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Supply Chain Management Explained and Defined


Supply Chain Management has become a proven and accepted practice and will continue to evolve and play a more significant role in organizations. The SCM footprint on an organization is getting bigger as SCM evolves from tactical to more strategic. Supply Chain Management software is changing how departments and trading partners collaborate and interact with one another, and organizations are rethinking and changing their reporting structure to facilitate modern SCM practices.

Advanced planning is being integrated into supply chain software with a greater emphasis on managing demand. A critical role of SCM is to provide the means for trading partners to articulate and integrate their plans with other trading partners and key stakeholders.

A robust supply chain system reduces waste, lead times and cash-to-cash cycle time while optimizing the flow of products and information and providing greater visibility into the supply chain. As Supply Chain Management evolves to being more strategic, the role of SCM is expanding into product design, globalization, highly adaptive supply networks and risk management.

Breakdown of Supply Chain Management

The requirements and implementation of Supply Chain Management software varies company to company and industry to industry. The following is a common breakdown of SCM areas and functions.

Strategic Network Planning

The strategic network planning horizon is typically over three years. The planning decisions define product groups, customers, suppliers and production strategies. To support these definitions, plans are made for facilities, equipment and transportation. The planning process also impacts system requirements, processes and SCM best practices.

Sales and Operational Planning

This is an emerging best practice that addresses the processes and planning to synchronize an organization with market demands. This practice consists of a collaborative planning effort between demand management, supply management and finance to produce monthly sales and operational plans. The typical sales and operational plan is a rolling 24 month forecast revised each month with the latest demand, supply and financial updates.

Demand Management

Demand Management is the practice of improving the predictability of demand for goods and services, and collaborating with others to optimize the supply chain efforts to meet those market demands. This process is broken down into a number of sub-topics.

Demand Planning – Planning looks at demand segmentation, forecast modeling, forecast structures (hierarchical levels, locations and product grouping), forecast periods and horizons, demand shaping and participating in S&OP.

Demand Forecasting – Demand forecasting is a projection of demand for products without consideration for operational constraints or causal effects. The best forecast models have adaptive algorithms that "self tune" to minimize forecast errors. The demand forecast becomes the baseline for the sales forecast.

Sales Forecasting – Sales forecasting is a collaborative process driven by S&OP. The S&OP process makes a collaborative judgment on the impact of operational constraints and causal effects. Examples of causal effects driving variations in demand are the economy, weather and special events. The judgments are merged into the demand forecast to create the sales forecast.

Demand Shaping - Demand shaping is getting demand to conform to the sales forecast. Demand shaping methods include product changes, pricing changes, sales promotions, product placement, and sales incentives. Constraints on supplies can also trigger efforts to reduce or postpone demand.

Demand Fulfillment – Demand fulfillment is the prioritization and scheduling of the availability of goods in production, in transit and in storage, to fill current demand such as a customer orders or replenishment of inventories.

Supply Management

Supply management priority is striking the optimal balance between inventory levels, service levels and costs. Supply planning is driven from demand forecast and refined in the S&OP process.

Supply Network Planning (SNP) – SNP is a high level planning tool that models the supply chain network, with algorithms that optimize procurement, distribution and inventory plans, thus reducing overall cost.

Distribution Planning – Mid-term planning focus is on inventory strategies and inventory positioning to support the sales plan. Short-term planning helps determine the best allocation of goods and the replenishment of stocking locations.

Replenishment – Short-term inventory planning methods include inventory systems with calculated Safety Stock, Re-Order-Point and Order-Up-To and visual Kanban systems.

Procurement – Procurement is driven by mid to short-term inventory planning to order goods and supplies. Other features include sourcing supplies and the Purchase Order (PO) process through approving invoices.

Vendor Managed Inventory (VMI) – The vendor plans and manages the replenishment of the customer’s inventory. The customer and vendor agree on inventory management criteria, service levels and exchange of information.


Logistics includes storage, distribution, transportation, reverse logistics, returns and resource management.

Relationship Management

The supply chain relationships include trading partners (customers and suppliers), SCM partners (including joint ventures, partnerships, and outsourcing) and 3PLs. Best practices for managing relationships include managing the value of their contribution and leveraging the relationship based on the degree of trust, value of contribution and level of commitment.

Product Lifecycle Management

To expedite new products to market, Supply Chain Management software is getting involved with product development early on in the process to plan SCM requirements.

Understanding and tracking how a product’s demand trends over the life of the product provides additional information into the monthly demand forecasting model. Another forecasting factor is other product lifecycle profiles in the same category; in other words, will a new product cannibalize sales of older products.

Role of SCM Software Vendors

Given the complexities and breadth of SCM software, using an enterprise software vendor as opposed to building custom application software in house has many advantages. In addition to allowing the supplier to focus on core competencies, the software vendor becomes a partner in optimizing the supply chain, and an enabler of best practices and industry standards.

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