Supply Chain Management in the Business, Supplier & Customer Network

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  • 0:05 Supply Chains
  • 2:18 Activities of SCM
  • 6:40 Lesson Summary
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Lesson Transcript
Instructor: Paul Zandbergen

Paul has a PhD from the University of British Columbia and has taught Geographic Information Systems, statistics and computer programming for 15 years.

Supply chain management is concerned with all the interconnected businesses that are part of providing end products or services to customers. Learn how SCM can reduce costs and improve customer service.

Supply Chains

Let's say you're the owner of a manufacturing plant that makes television sets. Your target is to produce 10,000 TVs every month. Every TV has 75 parts - 25 of which you build in-house from raw materials, and 50 of which you order from 10 different suppliers. So, every month you order the raw materials to make 250,000 parts in-house, and you order 500,000 parts from suppliers. Simple enough, right?

One day you get a phone call from one of your suppliers. 'Sorry, but one of our machines broke down, and we won't be able to deliver the parts you ordered.' You can't finish building a single TV without that one part. What now?

To avoid this from happening and to address such problems when they arise, what you need is to manage your supply chain. Supply chain management, or SCM, is the management of all interconnected businesses that are part of providing end products or services to customers. This involves the entire supply chain from acquisition of raw material, conversion to a finished product, transportation and supplying the final product or service to the end user.

The overall goals of SCM are to reduce costs and improve customer service. This is accomplished by reducing the overall investment in the inventory in the supply chain and ensuring a reliable supply of high quality products to the customers.

SCM is widely used in the manufacturing sector where an organization acquires raw materials and turns them into finished products. Many manufacturing organizations, however, don't necessarily start off with raw materials.

Consider the TV manufacturer. Many of the parts that go into making each TV are manufactured by suppliers. Some of those parts may be manufactured by putting together parts from other suppliers. There can be quite a few manufacturers between the raw materials and the finished product. This is why it is called a 'supply chain' - you need to look at all the organizations that are involved in making the product, not just your immediate suppliers.

Activities of SCM

A typical SCM system consists of a number of different activities. Sales forecasting develops an estimate of customer demand. This provides the information necessary to set overall production targets. In the case of the TV manufacturing plant, you could use sales forecasting to estimate by how much you need to increase production to meet the demand for the upcoming holiday shopping season.

Sales and operations planning examines customer demand and current inventory to determine how much product needs to be produced by when. You could use this type of planning to determine when exactly you need to have the extra TV sets ready to get them into stores on time.

A master production schedule sets out the production plan for all finished products based on sales and operating planning. The master production schedule for TV sets would include how many TV sets of each type need to be produced during certain periods.

Detailed scheduling represents the implementation of the master production schedule on the work floor and describes when and in what order different products should be produced to meet overall production targets. For example, some TV sets may be more complicated to put together, and therefore, you want to start their production a little earlier to get the extra units ready on time.

Materials requirement planning determines the amount and timing for placing orders for raw materials and parts with suppliers. This needs to consider delivery times as well as economies of scale. It may be cheaper to order a larger number of materials to cover more production runs, but that material also needs to be stored at a cost.

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