Supply Chain Management

Supply chain management (SCM) concentrates on the production side of ERP. It begins with logistics (purchasing and receiving components), through manufacturing configuration, and into distribution of the products.

The key to understanding the value of SCM is to go back in time again to see how manufacturing evolved. From the 1920s through the 1970s, companies in many industries recognized the importance of economies of scale or mass production.

The automobile industry presents the classic example. Producing thousands of identical cars enables the company to spread the huge fixed costs across a large base—leading to lower average costs. The huge scale enabled the car companies to negotiate better prices with suppliers and dealers, reducing costs even further. So, in the name of lower costs, the companies produced thousands to millions of identical items. They relied on the marketing departments for two critical purposes: (1) forecast consumer preferences in advance, and (2) convince consumers

they need the products that were built. So, the car salesperson says, “Sure, we could order a car for you, but it will cost more and take months. You would really be happier with this car and you can drive it home today.”

Of course, mass production has the potential for mass disaster. If you predict incorrectly, or cannot convince customers to buy the existing product, you end up dumping the products at sale prices. Remember that you have to clear the way for next year’s models. More critically, mass production means that it is impossible to

please all of the consumers—leaving a niche open for your competitors. A niche in the small-car market enabled Toyota to become one of the largest producers in the world.

So how does SCM help? It can change the entire system. Mass production begins at the supply side and builds products as cheaply as possible to eventually sell to

consumers. With a truly integrated supply chain, it is possible to start with the customers.

The marketing department identifies exactly what each customer wants. The customized orders are entered into the system, and the engineering department evaluates the order, makes design changes as needed, and schedules production. Manufacturing knows each desired production date and organizes products to minimize production costs. Component orders are placed with suppliers electronically.

On the day of production, as components arrive, they are scanned into the system and routed to the appropriate location. At the same time, payments are scheduled with the banks. As the parts arrive at each machine, the central process controller configures each machine correctly as the product moves through the assemblyline. At the end of the production line, the product is labeled and shipped to the appropriate customer. The customer can be notified electronically and billed automatically.

Imagine how much easier it is to be in marketing now. Instead of convincing customers to buy what you have produced, you first find out exactly what they want, and that is what you sell them. It is not quite that simple, but at heart, that is the principle. Mass customization is the process of manufacturing products designed for specific consumers but using mass-production techniques to keep costs

low. It can be done only if you have an integrated system.