Supply chain management is the management of three supply chain flows for the purpose of maximizing customer value, minimizing the total cost of the chain, and delivering products as quickly as possible. It is realized by optimizing, adjusting, or redesigning supply chain.
What are Supply Chain and Supply Chain Flows Process?
Simply, the supply chain is a chain that provides value to customers. In the traditional sales & marketing concept, it refers to the path of commodity flows. However, a typical supply chain involves three main flows: product flow, information flow and financial flow.
These three flows move up and down in the supply chain. The flow of physical goods and related information move down through the chain, and the money moves up in the chain.
For example, if you want to drink orange juice, as a supplier, I may do several following steps to close the deal with you.
- Go to the orchard to buy an orange
- Go to the juicer factory to squeeze the orange into juice
- Buy a bottle to put orange juice in
- Deliver the juice to you by an Express
- Ask you to make the payment and receive your funds
This entire chain is called the supply chain.
1. Product Flow
Also known as logistical flow, it is the physical flow of goods, from upstream to downstream. For example, goods from the exporter to the importer, then distributor and retailer, finally to the end user; or directly from the exporter to the end user.
Product Flow Example
The above flow of orange from the orchard to my hand, the flow from my hand to the juice extraction factory, the flow of orange juice to your hand through Express, all the processes materials involved are products flow.
2. Information Flow
It is how and where each role in the supply chain obtains product-related information, and it flows from upstream to downstream. For example, in the past, the downstream could only obtain information from their direct upstream, but with the development of the Internet, end users can find product information on the manufacturer’s website.
Information Flow Example
You tell me that you want to drink orange juice, I tell the orchard that I need orange, I tell the juicer that I need to squeeze juice, I tell Express that I need to express something. These are the flows of information.
3. Financial Flow
The way payment is made and how the funds flow in the channel. For example, since end users can find information on the manufacturer’s website, this gives them the possibility to directly place an order and pay to the manufacturer through the website, instead of paying only to direct upstream as in the past.
Financial Flow Example
I pay the orchard, the juice factory, the bottle merchant, and Express. You pay me when receiving the juice. These are the flow of funds.
Examples of Supply Chain Management
Supply chain management is not something that many people think is far away from our life, nor is it the job of the purchaser. It is the thinking of the actual operator of an enterprise on the business model, and continuous improvement of effectiveness and efficiency.
Examples of Supply Chain Management in Product Flow
1#. If you still want to drink orange juice for the second time, I wondered if the efficiency of going to the orchard to buy oranges and then sending the oranges to juicing was too low, so I asked the orchard if the oranges could be sent directly to the juicer, and the juicer plant would then send them to you directly.
2#. If you want to drink orange juice for the third time, I will ask you if you want to drink it every day. If so, I will go to the orchard and order hundreds of oranges at one time, which can produce a scale effect and reduce the total cost.
3#. If you want to get orange juice every time you want to drink it, so I rent a small warehouse near your home. Every time you want to drink it, you call me and the juice will be delivered in 5 minutes. The purpose is to improve the delivery speed.
4#. After you drink it a few times, you find it delicious and recommend it to many friends. The juice extraction factory is too busy, so I build a juice extraction factory by myself to ensure production efficiency.
What is Supply Chain Management?
Based on the above, we can know that the supply chain management is actually a design of how the product reaches the end user, whether the direct customer is B2B customers or B2C customers, whether the supply chain is long or short, how the logistics occur, where the information is disclosed, and how the funds flow, these flows all belong to the content of supply chain management.
Why is Supply Chain Management Important?
All competition is the competition of the supply chain. For example, why do most people think the price of the factory is lower than that of the trading company?
It is in a manufacturing firm’s supply chain: raw materials – factory; while the supply chain behind the trading company is: raw materials – factory – trading company. The longer the chain, the higher may the price.
Once you have a supply chain mindset (not just when you see direct customers), many questions that have been puzzled in the past may be answered immediately, such as: “Why do customers say that our prices are high?”
From the perspective of the supply chain, it is likely to be determined by the customer’s role in the supply chain.
1#. Price Competition Example
For example, suppose that the retail price of your product is 150 USD, supply chain A has manufacturer (you), importer, distributor, and retailer; but supply chain B has only manufacturer (you) and retailers. In theory, A may require a lower price than B from you. After all, the longer the supply chain, the more profit kept in the chain.
Also, sometimes the price competition is not only the competition between you and your competitors, but also the competition between your and your competitors’ supply chain flows.
For example, your price is 50USD, and the price of competitors is 60USD, does this mean that you are more competitive than your competitors?
Not sure. If your supply chain is longer than those of your competitors, will resulting in higher final prices in the retail selling, end users will gradually lose over time and ultimately affect your sales.
2#. E-commerce Business VS Traditional Business Example
The fast growth of e-commerce business is also due to the fact that e-commerce has changed the way and cost of product flow, information flow and financial flow in the supply chain.
For example, in a traditional supply chain, merchants must open a physical store to be able to display their information to consumers, and consumers must also go to a physical store to make payments and then take products.
However, in an e-commerce supply chain, merchants can use the Internet to display information to consumers, and consumers no longer have to spend time and energy in physical stores to pay and pick up the goods.
The cost saved in the chain is a supply chain dividend and distributed to merchants and consumers.
From this perspective, we can easily understand why some e-commerce companies begin to build physical store networks later, because online information costs have become more expensive.
Supply Chain Management in Your Sales Work
Does it mean that the shorter the supply chain, the better and the more competitive? For example, your company may let you work hard to develop the customer’s downstream. There is another item to consider: transaction cost.
Transaction cost, proposed by Ronald Coase, refers to the cost we need to pay in order to conclude a transaction, including:
- Searching for information Cost
- Negotiation and decision-making Cost
- Contracting Cost
- Monitoring Costs
- Enforcement Cost
- Conversion Cost
For example, we will spend 20,000 USD to book a booth to participate in an exhibition, which is the transaction cost of obtaining customer information.
A shorter supply chain may mean higher profits, but often also means higher transaction costs. The high transaction cost mentioned here is not the transaction cost of a single customer, but maybe the transaction cost of all customers.
Supply Chain Management of B2B customer and B2C customer
For example, you may cost 2,000 USD to develop a B2B customer, but you may achieve your sales goal if you can develop 5 B2B customers throughout the year.
For example, it may only cost 20 USD to develop a B2C customer, but you may need to develop 500 B2C customers throughout the year to get the same sales volume.
This is just the cost of searching for information in transaction costs.
What about in-sale and after-sales? To follow up with 5 B2B customers, you may only need one salesperson. While you may need three salespeople to follow up with 500 B2C customers.
Furthermore, the after-sales service of the products is borne by the B2B customers; while the after-sales service (e.g. complaints, repairs or replacement) of the B2C customers can only be undertaken by yourself.
Long Supply Chain or Short Supply Chain?
So there are two points to determine whether you are going to be a long supply chain or a short supply chain: the first point is the comparison of transaction costs; the second point is the comparison of supply chain value.
Long Supply Chain Turns to Short Supply Chain due to Information Flow Changes
For traditional business in the past, the main reason that makes the supply chain long is the information is not easy to flow from upstream to downstream due to information asymmetry. For example, in the past, it was difficult for overseas customers to find manufacturers in China, so many trading companies came out.
But with the development of the Internet, and the establishment of online & offline platforms, the asymmetry of information has greatly reduced. The length of the supply chain will inevitably be shortened because their value has been replaced.
Not Rely on information flow to Make Money
However, not all upstream vendors rely on information flow to make money.
For example, some trading companies not only buy products from manufacturers and resell to the customers. They empower the products with their design capabilities, although their existence will increase the customer’s procurement cost, but at the same time, it also creates value to customers. As long as the value of this part is greater than the customer’s purchase cost.
In summary, the supply chain is not as short as possible. The concept of blindly contacting the customer’s downstream and striving to do business directly with them may not be scientific.
How to Choose the Supply Chain that Suits You?
Choosing customers is actually equivalent to choosing a supply chain. Different companies can serve different customers due to their business model.
For example, everyone always wants to reduce the length of the supply chain to directly cooperate with retailers, but there is only a small part of the companies that have the ability to cooperate with retailers, because they have several rigid requirements:
- Quick response. For example, place an order today and deliver it in 15 days.
- Longer payment term. For example, up to OA 120 or even 180 days.
- Delivery on time. For example, if the delivery is delayed by one day, one day’s payment will be deducted.
- Undertake after-sales. For example, the after-sales service of all product problems is borne by the upstream.
Most ordinary manufacturing companies cannot meet these conditions, but some middlemen can, and this is the value that middlemen exist.
Therefore, to define your own ideal customer profile and only serve the customers you are best at is the best way to maximize your channel competitiveness.
It is what your target customer “looks like”, including but not limited to: which channel they come in, sell in which supply chain in the market, how big the company is, what is the value perception, what is the purchasing preference, and how much sales volume every year, brand positioning…etc.
As long as you define the customer profile, you can determine which supply chain you should focus on. When you meet a customer, you can know “This is the customer you want or not.” quickly.
How to Define the Customer Profile?
We can use the “inductive method” and “deductive method”. Through these two methods, you may be clear:
- what kind of customers can cooperate with you
- what kind of customers will be easier to trust you
- what kind of customers should be your target customers
Therefore, your customer profile will roughly come out after this process. Meanwhile, you’ll know what kind of supply chain is more suitable for you.
The first step is to list all the customers that you have been working with you, starting from their history, scale, business model, decision maker background, purchasing preferences, sales channels, information sources and other dimensions, and write them one by one, so as to find the similarities among different customers.
This is an induction method, focusing on solving the problem of “why customers buy from us”, and looking for common reasons between different customers, whether it is because of your low price, good service, advanced technology, or superior design. etc.
The second step is to list all the customers who have entered a certain sales funnel (for example, all the customers who have reached the customer approval stage), and seek the similarities among them, just like the first step.
This step is still inductive. The focus is to sort out “what kind of customers can reach this stage” and “the reasons for reaching this stage but finally cannot move forward.”
The third step, according to the conclusions of the first and second steps, to verify all customers entering the sales funnel (e.g. business opportunity stage). In this step, the deductive method is used.
For example, if we draw a conclusion through the first two steps of induction: among all the customers who have made a deal and customers who have moved to a certain sales process, the majority of them are not sensitive to prices, and pay more attention to the design of the product.
So does this mean that product design-oriented customers should be our target customers? Will it be easier for us to develop such target customers? When new customers entering the sales funnel, using these conclusions to match and see if it is suitable.
Supply Chain Design
After all, in a specific market, you may not have only one customer, nor may you have only one supply chain.
Most traditional companies only see the customers but not the supply chain, and only have the awareness of selling goods but lack of supply chain design thinking, so they are often easy to cause supply chain conflicts.
Supply Chain Design Example
You have customer A and customer B in a market, A is an offline distributor and B is an online seller. It seems that they both are not very relevant at the first glance. However, B’s online promotion also covers the customers where A is located, so these two customers will have channel conflict.
For example, if you were a factory, customer C buys 2 million USD from you a year, while customer D is smaller, which buys 300,000 USD from you a year.
You offer the price to D 5% higher than that of C. This is normal from the perspective of the factory due to the different purchasing volume.
However, due to the large scale of C, the cost is also high, and therefore its market price to end users is higher than that of D, which seriously affects the sales of C in the city where D is located.
Given the above, traditional companies are afraid of channel conflicts, and as a result, only develop one customer in a large market, which in turn causes a waste of the supply chain.
How to solve it?
Four Dimensional Business Thinking
The only way is to go out and look at things besides the customer. For example, visit the customer’s customer, the customer’s competitors, or the competitors’ customer, so that you can draw a supply chain map.
You may clear:
- who the customer is
- who the customer’s customer is
- who the customer’s competitor is
- which areas the customer cannot currently cover or sell to
- and whether it is possible for you to open a new market
Otherwise, you may only know the market from the mouth of customers. He tells you that the market requires lower prices and you have to decrease prices. He tells you that the market is very competitive and you have to believe it.
This is actually a four dimensional business thinking, which can help you from interval to square, cube to time.
One Dimensional Thinking
May only see a single factor, such as price, quality, technology, style, etc., this is an interval.
Two Dimensional Thinking
Begin to see a whole project, for example, not only rely on the price, but also the payment term to get the order, this is the square.
Three Dimensional Thinking
Begin to see the overall situation, including the market and the supply chain, consider the existence of competitors, and know the comparative advantages and disadvantages between you and them; realize customers expectation, the needs of customers and the market, and so on.
Four Dimensional Thinking
Begin to notice the dynamics, we will start to deduce changes, and predict what kind of impact the actions I am doing today will have on the market, customers, and competitors, and what measures we should take.
When we can do this, we can design a corresponding supply chain network for each market.
In order to achieve this step, sales must go out, and must visit customers and the market, instead of sitting at the office, relying on exhibitions and B2B platforms, not let yourself gradually become a customer service robot with one question and one answer.
Supply chain management (SCM) is important to your business. The change and innovation of product flow + information flow + financial flow basically determine the change and innovation of the supply chain.
Featured Image Source: https://kpakpakpa.com/spotlight/the-three-flows-of-supply-chain