the need to implement tools with three fundamental characteristics:

    • End-to-End integration;
    • Artificial Intelligence and Machine Learning;
    • The ability to make data available in real time.

    All this can then be translated into more reliable and accurate demand forecasting, thus enabling better management of the entire chain and better integration between supply and demand. However, the entire SCM process can be broken down again into furthermore specific level components, called Supply Chain Planning (or SCP) and Supply Chain Execution (or SCE). But what do these two areas (SCP and SCE) refer to and what factors characterize and distinguish them?

    Supply Chain Planning: characterizing elements and potential benefits

    Regarding Supply Chain Planning, this can be defined as the process of planning and anticipating demand for the finished product and all its components from a marketing, production, logistics and distribution perspective. All Supply Chain Planning applications use algorithms and rules to plan future requirements and balance demand and supply of products/services at the nodal points of the Supply Chain.

    A further objective is to simplify Supply Chain Planning, so it becomes of massive importance to have systems capable of accurately projecting demand so that it can be balanced with supply. This process then allows all sales revenue opportunities to be seized in a timely manner.

    In addition to balancing demand with supply, Supply Chain Planning also enables the analysis of hypothetical scenarios and helps companies meet demands in real time. It is a backward-looking process that aims to anticipate demand so that optimal inventory can be maintained, avoiding maintenance costs and surpluses. This process inevitably involves several work teams, ranging from sales, marketing, to production.

    Elements of Supply Chain Planning

    To optimally implement the entire supply chain, as we have already mentioned, there must be continuous real-time coordination of all work teams and processes. This involves the processing of a huge amount of data that can only be processed by equipping oneself with the right tools capable of considering information from different work areas, namely:

    • Sales Forecasting: which objective is to identify, as accurately and reliably as possible, the volume of business in a given period of time. A well-crafted Sales Forecasting process therefore makes it possible to estimate the amount and type of work required to produce a given product, anticipating market trends and being ready to meet supply.
    • Demand Planning: this is a supply chain management process with which it is possible to accurately predict the demand for products and thus have an optimal inventory available at all times, without incurring extra costs due to surplus goods. Demand planning requires taking into account historical data, expected sales, market conditions and many other factors, using advanced AI-powered technologies.
    • Inventory Planning: enables the optimal management of warehouses and stocks of goods, reducing production waste and overstocking of products in storage facilities.
    • Production Planning: through this process, it is possible to allocate the workforce, materials and production capacity in such a way as to foresee an adequate production plan that can meet demand without generating waste or product surpluses.
    • Procurement Planning: enables the identification and optimization of product procurement schedules, reducing their purchase costs, while at the same time maintaining optimum quantity and quality standards. A well-structured Procurement Planning process avoids interruptions or slowdowns in the Supply Chain.
    • S&OP: through Sales and Operation Planning it is possible to conduct an alignment between all teams, helping them to co-ordinate resources and supply capacities to be able to fulfil all demands in both short and long term. Very often this process also intersects with that of other departments, such as the Office of Finance and Human Resources.

    CCH tagetik Supply Chain

    Supply Chain Planning: why managing it correctly

    Optimal management of Supply Chain Planning brings with it a multitude of benefits, among them the ability to streamline production processes, improve the production efficiency of the company and reduce the operational costs of the entire chain, including purchasing, production, inventory management and logistics.

    Having an efficient Supply Chain Planning also ensures greater customer satisfaction by ensuring that products are available in the right place at the right time. In today’s highly variable environment, having efficient and timely Supply Chain Planning has become an essential imperative for business success.

    Supply Chain Execution: characteristics

    Within Supply Chain Management, we then find Supply Chain Execution (or SCE), which represents the flow of activities within the Supply Chain such as sales order management and processing, production, purchasing, transport management and goods in stock. The objectives of this process include optimizing the use of all the resources necessary for the Supply Chain, controlling costs at every stage and delivering the articles in accordance with the planned methods and timing.

    Within this framework, in order to optimize processes and not incur slowdowns or blockages in the chain, it is necessary to have Supply Chain Execution applications capable of constant tracking of the status of products from a physical point of view in all its components, while at the same time providing a constant financial reflection of Supply Chain phenomena.

    The elements for a successful Supply Chain Execution

    Every day supply chain decisions are influenced by possible disproportions that interfere with the balance between supply and demand. In order to avoid slowdowns, or in the worst-case scenario a total stop, it is necessary to constantly keep track of all goods movements along the Supply Chain, also identifying possible hiccups or other problems.

    Only by having full awareness of the situation in real time it is possible to intervene where necessary, e.g. by reallocating products, intervening in the workforce or balancing supplier orders, increasing or reducing supply. Of course, as with Supply Chain Planning, the processing of this information requires the implementation of specific applications capable of keeping track of all the stages that make up the supply chain, as well as co-ordination between all the company’s departments.

    Ultimately, the Supply Chain is an extremely complex process with several stages and several work areas that must constantly communicate with each other so as not to run into possible hiccups and slowdowns. Further complicating the situation today are additional problems of various kinds, such as the constant variation in demand and the unpredictability of scenarios, which inevitably force companies to equip themselves with a precise and accurate planning tool capable of providing the necessary elements so as not to be found unprepared.

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