What Is Supply Chain Management, and Why Is It Important?

When COVID-19 began to spread in 2020, many factories and businesses shut down, impacting the global supply chain. According to Axios, 75% of U.S. companies saw their supply chains disrupted early in the pandemic.

The pandemic also caused one-fourth of companies to experience a 50% drop in sales, according to the World Bank. Approximately 1.4 million manufacturing jobs in the U.S. were lost early in the pandemic, according to the National Association of Manufacturers.

Geopolitical issues such as the U.S.-China trade war added to the disruptive forces affecting the global supply chain.

What is supply chain management, and why is it important? Supply chain management is the overseeing of the flow of goods and services from raw materials to final products. It includes all the processes involved in getting products to customers, such as shipping.

As the global economy recovers, demand and supply continue to be at odds with each other. Take, for example, the more than 80 container ships that were waiting to be offloaded outside California ports in mid-November 2021 as the holiday shopping season began, according to a Bloomberg report. This logjam provides a visible example of the importance of effective supply chain management.

Supply chain management keeps the mechanisms of supply and demand operating smoothly so that people have access to goods and services. From sustenance and shelter to the way we work and entertain ourselves, a well-oiled supply chain is critical for maintaining economic stability and a functioning society.

What Is Supply Chain Management?

Supply chain management is the handling of the entire process of turning raw materials into a final product. Without the supply chain, we would not have access to food and health products, or the items that allow us to work, travel and entertain ourselves. Supply chain management involves a network of suppliers connected via a centralized management process. Each supplier acts as a link that moves a product along a chain of production, from raw material suppliers to manufacturers to retailers.

In the past, the supply chain management beginning-to-end model was mostly rigid — every link in the chain was touched in consecutive order to get a product from raw materials to the consumer. But lessons from the recent disruptions highlight the importance of flexibility in the supply chain management process.

What supply chain management is today is largely a result of market evolutions, digital transformations, and changing consumer preferences. Here are a few examples:

Different ways to buy. Consumers have many choices when purchasing products. They can buy products in physical stores or online, for example.
Climate-conscious consumers. Consumers have become more aware of how products are manufactured. They want to know about products that are climate-friendly. This affects the initial stages of the supply chain, where manufacturers need to incorporate sustainable practices and sourcing in their operations.
Evolving trade policies. When a manufacturer is unable to get raw materials from one supplier because of a trade policy, it must be able to adapt quickly and pivot to a new source for its raw materials.

Role of Supply Chain Management

Supply chain management sets the foundation for economic growth by enabling the exchange of goods between businesses and consumers. The important role of supply chain management and its impact on economic growth is possible because of the entities involved in the supply chain, which include the following:

Materials processors. This includes companies that process raw materials, such as metal, rubber, and wood, from natural resources.
Manufacturers/producers. These are the companies that create the products available for sale, turning raw materials into products for consumer use. Not all supply chains produce physical products. For example, in the energy sector, energy producers use raw materials, such as coal, to produce a form of energy for consumption.
Vendors. Also known as sellers, vendors sell products to the next link in the supply chain. Manufacturers can also be vendors.
Warehouses. Once the products are sold, they need to be stored. Warehouses are often located in major hubs where those involved in the next link in the supply chain can acquire them and ship them to distribution centers.
Transportation companies. Examples of transportation companies include freighter, container ship and trucking companies. At this point in the supply chain, the products arrive at another site with one purpose: to distribute the product to retailers.
Distribution centers. Distribution centers are regional facilities that house the products to be redistributed to retailers, wholesalers, and, sometimes, directly to consumers. A distribution center can include refrigeration facilities to preserve perishable products.
Retailers. At the tail end of the supply chain are the retailers who sell products directly to consumers in shopping centers, stores, and online.

In considering what supply chain management is and why it is important, it is useful to highlight other business functions that impact or are affected by the supply chain.

Product development. This is the process of introducing and bringing products to the market. It can also involve updating or renewing an existing product. Product development hinges on the materials available to make a product and the ingenuity of individuals to design, engineer and determine the purpose and function of a product.
Marketing. It is often said that a good product sells itself. In reality, organizations must try to stimulate demand for their goods. This is where marketing comes in. Marketing strategies include advertising and promotion, packaging, pricing, product placement, distribution, and target audience selection.
Operations. A key aim of operations managers is to ensure the inner workings of a business run efficiently to maximize productivity and reduce costs.
Distribution. This function is often considered part of the marketing mix. It describes the process of making products available to end-users in business and consumer markets, whether through direct or indirect distributors.
Finance. This area works with departments like sales to set revenue goals, acquire money or capital and decide how to spend and invest.
Customer service. This function plays a critical role in how an organization is perceived by its customers. The aim of customer service is to serve customers throughout the buying life cycle, from providing information that may help customers make informed decisions to supporting customer inquiries and troubleshooting customer problems.

Why Is Supply Chain Management Important?

Modern supply chains help improve living standards by enabling consumers to buy essential products at lower costs. This is because an effective supply chain streamlines the process of getting products to market, and ultimately to consumers.

Some key reasons why supply chain management is important to include:

Basic life necessities. Through supply chain management, individuals access necessities such as food and clothing, as well as life-saving medicines and health care products.
Power and light. People use electrical energy for homes and businesses for light, heat, and air conditioning. The energy supply chain involves the transformation of raw materials into usable energy and uses supply chain management principles to bring energy resources to consumers.
Infrastructure. Interstate highway systems, railroads, ports, and airports facilitate the exchange of goods between businesses and consumers.
Jobs. Supply chain management plays a critical role in job creation. Supply chain professionals work in areas such as transportation, warehousing, inventory management, packaging and logistics information.

When considering why supply chain management is important, it’s worth noting the potential repercussions of an ineffective supply chain. For example, a lack of raw materials can result in a manufacturer not having the resources to create a product that is in high demand. A scarcity of that product can result in abrupt price hikes, impacting consumers.

Disruption of the Pandemic

The pandemic played a major role in disrupting the current supply chain in several ways. For example, many factories in low-cost manufacturing hubs in Southeast Asian countries such as Vietnam, Indonesia, and Malaysia shut down or slowed production, hitting global companies hard financially.

A disruption at any point in the supply chain can create problems for everyone. Here’s an example of a chain of events due to the disruptions caused by the pandemic:

Millions of Americans, nearly all at once, stayed in their homes due to the lockdowns.
Many of them placed orders for goods, such as desks for homebound children learning remotely and furniture for home offices.
These materials are mostly imported from Asian countries, which faced deadly variants and many
This led to some factory shutdowns, which hit retailers hard because supply was not available to meet the demand.
Factories that remained in operation often reduced their activity, contributing to tighter supply and increased prices for raw materials.
When the price of raw materials went up, the cost of products increased.

In some cases, product prices rose abruptly. Food prices were affected as well. Prices for meat, poultry, fish, and eggs went up 10.5% for the year ending in September 2021, according to data from the U.S. Bureau of Labor Statistics (BLS).

As global markets recover, demand is increasing while manufacturing is still limited, creating a mismatch in the equilibrium between supply and demand. In economic theory, this is known as the scarcity principle.

Geopolitical Factors

Geopolitical forces can tighten the supply of global commodities, creating artificial disruptions in the supply chain. Recently, sanctions and the crackdown on supplying microchips to Chinese companies have disrupted the global semiconductor industry. In a world heavily reliant on technology, the global shortage means limited access to components that run our devices, computers, and electronics. Carmakers have also reported declines in sales due to problems in the global supply chain, including microchip shortages.

Another aspect of geopolitics that affects supply chain management is taxation and documentation at ports. Every country has different rules, regulations, and laws that can often change. This means that exporters and importers must be in tune with the changes to ensure their products make it to their intended destinations. Missing important documentation can mean that a shipment of products may sit at a port indefinitely, creating financial losses for businesses.

Role of Information Systems in Supply Chain Management

Supply chain management has many moving parts, requiring systems and tools that help streamline processes, improve efficiency and strengthen accuracy. The role of information systems in supply chain management is to help businesses manage supply chains through scheduling, sourcing, supplier management, and data analytics.

These systems help organizations oversee the key elements of the supply chain, from resource development to logistics. They can help organizations keep track of different participants in the supply chain, including suppliers, warehouses, transport companies, retailers, manufacturers, and customers.

The primary role of information systems in supply chain management is to ensure businesses have access to the information they need to make the right business decisions. For example, operational visibility allows companies to assess fluctuations and anomalies in their business. By leveraging data in their internal systems (and public data), businesses can act intelligently on identifying and solving supply chain issues before they become big problems.

Information systems can also improve decision-making throughout the supply chain process by helping decision-makers to:

Be aware of what’s happening at key touchpoints in the supply chain management process (operational visibility)
Analyze information through visual dashboards and easy-to-understand data using analytics and emerging technologies (for example, machine learning)
Find opportunities to improve the performance of the supply chain, which can lead to improved profitability and better customer experiences

Role of Finance in Supply Chain Management

The role of finance in supply chain management is vital. Finance and accounting functions bring stability and flexibility to supply chain management by helping suppliers and buyers in the following ways:

Ensuring payment predictability and transparency. Using financial and accounting principles, organizations ensure a business has strong working capital and meets regulations and tax requirements.
Extending payment terms. By offering flexible payment terms for items, finance departments at suppliers can help buyers optimize their cash flows, helping to strengthen the buyer-supplier relationship.
Ensuring that taxes are Indirect taxation can be a complex process — tax is paid by different entities throughout the supply chain process. The taxes paid are reflected in the final cost of the product, but it is invisible to the customer thanks to finance’s involvement in the process.
Decreasing Finance can play a key role in developing strategies that help other functions, such as customer service, to meet customers goals at the least total cost possible.
Improving Firms rely on the role of finance in the supply chain to help control and reduce costs, resulting in opportunities to improve margins.

The role of finance in supply chain management is evolving to help organizations explore supply chain opportunities. This includes using advanced technology that shares financial and transaction data. This visibility into financial data across all entities in a supply chain can help in the creation of sophisticated financing programs focused on optimizing the balance sheet requirements and liquidity of all entities involved in the supply chain.

Finance also collaborates with other functions in an organization, including legal, marketing, information technology and operations, to enhance operational value and minimize risk.

Prepare for a Career in Supply Chain Management

Every step of the global supply chain is interconnected, and everyone involved — from producer to supplier to consumer — plays a pivotal role.

Supply chain management is vital to society, providing the mechanism for getting products into the hands of consumers, from essential staples such as food and medicine to luxury items.

In business, supply chain management allows manufacturers to make as many products as needed to meet market demand. It helps retailers reduce excess inventory and lower the cost of storing products. The success of sales and marketing relies on effective supply chain models that help ensure that the right quality product is available at the right place and at the right time.

For individuals interested in working in supply chain management, an advanced degree in business, such as an online MBA, can help them launch their careers. The Online Master of Business Administration from the University of Maryland’s Robert H. Smith School of Business prepares students to identify, evaluate and mitigate risk; improve efficiencies; and utilize cutting-edge supply chain technology applications.

Learn how the University of Maryland’s Online MBA program and its Supply Chain Management specialization, with courses including Global Trade Logistics and Innovative Solutions to Supply Chain Challenges, can help you pursue your career goals and become a leader in the field.