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.