Supply Chain Management (SCM): How It Works and Why It Is Important (2024)

What Is Supply Chain Management (SCM)?

Supply chain management is the management of the flow of goods and services and includes all processes that transform raw materials into final products.It involves the active streamlining of a business's supply-side activities to maximize customer value and gain a competitive advantage in the marketplace.

Key Takeaways

  • Supply chain management (SCM) is the centralized management of the flow of goods and services and includes all processes that transform raw materials into final products.
  • By managing the supply chain, companies can cut excess costs and deliver products to the consumer faster and more efficiently.
  • Good supply chain management keeps companies out of the headlines and away from expensive recalls and lawsuits.
  • The five most critical elements of SCM are developing a strategy, sourcing raw materials, production, distribution, and returns.
  • A supply chain manager is tasked with controlling and reducing costs and avoiding supply shortages.


Explaining Supply Chain Management (SCM)

How Supply Chain Management (SCM) Works

Supply chain management (SCM) represents an effort by suppliers to develop and implement supply chains that are as efficient and economical as possible. Supply chains cover everything from productionto product developmentto the information systems needed to direct these undertakings.

Typically, SCM attempts to centrally control or link the production, shipment, and distribution of a product. By managing the supply chain, companies can cut excess costs and deliver products to the consumer faster. This is done by keeping tighter control of internal inventories, internal production, distribution, sales, and the inventories of company vendors.

SCM is based on the idea that nearly every product that comes to market results from the efforts of various organizations that make up a supply chain. Although supply chains have existed for ages, most companies have only recently paid attention to them as a value-add to their operations.

5 Parts of SCM

The supply chain manager tries to minimize shortages and keep costs down. The job is not only about logistics and purchasing inventory. According, supply chain managers “oversee and manage overall supply chain and logistic operations to maximize efficiency and minimize the cost of organization's supply chain."

Productivity and efficiency improvements can go straight to the bottom line of a company. Good supply chain management keeps companies out of the headlines and away from expensive recalls and lawsuits. In SCM, the supply chain manager coordinates thelogisticsof all aspects of the supply chain which consists ofthe following five parts.


To get the best results from SCM, the process usually begins with planning to match supply with customer and manufacturing demands. Firms must predict what their future needs will be and act accordingly. This relates to raw materials needed during each stage of manufacturing, equipment capacity and limitations, and staffing needs along the SCM process. Large entities often rely on ERP system modules to aggregate information and compile plans.


Efficient SCM processes rely very heavily on strong relationships with suppliers. Sourcing entails working with vendors to supply the raw materials needed throughout the manufacturing process. A company may be able to plan and work with a supplier to source goods in advance. However, different industries will have different sourcing requirements. In general, SCM sourcing includes ensuring:

  • the raw materials meet the manufacturing specification needed for the production of goods.
  • the prices paid for the goods 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 in good quality.

Supply chain management is especially critical when manufacturers are working with perishable goods. When sourcing goods, firms should be mindful of lead time and how well a supplier can comply with those needs.


At the heart of the supply chain management process, the company transforms raw materials by using machinery, labor, or other external forces to make something new. This final product is the ultimate goal of the manufacturing process, though it is not the final stage of supply chain management.

The manufacturing process may be further divided into sub-tasks such as assembly, testing, inspection, or packaging. During the manufacturing process, a firm must be mindful of waste or other controllable factors that may cause deviations from original plans. For example, if a company is using more raw materials than planned and sourced for due to a lack of employee training, the firm must rectify the issue or revisit the earlier stages in SCM.


Once products are made and sales are finalized, a company must get the products into the hands of its customers. The distribution process is often seen as a brand image contributor, as up until this point, the customer has not yet interacted with the product. In strong SCM processes, a company has robust logistic capabilities and delivery channels to ensure timely, safe, and inexpensive delivery of products.

This includes having a backup or diversified distribution methods should one method of transportation temporarily be unusable. For example, how might a company's delivery process be impacted by record snowfall in distribution center areas?


The supply chain management process concludes with support for the product and customer returns. Its bad enough that a customer needs to return a product, and its even worse if its due to an error on the company's part. This 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 returns received. Whether a company is performing a product recall or a customer is simply not satisfied with the product, the transaction with the customer must be remedied.

Many consider customer returns as an interaction between the customer and the company. However, a very important part of customer returns is the intercompany communication to identify defective products, expired products, or non-conforming goods. Without addressing the underlying cause of a customer return, the supply chain management process will have failed, and future returns will likely persist.

SCM vs. Supply Chains

A supply chain is the network of individuals, companies, resources, activities, and technologies used to make and sell a product or service. A supply chain starts with the delivery of raw materials from a supplier to a manufacturer and ends with the delivery of the finished product or service to the end consumer.

SCM oversees each touchpoint of a company's product or service, from initial creation to the final sale. With so many places along the supply chain that can add value through efficiencies or lose value through increased expenses, proper SCM can increase revenues, decrease costs, and impact a company's bottom line.

Types of Supply Chain Models

Supply chain management does not look the same for all companies. Each business has its own goals, constraints, and strengths that shape what its SCM process looks like. In general, there are often six different primary models a company can adopt to guide its supply chain management processes.

  • Continuous Flow Model: One of the more traditional supply chain methods, this model is often best for mature industries. The continuous flow model relies on a manufacturer producing the same good over and over and expecting customer demand will little variation.
  • Agile Model: This model is best for companies with unpredictable demand or customer-order products. This model prioritizes flexibility, as a company may have a specific need at any given moment and must be prepared to pivot accordingly.
  • 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 impacted by seasonality. Some companies may have much higher demand requirements during peak season and low volume requirements in others. A flexible model of supply chain management makes sure production can easily be ramped up or wound down.
  • Efficient Model: For companies competing in industries with very tight profit margins, a company may strive to get an advantage by making their supply chain management process the most efficient. This includes utilizing equipment and machinery in the most ideal ways in addition to managing inventory and processing orders most efficiently.
  • Custom Model: If any model above doesn't suit a company's needs, it can always turn towards a custom model. This is often the case for highly specialized industries with high technical requirements such as an automobile manufacturer.

Example of SCM

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. For several years the company has been investing and revamping its supply chain management process. Walgreens was able to use big data to help improve its forecasting capabilities and better manage the sales and inventory management processes.

This includes the 2019 addition of its first-ever Chief Supply Chain Officer, Colin Nelson. His role is to boost customer satisfaction as the company increases its digital presence. Beyond that, in 2021, it announced it would be offering free two-hour, same-day delivery for 24,000 products in its stores.

What Is a Supply Chain Management Example?

Supply chain management is the practice of coordinating the various activities necessary to produce and deliver goods and services to a business’s customers. Examples of supply chain activities can include designing, farming, manufacturing, packaging, or transporting.

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

How Are Ethics and Supply Chain Management Related?

Ethics has become an increasingly important aspect of supply chain management, so much so that a set of principles called supply chain ethics was born. Consumers and investors are invested in 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 the impact on the environment.

What Are the 5 Elements of Supply Chain Management?

Supply chain management has five key elements—planning, sourcing raw materials, manufacturing, delivery, and returns. The planning phase refers to developing an overall strategy for the supply chain, while the other four elements specialize in the key requirements for executing that plan. Companies must develop expertise in all five elements to have an efficient supply chain and avoid expensive bottlenecks.

What Element of the Marketing Mix Deals With Supply Chain Management?

Place is the marketing mix element that deals with supply chain management as it involves the processes that take goods and services from their raw beginnings to the ultimate destination—the customer.

Supply Chain Management (SCM): How It Works and Why It Is Important (2024)


What are the 4 main functions of SCM? ›

The five functions of supply chain management include the following:
  • Purchasing. The first function of supply chain management is purchasing. ...
  • Operations. ...
  • Logistics. ...
  • Resource Management. ...
  • Information Workflow.
Feb 4, 2021

What is SCM and how does it work? ›

At the most fundamental level, supply chain management (SCM) is management of the flow of goods, data, and finances related to a product or service, from the procurement of raw materials to the delivery of the product at its final destination.

What is the main purpose of SCM? ›

The goal of supply chain management is to provide customers with the right bundle of time, place, form, and possession utilities. Meeting this goal efficiently, effectively, and sustainably is a challenge. Managers employ a variety of approaches to maximize capabilities and create network synergies.

Why is it important to study SCM? ›

Why is supply chain management important? Supply chain management is regional, national and global – it is everywhere. Without it, the wheels of industry and the economy would grind to a halt. Many aspects of our day-to-day lives depend on the ability to manage supply chains successfully within a global economy.

What are the three 3 main goals of SCM? ›

Here are the three main goals, explained.
  • Improving Efficiency. Efficiency refers to the minimization of waste. ...
  • Improving Quality. Reducing waste isn't the only goal of supply chain management. ...
  • Improving Stability. ...
  • Summary.
Jul 28, 2020

What are the benefits of SCM? ›

Important benefits of supply chain management
  • Better collaboration with suppliers.
  • Better quality control.
  • Shipping optimisation.
  • Reduced inventory and overhead costs.
  • Improved risk mitigation.
  • Stronger cash flow.
  • A more agile business.
  • Better visibility and data analytics.
Jan 26, 2022

How supply chain process works? ›

The Key Steps in a Supply Chain

Refining or manufacturing materials into basic parts. Assembling basic parts into finished products. Selling finished products to end users. Delivering finished products to end users or consumers.

What is an example of SCM? ›

Example of SCM

The most basic version of a supply chain includes a company, its suppliers and the customers of that company. An example would be: raw material producer, manufacturer, distributor, retailer and retail customer.

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