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inventory management

What is supply chain management?

When you think about it, customers only experience a very limited slice of your business. Your product moves from the shelf or screen into their hands—and that’s it.

But every business owner knows that there’s far more to the process than meets the eye.

Way before your customer purchases that product, you need to secure the raw materials, manufacture the goods, transport them to your retail location, and more.

That’s your supply chain in its most basic form.

Are you shuddering at the mere sight of the term “supply chain”? We can’t blame you. It can seem daunting and complex, but it doesn’t need to be.

In this article, we’re breaking down everything you need to know about supply chain management—including what it is, why it matters, and how you can leverage it to boost your business.

What is supply chain management and its benefits?

Supply chain management is the management of the flow of goods and services as they move from the starting point of procurement (or, raw materials) all the way to finished products in the hands of your end customer.

Every single product or service moves through a supply chain—some are relatively; others, far more complex.

Put simply, think of your supply chain as the sequence of phases that your products or services pass through. This could include (but certainly isn’t limited to):

  • Purchasing raw materials
  • Manufacturing the products
  • Warehousing the finished products
  • Transporting the product to retail outlets

Let’s imagine that Marissa runs a business producing handmade soaps. Her supply chain might look like this:

First, she acquires her materials from suppliers, including:

  • Oils, fragrances, and colorant
  • Custom packaging material
  • Equipment for production

Second, she creates the soaps in a shared-use kitchen space in her community. Third, she stores her soap inventory in a spare bedroom in her basement, which she has converted with wire racks and labeled bins. Last, she and her one part-time employee transport finished soaps to local boutiques and craft fairs to be sold to customers.

Beyond understanding the supply chain itself, the goal of supply chain management is to increase the speed and accuracy of getting products or services to market.

Optimizing the supply chain can lead to numerous benefits for businesses, including…

1. Saving money

Removing bloat from your supply chain means you’ll pay less money to store and warehouse products (because you’ll have less inventory sitting around), find the most cost-competitive suppliers and streamline your ordering process.

All of this reduces the cost of producing and selling your products or services. In fact, businesses with optimal supply chains have 15% lower supply chain costs.

2. Streamlining your inventory

Using supply chain analysis empowers you to maintain more ideal amounts of inventory because you understand exactly how long it takes to move from raw materials to a finished product.

Combined with demand planning (which is the process of predicting customer demand for a product), you’ll have a much better idea of how much product you’ll need and when.

This in-depth understanding means you’ll be able to fulfill orders promptly, without stressing over shortages or surpluses.

3. Boosting efficiency

Taking a close look at your supply chain helps you spot bottlenecks, so you won’t have items stuck in different parts of your production process for an unreasonable amount of time.

You’re able to eliminate unnecessary delays and get products to your customers (and, as a result, money in your own bank account) far faster.

4. Improving customer satisfaction

While your supply chain might not seem as flashy or exciting as a new marketing campaign or a customer loyalty program, it carries a lot of weight for customer satisfaction.

“Your supply chain is far and away your most effective customer service tool. It directly dictates the two most vital parts of customer satisfaction: price and delivery,” explains Jim Laverty in an article for irms|360Enterprise by Aptean.

“Having an efficient supply chain means you can beat your competitors on retail price and improve your profitability. Having high performing operations also means you’ll be able to meet or exceed your customers’ expectations on delivery of their product. Giving your customers what they want when they want it and at the cheapest price is key to keeping them satisfied.”

Example of supply chain: How raw materials turn into handmade soaps

The very concept of a supply chain strategy can seem daunting. But, once you dip your toe in and gain more familiarity, you’ll realize that things actually move in a pretty sensical order.

Using our same example of Marissa and her delicious-smelling soaps, let’s take a look at a supply chain diagram.

This sort of visual can be helpful for getting a better grasp of the sequence of events that products or services move through:

Raw Materials -> Supplier -> Manufacturer -> Distributor -> Retailer -> Consumer

In Marrisa’s supply chain, she would function as both the manufacturer and the distributor, since she’s the one producing the soaps and delivering them to their retail locations.

Logistics and supply chain management: Key differences

As you start to learn more and more about your supply chain, you’ll hear this term come up quite a bit: logistics.

That’s because logistics and supply chain management go hand in hand. But, that also means that the two terms are often confused—when, in reality, they represent two different things.

Here’s the rub on supply chain vs. logistics:

  • Supply chain captures the entire flow that brings a product or service to market
  • Logistics is a small segment of the supply chain, focused on the movement and transportation of the products

Benn Bekic, the Chief Strategy Officer for WiseTech Global, a software developer for logistics industries, has a great quote that translates this difference to the real world:

quote image
“If managing the supply chain is like fetching a hungry baby a bottle, then logistics is the thankless trek up and down the stairs in the middle of the night.”

Take another look at the supply chain diagram we outlined for Marissa’s business above.

Logistics is essentially everything that happens during the arrows—it’s the stuff in between the distinct phases. When the raw materials move to the supplier or the finished soaps move to the retailer, that’s logistics in a nutshell.

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Supply chain management processes

Logistics is just the tip of the iceberg. There are several other key supply chain management processes involved in transforming raw goods into finished products.

Consider this your glossary of a few other terms that you’ll want to be familiar with:

  • Demand planningForecasting the customer demand for a product or service.
  • Supply planning: Determining how to best meet the needs discovered during demand planning. Basically, how will you balance supply and demand?
  • Production planning: Ironing out the details of how you’ll manufacture the products called for in your demand and supply plans.
  • Material requirements planning: Ensuring sufficient materials are available to produce the necessary products.
  • Sales and operations planning: Gathering data, discussing, and reconciling demand plans with production plans, oftentimes with manager approval.

While these processes can stand on their own (and, in large companies, often have entire teams dedicated to them), they all ultimately fall under the supply chain management umbrella.

What is supply chain planning?

You’ve learned a lot about your supply chain. But, it’s important to remember that the goal here isn’t just to understand your supply chain—it’s to make sure it’s in tip-top shape. You’ll only reap the benefits if your supply chain is optimized.

That’s where supply chain planning comes in. Supply chain planning is the process of designing the most optimal supply chain, where items move from raw materials to finished products as accurately and efficiently as possible.

As Gartner explains, supply chain planning is the “forward-looking process of coordinating assets to optimize the delivery of goods, services, and information from supplier to customer, balancing supply and demand.”

Supply chain strategies for small business

All of this begs the question: how do you optimize the supply chain for your small business? When you feel like you only have ultimate control over limited parts of the process, how can you cut down on time and save your business money?

Here are several strategies that small business owners can use.

1. Build relationships with multiple suppliers

A single delayed order can quickly throw things off track. If you’re a manufacturer and your primary supplier is late with a delivery, that holds up your production process and causes you to miss customer deadlines. As a result, you may end up with fewer repeat orders and lower profits.

Diversifying applies to more than your product selection—having multiple suppliers helps you avoid this situation. Find one or two emergency backups for each of your main vendors, or split your orders between multiple suppliers to avoid a crisis due to a delivery delay.

2. Go straight to the source

Adding to your roster of suppliers is a great first step, but it’s also worth checking if you can get your raw materials straight from the source: the original manufacturer.

Some manufacturers will sell direct. Often, that’s the best way to get great service and the best cost, since you’ll cut out the middleman. If they don’t sell direct, they can point you to other reputable distributors with whom they contract.

Unless they have an exclusive deal with one distributor, you can then compare prices and service to find the one that works best for you.

3. Understand the lead times for your supply chain

Customers rightfully want to know when they will receive a certain product, and you can only give them a definitive answer if you know your lead time, based on the various links in your supply chain. That can vary depending on what you sell—for commodity items, you might have them in stock and be able to send them off the next business day.

But, for specialty items, you might need to contract with various suppliers to create the product.

For example, imagine that Marissa receives an order for a special-order soap scent and knows it’ll take her a week to produce those soaps once she has the supplies in hand. However, she doesn’t have those fragrances in stock, and she’ll need to acquire them. If her supplier doesn’t already have that fragrance, they’ll need to acquire it first.

Each of these supply chain steps can add to the lead time, so make sure you have a good handle on realistic lead times for your specific products so you can be transparent with your customers and avoid frustrations.

4. Nurture your relationships with suppliers

You’ll notice that a lot of these strategies deal with your suppliers. That’s because they’re a key part of the process, and hitting snags with them can lead to numerous supply chain disruptions.

So, treat your suppliers as you would a valued customer. After all, they’re the key to your valued customers.

Try to avoid giving them unrealistic deadlines, or spending too much time grinding them on price. Yes, you want to make a profit, but so do they.

As with any other aspect of your business, relationships are key. Becoming your supplier’s valued customer means that they are likely to treat you with favor—passing on cost savings when they can, occasionally expediting emergency orders (as long as this doesn’t become the norm, of course!), and possibly even giving you access to limited-edition specialty products, samples, or promotional prices.

5. Understand the importance of your inventory

Inventory (which is the goods you have on hand) can be another major snag in your supply chain. If you hold too much inventory, you’ve spent money that’s sitting on your shelf rather than your bank account—plus, if you need a warehouse, you’re also paying to store that inventory.

That’s why you can’t skip the importance of inventory management as you’re refining your supply chain. Get into the habit of taking regular stock of what you have on hand, taking into account things like your sales cycle, upcoming busy seasons, and your product mix. The more streamlined your inventory is, the more optimal your supply chain will be.

6. Know your limits

You have a lot on your plate as a business owner, but nobody is saying that you need to have your finger in every single pie.

There are resources out there—from online groups to formal training—to help you boost your supply chain management expertise.

But, if this aspect of running your business feels far too intimidating or simply isn’t interesting to you, consider hiring someone with supply chain management knowledge who can help make sure that your logistics and chain supply management is growing in the right direction. This can be especially helpful if you anticipate large growth and a more complex supply chain moving forward.

If you’re not sure what sort of tasks supply managers do, check out an existing supply chain management job description to see if the criteria fits the kind of help you can use.

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Master your supply chain and reap the rewards

Understanding and optimizing your supply chain offers numerous advantages, including reduced costs, streamlined inventory, and even improved customer satisfaction.

If that sounds like something you need to prioritize (spoiler alert: it is!), use this as your guide to make changes to your supply chain—and watch as your business takes a positive turn.

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