Supply Chain Modeling: Types, Models and Best Practices

supply chain business model example

Supply chain modeling is a process used to evaluate and optimize the flow of goods, information and money in a supply chain. It can be used to find bottlenecks, optimize transportation routes and identify opportunities for cost savings. There are different types of supply chain models, each with its advantages and disadvantages. The most popular models are the bullwhip effect, the Beer Game and the newsvendor model. This blog post will explore each of these models and explore some of the best practices for supply chain modelling.

What Is Supply Chain Modeling?

Supply chain modeling is designing and analyzing a supply chain to identify potential improvements. A supply chain model can be used to simulate different scenarios to determine the most efficient or practical course of action.

There are many supply chain models, including static, dynamic, and Monte Carlo simulation models. The most appropriate model for a particular situation depends on the certain goals and constraints of the business.

Some of the benefits of supply chain modelling include:

  • Reduced costs
  • Increased efficiency
  • Improved customer satisfaction

To learn more about supply chain modeling, check out our course Advanced Certificate in Operations, Supply Chain and Project Management to learn more about supply chain management.

What Are The 8 Major Components of Supply Chain Modeling?

  • Inventory: This is the most critical component of supply cha in modeling as it directly affects the bottom line.
  • Transportation : This includes all modes of transportation such as road, rail, air and water.
  • Warehousing: This is important for finished goods as well as raw materials. It includes storage, retrieval and packaging.
  • Manufacturing: This converts raw materials into finished products. It includes processes like assembly, testing and quality control.
  • Procurement: This involves sourcing raw materials and components from suppliers. It also includes contract negotiation and management.
  • Distribution: This covers the delivery of finished products to customers through wholesalers, retailers or direct sales channels.
  • Customer Service: This comprises activities like order taking, invoicing, returns processing and after-sales service.
  • Information Technology: IT is critical in all aspects of supply chain management, from planning to execution.

What is The Significance of Supply Chain Modeling?

In any business, supply chain management aims to minimize costs while maximizing customer service. To accomplish this, managers must plan and control the flow of materials, information and money across the entire supply chain—from suppliers to manufacturers to wholesalers to retailers to customers.

Supply chain modeling is a tool to help managers make better decisions about how to run their supply chains. By creating a model of the supply chain, managers can experiment with different scenarios and see what effect they would have on costs and customer service.

There are many different types of models for supply chain modeling. The most popular type is the linear programming model, a mathematical model that helps managers find the best way to distribute resources to achieve specific objectives. Other types of models include simulation models, queuing models and statistical models.

The best way to choose a model is first to identify the specific problem you are trying to solve. Once you know what you want to optimize, you can select the type of model that will best help you find a solution.

Types of Supply Chain Models

The Continuous Model

A supply chain is defined as a system of facilities and distribution options that receives goods from suppliers and delivers products to customers. The main objective of supply chain managemen t (SCM) is to minimize the total cost of ownership while maximizing the customer service level. 

The continuous model is a type of supply chain in which materials flow continuously and constantly through the production process. This type of supply chain is often used in manufacturing industries with a high demand for products and a need for consistent output. 

One advantage of the continuous model is that it allows for just-in-time production, which can save on inventory costs. This type of production also eliminates waste, as materials are only produced when needed. A disadvantage of this model is that it can be challenging to change or adapt the production process if there is a sudden change in demand. 

If you are considering using the continuous model for your business, it is essential to weigh the advantages and disadvantages to see if this type of supply chain is right for you.

The Fast Model

The Fast Model is a supply chain model designed to help businesses make decisions quickly. This model is based on the principle that the faster a business can make decisions, the better off it will be. The Fast Model is designed to help companies to make decisions about inventory, production, and other aspects of their operations.

Also Read: What Is The Scope Of Operations Management?

The Inventory Model

In business, the term “supply chain” is about transforming raw materials into finished goods and then getting those finished goods into the hands of the customer. The supply chain encompasses everything from the sourcing of raw materials to the manufacturing of products to the distribution and delivery of those products.

There are various inventory supply chain models that businesses can use, depending on their specific needs and goals. The three most common types of supply chain models are make-to-stock (MTS), make-to-order (MTO), and assemble-to-order (ATO).

The make-to-stock (MTS) model is the most common type of supply chain. In this model, finished goods are manufactured and stocked in anticipation of customer demand. When a customer orders, the finished product is simply pulled off the shelf and shipped out. This type of model is often used for fast-moving consumer goods (FMCG) like food and beverages, where customer demand is relatively easy to predict.

The make-to-order (MTO) model is similar to MTS, but businesses only stock raw materials or components instead of finished stocking goods. When a customer places an order, the necessary components are pulled from inventory and assembled into a finished product before being shipped out. This type of model is often used for customized products or products with a long lead time, like furniture or big-ticket items.

The Custom-Configured

A custom-configured supply chain model is designed specifically for a company’s individual needs. This type of model takes into account the specific products, services, and materials that a company uses, as well as the unique way in which its supply chain operates. Custom-configured models are often used by companies with very complex or unique supply chains, such as the automotive or aerospace industries.

There are several benefits to using a custom-configured supply chain model:

  • It ensures that a company’s supply chain is optimized specifically for its products and processes.
  • It allows a company to take into account changes in its business environment, such as new legislation or market conditions.
  • Custom-configured models can be adapted over time to reflect changes in a company’s business model or operations.

The downside of custom-configured models is that they can be very expensive and time-consuming to develop. In addition, they require close collaboration between the modeling team and the company’s decision-makers to succeed.

The Flexible Model

The Flexible Model is a type of supply chain model designed to adapt to changing conditions. This model focuses on flexibility in all aspects of the supply chain, from manufacturing to distribution. The Flexible Model aims to provide a greater level of customer service while still being able to respond quickly to changes in demand.

Many businesses use the Flexible Model as their primary supply chain model. The Flexible Model allows businesses to keep inventory levels low, which can reduce costs and increase profits. This model is especially popular in industries where demand can change rapidly, such as the fashion industry.

The biggest advantage of the Flexible Model is its ability to adapt to changing conditions. This flexibility can help businesses avoid stockouts and disruptions in the supply chain. The Flexible Model can also help companies to save money by reducing the need for safety stock.

There are some challenges associated with using the Flexible Model as your primary supply chain model:

  • This model requires close coordination between all supply chain members. This can be difficult to achieve, especially if your suppliers are worldwide.
  • This model can be expensive to implement since it requires more resources and infrastructure than other models.
  • The Flexible Model may not be suitable for all types of products or businesses; for example, it may not work well for products with long lead times or high levels of customization.

What Are The Best Practices For Supply Chain Modeling?

The best practices for supply chain modeling vary depending on the specific model being used. However, some general best practices apply to all models.

When creating a supply chain model, it is essential first to understand the specific needs of the business and what they hope to achieve with the model. Once this is understood, the next step is to choose the appropriate modelling approach and technique.

After the model has been created, it is important to validate it against accurate data. This will help ensure that the model accurately represents the reality of the business’s supply chain.

Finally, once the model has been validated, it should be used to test different scenarios and “what if” situations. This will help businesses make better decisions about their supply chain in the future.

What Are The Challenges of Supply Chain Modeling?

The main challenge associated with supply chain modeling is the complexity of the relationships between the various supply chain elements. For example, a change in one element (such as production) can have a ripple effect in the supply chain, affecting other aspects, such as transportation and inventory.

Another challenge is that the data used to build models is often imperfect or incomplete. This can make it challenging to accurately capture all relevant relationships between different supply chain elements. Additionally, real-world data can be noisy and may contain outliers that can throw off results.

Finally, another challenge is that multiple objectives often need to be optimized when designing a supply chain (e.g., minimizing cost while maximizing customer satisfaction). Finding an optimal solution that meets all objectives can make it challenging.

Also Read: How to formulate Advanced Supply Chain Strategy?

How To Become A Supply Chain Manager?

There is no one-size-fits-all answer; the best way to become a supply chain manager may vary depending on your prior experience and education. However, there are some basic steps that you can take to increase your chances of becoming a successful supply chain manager.

  • Firstly, it is essential to gain experience in the field of supply chain management. This can be done through working in a relevant position within a company or by completing an internship or traineeship program.
  • Secondly, earning a degree in SCM or a related field, such as business management or logistics, is helpful. While not required, having an advanced degree may give you an edge over other candidates when applying for jobs.
  • Thirdly, consider obtaining professional certification through reputed organizations. This will give you an upper edge in the competition. These credentials can demonstrate your commitment to professional development and provide employers with evidence of your knowledge and skill set.
  • Finally, networking is another critical component of becoming a successful supply chain manager. Attend industry events and connect with other professionals through online forums and social media platforms like LinkedIn to make valuable contacts who can help you further your knowledge.

Modeling your supply chain is a critical part of running a successful business. The type of model you use will depend on the specific needs of your business, but there are some best practices that all companies should follow. By understanding the different types of models and how to implement them best, you can ensure that your supply chain is as efficient and effective as possible.

Supply chain management is indeed a flourishing field, and starting a career in the field would be the best decision. Whether you want to fine-tune your skills as a professional or start as a fresher in the industry, we have a course that will just into your requirements. Check out our Advanced Certificate in Operations, Supply Chain now to know more!

More Information:

What is Green Supply Chain? An Overview

Green Supply Chain Management: What It Is and Why It Matters?

What Is A Supply Chain Control Tower? Types & Uses

What Is Supply Chain Management And Why Is It Important?

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A Simpler Way to Modernize Your Supply Chain

  • David Simchi-Levi
  • Kris Timmermans

supply chain business model example

Conventional wisdom says it takes three to five years and tens of millions of dollars to digitize a corporation’s supply chain. However, a few companies have reaped major benefits—including higher revenue and customer retention—with a faster, cheaper approach. It involves assembling available data; using analytics to understand and predict customers’ and suppliers’ behavior and optimize inventory, production, and procurement; and adding automation to revamp or introduce processes. The transformation requires three main initiatives: replacing consensus forecasts with one unified view of demand, changing one-size-fits-all supply strategies to segmented ones, and creating a plan to continually balance supply and demand and manage deviations or disruptions.

How to spend less and accomplish more

Idea in Brief

The conventional wisdom.

Digitizing a company’s system for managing its supply chain is a megatransformation project that takes three to five years and costs tens of millions of dollars.

The Reality

There is an alternative: Substantial benefits can be reaped from a modernization effort that takes 12 to 24 months and costs a few million dollars.

What It Entails

Assembling readily available data; using advanced analytics to understand and predict customers’ and suppliers’ behavior and to optimize inventory, production, and procurement decision-making; and adding some automation to revamp existing processes and introduce new ones.

Most executives believe that digitizing a major corporation’s supply chain costs tens of millions of dollars. The assumption is that it will be a massive three- to five-year transformation effort—requiring major investments in cloud technology, the installation of RFID tags and readers on every product container and in every facility, the deployment of 3D-printing and robotics technologies, and new instruments on machines on the shop floor to monitor their performance and condition. All that is necessary, the thinking goes, to break down the walls between functional areas and create an integrated supply chain that provides a competitive advantage.

  • David Simchi-Levi is a professor of engineering systems at Massachusetts Institute of Technology and the head of the MIT Data Science Lab.
  • Kris Timmermans is a senior managing director at Accenture and the head of its supply chain and operations practice. Connect with him on LinkedIn .

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Supply Chain Management 101: Principles, Examples, and Templates

By Andy Marker | June 25, 2017 (updated February 22, 2022)

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Globalization has become an undeniable part of commerce over the last few decades, as large companies have grown first to source labor and parts from developing regions, and then to start selling in those same areas as they grew in wealth and buying power. Supply chains have had to keep in step, passing through numerous countries to obtain goods most efficiently and cost effectively, and growing more complex as a result. And on the other end, the supply chain grows more frayed in order to deliver to countless countries for consumption. For the largest companies, managing a supply chain can require dedicated teams in every area the chain touches. It’s safe to say that supply chain management is both an art and a science.   This article will cover what a supply chain is, with examples; discuss how supply chain management works and its principles; and vital concepts in the field. Then we’ll move on to current issues and where the field is going. Finally, you’ll find useful resources, templates, and education programs. Ready? Let’s get started.

What Is a Supply Chain?

A supply chain is a collection of suppliers required to create one specific product for a company. The chain is made up of nodes or “links,” which can include multiple manufacturers for parts, then the completed product, then the warehouse where it is stored, then its distribution centers, and finally, the store where a consumer can purchase it. The concept of the chain is important, because each link is connected in a specific direction and order, and the next link cannot be reached without going through the previous one. Each link adds time and costs, and can involve labor, parts, and transportation. Every product a company carries may have its own supply chain, though they may use certain suppliers for multiple products. You can see why this gets so complicated, especially for international supply chains.

The process described above was that of a typical retail supply chain. However, there are many different types in practice. Here are three examples from well-known masters of supply chains:    Example: Walmart and “Big Box” Retailers The “Big Box” store, which represents one of the major disruptions of the retail model from the last century, thrives on size, ubiquity, and well-planned supply chains to drive out the competition. How else would a company like Walmart make a profit on a t-shirt made overseas that retails for $5.00?   Walmart succeeds by having fewer links in its supply chain, and buying more generic goods directly from manufacturers, rather than from suppliers with brand names and markup. It uses “Vendor Managed Inventory” to mandate that manufacturers are responsible for managing products in warehouses owned by Walmart. The company is also is particularly choosy with suppliers, partnering only with those who can meet the quantity and frequency it demands with low prices, and with locations that limit transportation needs. They manage their supply chain like one firm, with all partners operating on the same communication network.    By buying at large enough quantities to take advantage of economies of scale, moving products directly from manufacturers to warehouses, and then delivering to stores which are large enough to be distribution centers, it reduces links in the supply chain and cost per item, translating to low prices for consumers. 

Walmart big box supply chain flowchart

Example: Amazon and “Ecommerce Platforms” Having overtaken Walmart as the world’s largest retailer in the last decade, Amazon’s “online big box” concept is a perfect example of unique supply chains. As an e-commerce shop, obviously they cut the retail store out and ship from distribution center to consumer’s homes directly. Where Amazon innovates is both in its supplier-side and its final supply chain link - delivery.    Just about anyone can sell things on Amazon because it’s a platform, not just a shop. As a result, Amazon has more things than any other online store, so when people shop online, they think of Amazon. Then, it produces everyday goods cheaply, and underbids suppliers. Next, their warehouses make serious use of automation to store items going to like destinations together, ready for immediate transport. Finally, its investments in delivery staff and technology make 2-day shipping a basic expectation, and even same-day delivery a possibility. Amazon ditches third-party logistics (3PL) and fulfills orders itself.

Amazon ecommerce platform supply chain flowchart

Example: Tesla and Specialized, Owned Chains Automotive manufacturing has come a long way since Henry Ford used assembly line manufacturing to speed up the production of a single car model in a single color. Now, in a time when even American carmakers are opening factories abroad, Tesla is making innovative, incredibly popular, and luxurious cars right in California, a location with incredibly costly real estate.   Rather than having a long supply chain of cheap part makers, they have a vertically integrated supply chain, with a full-service auto plant near its corporate headquarters and plans for a supplier park and a massive battery factory, and Tesla owns it all. Even more interesting is the digital supply chain the company promotes - new firmware and algorithm updates are pushed out to existing car owners over the cloud.

Tesla motors specialized own supply chain flowchart

What Is Supply Chain Management?

As the name implies, supply chain management (SCM) is handling and optimizing all the many complicated facets of a supply chain, involving goods and services. Even ensuring timely handoff from manufacturer to shipper to supplier to shipper to buyer is a massive task, but to do it cost effectively and build net value is truly a challenge.    Supply chain management is so important because modern commerce exists in a networked global economy. Most businesses are specialized - even department and big box stores are only really equipped to sell to customers, despite their wide variety of products. The value of vertical integration is hard to justify when communication costs and SCM tools are so inexpensive - it almost always makes more sense to outsource for price efficiency.

The concept of supply chain management was in effect long before the term was created in 1982. In the colonial era, international trade by ship was already making for complicated transportation issues and the need for efficiency. During the Industrial Revolution, the ability to quickly produce goods with machine assistance led to the need to manage significant inventory and constant consumption. By the time history arrives at Henry Ford’s famous assembly line for the world’s first car production in 1913, supply chain management had become an art.    As the century wore on, more companies were producing more goods and looking for ways to reduce costs. They vertically integrated into owned supply chains to try reducing costs at each stage. In the 1980s and on, globalization became a realistic dream for many companies, because of computer systems, easier communication, and commerce-friendly trade laws. Around the 1990s, it became a common practice for firms to specialize, and focus on core competencies and outsourcing the rest, abandoning the vertical integration of the previous era. At this point, supply chains became truly complex, in order to coordinate hundreds of otherwise unrelated and geographically-distant manufacturers, suppliers, shippers, warehousers, and retailers.    Now, in the “SCM 2.0” era, the Internet and new methodologies have led to collaborative platforms and democratized processes. This is allowing smaller competitors to use some of the same manufacturers as major players, and reducing inefficiencies for those manufacturers as a  result. Better communication and planning tools are providing a way for small and large companies alike to manage even more complex supply chains.

Variants of SCM

Global SCM: The combination of global manufacturing with supply chain management, which must account for tariffs and local taxes as goods and services travel internationally to ultimately provide greater value at the end of the chain.   SAP SCM: Systems, Applications, and Products (SAP) is a software company that revolutionized logistics and enterprise resource planning. It provides an automated way to manage supply chain networking, supply chain planning, and supply chain execution, along with production planning, business forecasting, and demand planning.   Logistics and SCM: The art of coordinating efforts between every member of the supply chain to get products from their source to the consumer.    Purchasing and SCM: The focus on the monetary aspect of SCM, from costs to value added at each link in the supply chain.

Principles of Good Supply Chain Strategy

Principles of supply chain management

‌ Download Supply Chain Management Checklist

The Basics of Supply Chain Management Processes

There are key supply chain processes that you must take into consideration to effectively understand and manage them. These processes are all at play regardless of the type of supply chain you’re using.   Customer relationship management (CRM) comes first, because as the principles of SCM state, you must adapt everything in the supply chain to the customer. If no one is buying, there’s no need to produce anything. At the front of your supply chain, where a store’s staff interacts with its consumers, they must have plans in place for ongoing relationships. They need CRM tools to gather customer information for marketing and market research, all to determine the products and services to offer in the future.   Customer service management is another process that ties in, as it is where you gather negative and positive feedback to determine future needs.   Demand management is closely linked with the previous two, as it takes customer interactions and orders into account to determine the workload all the way up the supply chain. At its core, customers buying more means make more, and customers buying less means make less. Customer forecasting is an important task that analysts must perform well to determine the current demand and what it will be in the future, to prevent waste in the supply chain.   Product development is an important part of the supply chain that is informed by consumer demand. You must work with CRM and customer service data to determine what they want, which influences new products, product line extensions, and also what to stop making. You must integrate suppliers in this process because it affects cost, quality, and delivery time.   Supplier relationship management goes without saying - if you want to produce your products on time and on budget, you need a solid rapport with everyone you’re outsourcing to in the chain. This impacts manufacturing flow management , which ensures everything gets where it needs to go without delay, and at the correct spec.    Order fulfilment involves coordinating with distribution centers and either retail locations or 3PL to get the product direct to consumers. You’ve now made it all the way back to the beginning of the cycle, and need to pay attention to new CRM and customer service data.   Returns management , also known as the “reverse supply chain,” is a vital part of the flow of products that doesn’t fit perfectly into the clean supply chain cycle. It involves picking up online orders from 3PL locations or from consumers’ addresses and accepting returns at retail locations. Once these items are put back into inventory, they must be ready to get to a different customer while the product run is still live. 

What Supply Chain Managers Look for When Managing Supplier Relationships

One of the most complex parts of SCM is handling all the other people in the supply chain. They have their own needs and motivations, and to keep them all happy and working together with partners they are only loosely affiliated with is a challenge - especially when trying to meet deadlines and turn a profit. The following are what managers should focus on most in such relationships:   Org Chart and Leadership Style: How is the supplier’s organization set up? Is it a vertical or horizontal structure? Is the leadership strong and long lasting, or fickle and prone to change? You need to know who you’ll be interfacing with, and who will be the next one in line should some shakeup occur. Business relationships are always between people, and don’t always survive a reorg.    Management Style: How do the leaders at this supplier run their shop? Make sure it works with your crew. A micromanager at a relatively replaceable link in your supply chain will waste inordinate time, just as a hands-off manager at a vital link could result in sloppy delivery or substandard product quality.   Company Culture: Always important for working with suppliers, determine what kinds of people rise to the top, and how everyone acts when nobody's watching. If, for example, middle managers are constantly in fear for their jobs because of ruthless quarterly performance reviews, they may over-promise, make excuses, or otherwise be unstable work partners.    Product Flows: Once you know that you can work with the people, make sure their facilities are in order. Are they equipped for orders of the size and frequency you plan to make? How do they handle emergency, fast-turn around orders? What about other customers - are they only able to use their facilities for your product flows at certain portions of the month due to full inventory? Leave no stone unturned.   Information Flows: Just as vital is the ability to control information about the day-to-day flow of materials, and to communicate and coordinate long-term plans. Is the supplier up on their product details, inventory, and SKU organization? Is their security and encryption up to the standards of your company, and your industry? Big data is useless if the right people don’t see it in time.   Rewards and Risks: Take into account opportunities and threats of working with this supplier. Maybe they’re well-equipped to handle your exact product because they also work with your competitors. Perhaps they are new and establishing themselves, so offer a substantial discount, but may not be able to deliver on time? Do what’s best for the company, and use risk assessment to keep your whole supply chain operable.

Vital Supply Chain Management Concepts to Know

Having a passing familiarity with the following terms will help you see just what kind of skillset and abilities will be required when working in supply chain management:   Border Adjustment Tax: Also known as a destination-based cash flow tax (DBCFT), it is a tax levied on imported goods which is important to know in global supply chains.   Customer Relationship Management: Also known as CRM, this concept refers to providing ongoing service to customers and collecting data about their likes and purchases. There are also CRM tools that help automate and record interactions with customers.   Cumulative Mean: A figure for knowing how much or how little to produce in advance, involving mean orders with all previous data treated as equally useful.   Demand Management: Understanding customer behavior and patterns to control how much is ordered and produced at each link in the supply chain, with the goal of eliminating wasted production.   Financial Flows: Credit terms, payment schedules, accounts payable and receivable, and other factors that you must monitor to determine if a supply chain is profitable or not.   Information Flows: Transmission of orders, delivery status, and other data that influence the supply chain’s responsiveness to demand.   Integrated SCM: This is a method of SCM wherein all of the links are tightly integrated, operating almost as one company rather than a loose association of buyers and sellers.   Inventory Management: Monitoring and controlling orders, storage, and use of owned components to create the products your company sells.   Lean Six Sigma: A data-backed philosophy of continuous improvement that focuses on preventing defects and mistakes rather than discovering them later, which reduces waste and production time via standardization. Read Everything You Need to Know About Lean Six Sigma to learn more about this methodology.    Logistics: The physical movement of products from one link in the supply chain to the next, and the practice of improving their efficiency.   Make vs. Buy: A simple evaluation of whether it is more cost-effective and time-efficient to produce a required product with your company’s existing resources, or to outsource the need.   New Product Development: The creation of new products both in response to and in anticipation of customer demand, using data gleaned from CRM and the whole supply chain. Read Innovation for Everyone: Everything You Need to Know About New Product Development to learn more about this process.   Operational Accounting: Accounting for a company that focuses on planning, directing, and controlling of daily activities by their costs and eliminating waste.   Physical Flows: The actual movement of parts and products throughout the supply chain, which the Logistics team must manage and analyze to keep going without pause.   Project Management: The process and tools involved in ensuring that a codified piece of work (project or product) gets done on time while keeping all contributors aware of their next step.   Reverse Supply Chain: Aftermarket customer service, which may involve accepting returns, refurbishing and discounting, or otherwise finding use for the reacquired inventory.   Risk Management: Identifying, evaluating, and then choosing which risks to address first, with the goal of reducing overall risk in a supply chain.   S&OP: Sales and Operations Planning is a management process that aligns its constituent parts to ensure that the organization is only focused on operations that improve sales. Learn more about S&OP here .   Strategic Sourcing: Formalizing a company’s information gathering in order to use its purchasing power to take advantage of the best values in the marketplace of suppliers.   Theory of Constraints: A methodology that identifies the largest limiting factor in production, then finding a way to remove it to improve the efficiency of the entire production.

Current Issues in SCM

In addition to the major terms, it’s important to keep aware of legal, political, and social events which affect supply chain management when seeking a career in the field. Here are some of the bigger issues of the day:   Dodd-Frank Decision: This was a 2010 law which included a clause on “Conflict Minerals.” It requires companies to audit their supply chains in order to determine whether gold, tungsten, tantalum, and tin came from the Democratic Republic of the Congo, and report on their due diligence. It adds an extra layer of complexity and costs to SCM for those involved in chains with those minerals.   NGO Actions: Activist groups of all kinds work to end common practices within major companies’ supply chains, such as sweatshop labor, or push consumers towards less complicated supply chains by encouraging them to support local businesses and farms.    SEC Regulations: Whereas NGO actions can force a company’s hand for PR reasons or changing the marketplace of ideas, the Securities and Exchange Commission can slap that same company with fines, making company’s quick to comply. Third-party audits of supply chains are an important part of keeping in step with these regulations.    SECH Ratings: This is a rating that involves economic, social, and environmental judgements to gauge a company’s overall sustainability.   Transparency: Though protecting data is important, certain measures of transparency can improve company performance. Among consumer products, many younger, disruptive brands make their supply chain a selling point in marketing by being upfront about how and where they get their components, and where they make their products. The reasoning goes, if a company is hiding something, there must be an unethical component to it.   Sustainability Measures: As major companies and countries around the globe move towards sustainable production, all supply chains become impacted. Whether due to changing regulations or seeking good PR, many companies are working to reduce pollution and other issues in their chain.

The Future of Supply Chain Management

Aside from the issues of the day, it’s also vital to see where the field is going. The future of SCM is bright, but certainly evolving. We asked a group of experts and innovators in supply chain management to discuss what they believe the future of SCM holds: ​

Jake Rheude

Jake Rheude , Director of Business Development and Marketing for Red Stag Fulfilment

Over the next decade, we will see massive and disruptive forms of innovation both in terms of technology that expedites the speed at which customers receive their products ( drone delivery ) as well as technologies that drastically enhances the online shopping experience for customers, ( virtual reality ).

While these and other technologies no doubt have the opportunity to significantly change the landscape of online shopping and the supply chain, I expect we will see firms diverge on two different strategies. Some will rush to implement these costly new technologies in order to drive down the total time between an order being placed and last mile delivery, while other firms will stand by the current landscape (for most B2C online sellers) of product delivery in approximately two-days, acting cautiously, particularly in regards to the cost of these new technologies versus their impact on the overall value chain for consumers.

Certainly, there are niche industries where significant investments in drone delivery technology will provide a distinct competitive advantage, but I predict that for many B2C online sellers, the impact on the overall value chain of these new technologies will be misaligned with a consumer's perception of value, and therefore make the initial cost of these new technologies unjustified.

Lauren Stafford

Lauren Stafford , Digital Publishing Specialist for Explore WMS

Embracing big data is an essential principle of modern SCM, specifically real-time data which has the potential to improve the efficiency of a supply chain and negate potential risks to strategy. We know that logistics optimization through technological innovations and data integration can make supply chains more efficient and more financially sound.

The future of the multi-modal SCM depends on successful integration with data and systems to achieve synchromodality. To achieve this, there needs to be a connection to all available transport modalities in the form of a real-time data flow. Once any issues with connectivity are addressed, a ranking system is required to consider a variety of variables such as dock schedules and material restrictions. Pricing data is another integral component.

The great advantage of a synchromodal platform is that it’s informed by every available option and makes a selection based on key factors like speed requirements. There is still significant work to be done in terms of how best to access and integrate a supply chain partner’s real-time data but, as these platforms are developed, we’re likely to see faster order processing times for large shipments and systems which can help generate a better ROI. The way we understand it, SCM is changing because now an efficient supply chain can be a competitive asset as opposed to a cost center.

John Boyd

John Boyd , founder of The Boyd Company, Inc

Probably the most dynamic link in the supply chain in recent years has been the "last mile": that movement of goods from a DC to a final destination in the home. E-commerce king Amazon has done much to challenge and ultimately rewrite the rules of last mile delivery. Last mile delivery has also produced a new warehousing subsector: the locker. Studies show that online shoppers not only want their packages now, they also want their packages delivered to places other than their homes. These lockers can be viewed as "micro warehouses" and will come with additional costs. We expect many to be operated by an emerging sector of third-party logistics (3PL) providers specializing in this particular segment of the supply chain.

Lockers are now common in Europe, where densely populated and congested urban centers make them a natural fit. We anticipate that lockers will also become the next boom sector within logistics/distribution site selection in the United States. Amazon already has automated lockers in six states, while the U.S. Postal Service has lockers located within post offices in the Washington, D.C., area.

Upstart third-party logistics providers will be looking for sites where they can locate lockers, such as in transit centers, apartment buildings, convenience stores, or any establishment that provides off-hours access for picking up packages. Also, the growing online meals industry is expected to fuel the need for temperature-controlled lockers for the delivery of perishables.

Careers in Supply Chain Management

With a bright future filled with unique challenges, a career in SCM is a strong choice. It might be surprising to hear about an industry that’s all about outsourcing and automation, but new experts are more vital than ever for global organizations and even local ones to grow. Look at these industry stats:

Careers in Supply Chain Management

Career Paths

What kind of positions can you take on in supply chain management?   Supply Chain Business Analyst: Examine your company’s workflow and come up with creative ways to streamline its business processes. Live and breathe efficiency.   Inventory Control Administrator: Ensure that inventory systems’ data is accurate with physical inventory, troubleshoot discrepancies, discover root causes and interact with everyone related to this inventory.    Purchasing Specialist: Work out deals with suppliers and compare bids to minimize cost across the supply chain.   Procurement Manager: Research, evaluate, and purchase large quantities of products for companies to resell or use in operations. Determine what is in your company’s store, ecommerce shops, and more.    Operations Analyst: Evaluate, report on, and improve the management of activities that generate recurring revenue for your organization, i.e. its core competencies.   Material Planning Manager: Plan, monitor, and manage products and the materials required to make them in your organization’s manufacturing operations. You ensure the constant flow of materials so the factory never runs out. 

Logistics Analyst: Evaluate and report on transportation of goods and services up and down your organization’s supply chain, ensuring that everything gets where it needs to go and when it needs to get there.

Top Higher Education Programs

Supply chain management is a game with global stakes, as such major universities and academies around the world offer Bachelor’s and Master’s degrees in the subject. If you want to secure a job in the sector with a Fortune 500, becoming accredited in SCM is vital. Look at some of the top schools on this list for more details on breaking into the industry:

  • Cambridge University
  • Copenhagen Business School
  • Cranfield School of Management
  • Eindhoven University of Technology
  • London Business School
  • Vlerick Business School

Certifications in Supply Chain Management

If a full Master’s program seems like too big a commitment, explore some of the short-term certifications available below. They give you a shot at entry level jobs if you’re inexperienced, and are a nice brush-up on current SCM standards for seasoned professionals.

  • Chartered Institute of Supply Chain Management (CISCM) Chartered Supply Chain Management Professionals (CSCMP)
  • Institute for Supply Management (ISM) Certified Professional in Supply Management (CPSM)
  • Institute of Supply Chain Management (IOSCM)
  • International Institute for Procurement and Market Research (IIPMR) Certified Supply Chain Specialist (CSCS) , Certified Procurement Professional (CPP) and Certified Supply Chain Associate (CSCA)
  • International Supply Chain Education Alliance (ISCEA) Certified Demand Driven Planner (CDDP) and Certified Supply Chain Manager (CSCM)
  • Association (SCMA) Supply Chain Management Professional (SCMP)
  • The Association for Operations Management (APICS) Certified Supply Chain Professional (CSCP) and Certified Production and Inventory Management (CPIM)

Supply Chain Management Templates

Outside of the physical work of checking inventory, or the personal work of communicating with different members of the supply chain’s links, much of your work as a supply chain manager is using systems and dashboards to get an understanding of logistics, operations, and flows. What follows are some templates that can help manage and streamline workflow, while understanding and sharing inventory reports and more.

Risk Management Matrix Template

Download Risk Management Matrix Template

Excel  |  Word  |  PDF  |  Smartsheet

Stock Inventory Control Template

Download Stock Inventory Control Template

Excel  |  Smartsheet

Supply Chain Dashboard Template

‌ Download Supply Chain Dashboard Template

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‌ Download Microsoft Excel Template for Choosing MRP Software

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‌ Download RFP Vendor Template

A Better Way to Manage Supply Chain & Manufacturing Operations

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As companies grow, their supply chains become complex and difficult to manage. A point is reached where it becomes increasingly difficult to make the right supply chain decisions due to inflexibility of the supply chain model — a point where the model no longer reflects the current realities of the market or the supply chain, itself.. It’s at this point that many supply chain managers are turning to another form of supply chain model. This type uses mathematical optimization modeling  software to determine appropriate supply chain decisions.

In this blog, we’ll cover:

  • The definition of supply chain modeling
  • Why it’s important
  • Common theories
  • Putting theory into practice

The Need for Informed, Forward-looking Decisions

  • Benefits of dynamic modeling

What Is Supply Chain Modeling?

Supply chain modeling represents a conscious attempt to bring order into a supply chain to achieve certain business objectives, such as lowest supply cost, on-time delivery and an ability to cope with disruption. It deals with questions such as:

  • What to produce
  • Market identification
  • Siting of production plants
  • Finding the best suppliers
  • Supplier and plant locations
  • Transportation and inventory
  • Distributing finished products
  • Warehousing strategies

Supply chain theory is well-established. However, when setting up a supply chain model, there’s an almost endless list of requirements to meet, and as the number of SKUs, plants, and customers grows, the model’s complexity increases exponentially. What may have started as a relatively simple exercise of optimizing supply and distribution costs for one or two products quickly turns into a nightmarish exercise where it’s almost impossible to engineer the optimal solutions.

Why Is Supply Chain Modeling So Important?

The ultimate goal of any supply chain must be to satisfy the final customer. Satisfied customers return to buy more products, and through this process, successful organizations develop brand loyalty and recognition. According to customer service consultant Micah Solomon , customer satisfaction starts with:

  • A perfect product
  • On time delivery
  • Friendly service
  • Effective problem resolution

To achieve this, you need the right supply chain model, but not only that, you need to manage it effectively. This demands two things. Firstly, your model must be robust and fit for purpose. Secondly, your model should have internal visibility so you can identify problems and deal with them proactively. You need to be able to interrogate the model to discover the best solution for every key decision.

Supply chain modeling provides forward-looking companies with the tools they need to manage their supply lines to:

  • Control inventory
  • Reduce costs
  • Meet customer demand
  • Increase efficiency
  • Respond to demand

It is due to supply chain excellence that Unilever was recognized by Gartner as one of the five companies in its Masters Category. This category recognizes businesses that have consistently scored in the top five supply chain rankings for seven out of the past ten years. However, this doesn’t come easily. Top supply chain companies recognize that, as their business changes, their technology investments, supply chain strategies, and decision-making models must also change. Thus, investment in advanced analytics is top of mind for these companies.

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Customary Theory of Supply Chain Modeling

Supply chains tend to fall into one of two broad categories: those that focus on efficiency and those that are responsive. These are broken down further into six categories:

  • Continuous-flow models for mature and stable industries
  • Fast chain models producing fashion and trendy products with a short lifecycle
  • Efficient supply chain models delivering highly competitive products based on price
  • Custom-configured models for products with multiple configurations
  • Agile supply chain models for made-to-order products with unpredictable demand
  • Flexible models to handle seasonal demand peaks

Each model has certain requirements, and the primary role of the supply chain manager is to design a supply chain model that best meets the above requirements. Naturally, there’s often a degree of overlap that must be allowed for and incorporated into the model.

Customary modeling focuses on setting up a supply chain that meets specific requirements and, as the organization matures, adapting the supply chain to meet changing circumstances.

Transferring Supply Chain Modeling Theory into Practice

The difficulties supply chain managers face is that supply chain management is a dynamic exercise unsuited to static modeling. What appears great on paper rarely functions as anticipated. While delivery and quality problems are obvious and generally receive urgent attention, soft issues such as cost optimization and risk analysis are harder to deal with, in part, because information isn’t readily available. Also, supply chain complexity , lack of visibility into the supply chain and the need to improve revenue represent major challenges. Another issue facing organizations is a lack of adequate strategic planning tools, which means that as many as 79 percent use spreadsheets for supply chain planning . What is interesting is that only 47 percent believe their supply chain plans are accurate.

The supply chain models referred to earlier are an essential component of supply chain planning for setting up supply chains. Thereafter, they play a small role in managing the supply chain and resolving supply issues other than to point toward best practice. Similarly, spreadsheet planning that relies on a snapshot is quickly out of date, and such planning rarely takes into account the full picture. What’s needed is a dynamic supply chain modeling solution.

When confronted with the need to make informed supply chain decisions, managers’ access to high-quality historical data as well as forward-looking information, such as sales trends, forecasts and an idea of what may happen in the future, is essential. Although much data is available from business intelligence software, what’s missing is the intelligence to guide the right decisions. For example, conventional supply chain modeling tools can’t tell leaders exactly what will happen to the bottom line if you increase production at a particular facility to meet anticipated demand. In fact, answering that question with conventional business intelligence tools entails a lot of guesswork.

However, if you build a mathematical model that accurately reflects how your business functions, you can interrogate this model to see the effect of increasing production. While this may seem an almost impossible task, the reality is that it’s entirely feasible, especially when using modeling tools that obviate the need for generating computer code through the use of intuitive drag-and-drop interfaces . As many organizations have discovered, this is possible; once the model is validated using known events, it’s possible to measure the effects of change. Additionally, through the use of optimization solver software, it’s possible to take your decision-making to the next level to answer questions such as which supply chain combination maximizes profitability or how to reduce logistic costs while meeting demand.

Benefits of Dynamic Supply Chain Modeling

The benefits of creating a model of your business, populated by your own data, are many. Possibly the most important is the ability to discover the interaction between different parts of the organization and how they can be harnessed to improve overall profitability. Because the model works with your data, and also because of the ability to calibrate the model so it reflects reality, you can have confidence in its integrity. Additionally, with the ability to factor in constraints and to pose multiple what-if scenarios , it’s possible to anticipate and mitigate the effects of uncontrollable events and to determine the most profitable operational strategies.

What’s also important is that when you use this type of drag-and-drop modeling, it’s easier to internalize the model so your own people can work with it and develop it further without the need to rely on high-level coding experts.

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Understanding the Most Common Supply Chain Models

Last Updated Aug 2, 2023

supply chain models

Logistics is essentially the management and maintenance of supply chains. Therefore, in order to have a good working knowledge of how best to move products from raw materials to end consumers, you need to have a basic understanding of the fundamentals first. And at the center of those fundamental bits of knowledge is the understanding of how supply chain models work. 

Supply chain management is critical to every business, large or small, and it is generally broken down into six different models. These six models all have some of the same basic tenets, goals, and rely on similar components of the supply chain. Understanding the differences in each can help to determine which method is the best model for your particular business and how each of them can be best managed . Some of these models may require the help of a 3PL such as Redwood Logistics to reach full optimization. To find out how partnering with a 3PL could be beneficial to your business, schedule your free consultation with our team today.

Lastly, these six supply chain models each fall into one of two categories. Those models that are primarily focused on efficiency, and those that are primarily focused on responsiveness. All models have some elements of each, but have one or the other as their main focus.

The Efficiency-Focused Supply Chain Models

The efficient chain model.

The efficient chain model is best for businesses that are in very competitive markets, and where E2E efficiency is the highest priority. This model is usually employed by commoditized businesses where production is based on expected sales for the length of the production cycle, and competition is almost solely based on price. The key objective of this model is often met by high rates of asset utilization in order to lower costs.

The Fast Chain Model

The fast chain model is most often used by businesses that manufacture finished products and deal mainly with extremely trendy products that have a short lifecycle. This model works best with businesses that must change their products frequently and get them to market quickly before a trend is no longer relevant.

Consumers of these types of products are mostly concerned with how quickly a business updates their product options to keep up with the latest fashion trends. You may have heard of the term “fast-fashion,” when talking about large companies that are particularly well-known for employing this method, regardless of whether they are in the fashion industry. 

The focus of this model is to shorten the time from idea to market and maximize the level of forecast accuracy to reduce market mediation costs. 

The Continuous Flow Model

The continuous flow model is one of the most traditional supply chain models. This model is ideal for commodity manufacturing and companies that produce the same goods constantly with little to no fluctuations and high demand stability. It’s best-suited to mature industries.

In order to be competitive, this model offers a continuous replenishment system that ensures high levels of service and low inventory kept on-site for end customers.

The Responsiveness-Focused Supply Chain Models

The agile model.

The agile model is ideal for businesses that deal in specialty order items. This model allows for flexibility, a key component in responsiveness focused supply chain models. It’s mostly employed by companies in industries with unpredictable demand.

This model utilizes a “made-to-order” method that allows for the manufacturing of items after receiving the order from a customer rather than complete pre-production. For this model to work best, there must be the ability to allow for both extra capacity in the event of large orders and the ability to complete purchase orders in the smallest batches possible.

The Flexible Model

The flexible supply chain model is best for industries that typically experience peaks of extremely high demand followed by extended periods of low demand. This model is characterized by high levels of adaptability, the capability to reconfigure internal manufacturing processes to meet customer needs, and the ability to switch on and off easily.

Businesses that deal in products associated with particular holidays or other seasonal items benefit from the flexible model.

The Custom Configured Model

As indicated by its name, the custom-configured model is focused on providing custom configurations, particularly during assembly and production. It is essentially a combination of the agile and continuous flow models, and ideal in scenarios where multiple product configurations are required.

This model features a high degree of correlation between an asset and total cost. The custom configuration model incorporates the continuous flow model in processes where the product is built before configuration, and the agile model is utilized for downstream processes. An example of this model could be a furniture company that allows for certain customizable options, such as varying hardware or furniture leg styles. 

Although at first glance it may be difficult to determine which model of the supply chain is being used in a particular business due to the similarities, the variance in methods allows for the model that best suits the needs of a particular industry to be employed. After determining the consistency of demand, customization and configuration of the product, the stability of the industry, and frequency of demand peaks and valleys, you can be assured there is a supply chain model that will best fit your business. Schedule your free consultation today and let our experts help you determine what supply chain model or addition would help your business succeed.

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Supply Chain Management (SCM): How It Works & Why It's Important

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What Is Supply Chain Management (SCM)?

Supply chain management (SCM) is the process of managing the flow of goods and services to and from a business, including every step involved in turning raw materials and components into final products and getting them to the ultimate customer. Effective SCM can help streamline a company's activities to eliminate waste, 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 to and from a company and includes all of the processes involved in transforming raw materials and components 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 can help prevent expensive product recalls and lawsuits as well as bad publicity. 
  • The five most critical phases of SCM are planning, sourcing, production, distribution, and returns.
  • A supply chain manager is tasked with controlling and reducing costs and avoiding supply shortages.

Investopedia / Alex Dos Diaz

How Supply Chain Management Works

Supply chain management represents an ongoing effort by companies to make their supply chains as efficient and economical as possible.

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 needless steps 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 does so as the result of efforts by multiple 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.

A supply chain manager's job is not only about traditional logistics and purchasing but finding ways to increase efficiency and keep costs down while also avoiding shortages and preparing for unexpected contingencies. Typically, the SCM process consists of these five phases:

To get the best results from SCM, the process usually begins with planning to match supply with customer and manufacturing demands. Companies must try to predict what their future needs will be and act accordingly. This will take into account the raw materials or components needed during each stage of manufacturing, equipment capacity and limitations, and staffing needs. Large businesses often rely on enterprise resource planning (ERP) software to help coordinate the process.

Effective SCM processes rely very heavily on strong relationships with suppliers. Sourcing entails working with vendors to supply the materials needed throughout the manufacturing process. Different industries will have different sourcing requirements, but in general, SCM sourcing involves ensuring that:

  • The raw materials or components meet the manufacturing specifications needed for the production of the goods.
  • The prices paid the vendor 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 of good quality.

Supply chain management is especially critical when manufacturers are working with perishable goods. When sourcing goods, companies should be mindful of lead times and how well equipped a supplier is to meet their needs.

Manufacturing

This is the heart of the supply chain management process, where the company uses its machinery and labor to transform the raw materials or components it has received from its suppliers into 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, and packaging. During the manufacturing process, companies must be mindful of waste or other factors that may cause deviations from their original plans. For example, if a company is using more raw materials than planned and sourced for due to inadequate employee training, it must rectify the issue or revisit the earlier stages in SCM.

Once products are made and sales are finalized, a company must get those products into the hands of its customers. A company with effective SCM will have robust logistic capabilities and delivery channels to ensure timely, safe, and inexpensive delivery of its 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. It's bad enough when a customer needs to return a product, but even worse if that's 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 them. Whether a company is conducting a product recall or a customer is simply not satisfied with the product, the transaction with the customer must be remedied.

Returns can also be a valuable form of feedback, helping the company to identify defective or poorly designed products and to make whatever changes are necessary. But without addressing the underlying cause of a customer return, the supply chain management process will have failed, and future returns will likely persist.

Supply chain management does not look the same for all companies. Each business has its own goals, constraints, and strengths that will shape its SCM process. These are some of the models a company can adopt to guide its supply chain management efforts.

  • 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 show little variation.
  • Agile model: This model is best for companies with unpredictable demand or custom-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 affected 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 ensures that 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 its 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 toward a custom model. This is often the case for highly specialized industries with high technical requirements, such as an automobile manufacturer.

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. That included using big data , collected from its 9,000 stores and 20,000 suppliers, to help improve its forecasting capabilities and better manage sales and inventory. In 2019 it appointed its first-ever chief supply chain officer, a key leadership role in the company.

The company has also incorporated supply chain management into its environmental, social, and governance (ESG) initiatives, including those involving human rights, animal testing, sustainability, and transparency regarding product ingredients.

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, control over shipping procedures can improve customer service by avoiding costly shortages or periods of inventory oversupply. Overall, supply chain management provides multiple opportunities for companies to improve their profit margins and is especially important for businesses 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. Many investors today want to know 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 their impact on the environment—all of which can involve SCM.

How Much Do Supply Chain Management Jobs Pay?

Supply chain managers across the United States had average annual salaries in the range of $109,645 to $140,513 as of December 2023, according to the website Salary.com.

A supply chain starts with the ordering of raw materials or components from a supplier and ends with the delivery of a finished product or service to the end consumer. In supply chain management, every link in that chain may offer an opportunity to add value or reduce inefficiency. A well-run SCM program can increase a company's revenues, decrease its costs, and bolster its bottom line .

Cision PR Newswire. " Walgreens Transforms Supply Chain Management with Kyvos, Tableau, and Big Data ."

Walgreens Boots Alliance. " Walgreens Boots Alliance Announces Key Leadership Appointments Live ."

Walgreens Boots Alliance. " Environmental, Social & Governance. "

Salary.com. " Supply Chain Manager Salary in the United States ."

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Building a flexible supply chain in low-volume, high-mix industrials

For many industrial companies, supply-chain problems are a fact of life. Although these businesses have attempted to simplify their product portfolios, customers increasingly want freedom to configure appliances, commercial vehicles, aircraft equipment, and other goods. But industrials often have difficulty getting the parts they need to support low-volume, high-mix manufacturing when needed for production. The requested quantities can be relatively small, and suppliers often prioritize their larger customers when fulfilling orders.

Part delays can have dire consequences. Consider the case of an industrial company that won a large order for devices with customer-specific requirements for size, engine strength, and several other features. The industrial’s suppliers could not provide the required parts when needed. What’s more, the company’s leaders did not have visibility into supply-chain issues and thus could not adapt the ordering process. These issues delayed the industrial’s promised shipment to its client by six months, putting its contract in jeopardy.

Adding to such problems, several external events—including global political tensions, increased protectionism and tariffs, the recent novel coronavirus outbreak, and shifts in ownership of raw materials—have made it more difficult to maintain an efficient supply chain . These constraints, combined with the recent rise in customization, can complicate even the most efficient supply chains.

Industrial companies often try to improve their supply-chain performance  by investing in new enterprise-resource-planning (ERP) and forecasting systems. The results may be disappointing, however, since industrials typically struggle to program these systems to follow a customized ordering logic based on their unique business models and requirements. Many companies combat these limitations with manual overrides to increase inventory and ensure that materials are always available. Unfortunately, this approach produces few gains and causes a sharp rise in working capital. Frustrated companies may then blame suppliers and their perceived lack of performance, when their own forecasting and planning approach is truly the root cause.

Although their past efforts to improve forecasting and planning have often fallen short, industrials may now find greater success by implementing a new approach, which we call “segment, stock, and plan” (SSP), for low-volume, high-mix companies. As its name suggests, the approach focuses on three elements: improving part segmentation, increasing the accuracy of stocking algorithms, and building flexibility into the planning process. One major change is that the SSP approach calls for manufacturers to create virtual kits that contain the parts needed for specialized products.

Case study: Better supply-chain management in action

A global leader in the industrial-vehicles sector had great-quality products but was struggling to deliver them on time, making it vulnerable to competitors. Several problems, including the following, contributed to the inefficiency:

  • lack of synchronization among sales, procurement, and manufacturing operations
  • gaps in tools and capabilities, which made it difficult to move products seamlessly along the supply chain
  • unknown or misplaced accountability

Delivery times were 20 to 50 percent longer than promised because of these issues. The company lost around 5 percent of its revenue as customers canceled orders and refused to work with it in the future.

Following the approach described in the article, the company analyzed which parts were buy to order and which were buy to stock. It determined that 40 percent of the parts needed to be reclassified. The company also reduced the inventory on hand by 15 percent, partly by eliminating obsolete parts. It then implemented a new algorithm that improved forecasting and reduced shortages by 50 percent. Finally, the company created a new planning approach that gave the business more flexibility on orders. In turn, this allowed more flexibility within the supply chain.

The new approach almost entirely eliminated part shortages. It also helped the company achieve an on-time delivery rate of more than 90 percent.

The new approach does not require investment in tools or platforms, and it produces rapid improvement. While it will not entirely eliminate supply-chain problems, companies typically reduce part shortages by 50 to 90 percent while shrinking inventory by 15 to 35 percent below historical levels. These benefits translate into greater on-time delivery, lower inventory costs, and increased flexibility.

This article provides a step-by-step description of the approach (see sidebar, “Case study: Better supply-chain management in action,” for an example of the entire process).

Improved part segmentation

When purchasing and stocking parts, most companies do not follow a set methodology. Instead, they ask their sales organization to estimate product demand and translate that prediction into a needed quantity of parts. But salespeople focus on customers, not suppliers, and may also be tempted to overestimate demand to ensure product availability. They also have little insight into supply-chain capabilities or constraints—most importantly, the lead time required to obtain parts. If companies do not factor this lead time into their stocking decisions, they might discover that critical parts are unavailable when required for production.

Other forecasting errors relate to customers and suppliers themselves. It is easy to assume that a reliable vendor will always be able to make timely shipments or that suppliers with performance issues will never improve. As with any business, however, supplier performance is dynamic, not static. Likewise, customer demand and market trends could shift in unexpected directions, and companies that rely only on historical data when stocking parts may find themselves with excess inventory or shortages. Consider commercial cooking equipment, such as ovens. Some specialized models are now Wi-Fi enabled and require different components. If demand for them surges, manufacturers may be caught off guard.

To avoid these problems, industrial companies with high product customization should segment parts into two categories: bought to stock and bought to order. When done correctly, segmentation can significantly reduce part shortages while minimizing the volume of parts held in inventory. Three metrics are critical to the segmentation:

  • customer lead time, defined as the period between receipt of an order and the promised delivery date
  • supplier lead time, both contractual and actual
  • cutoff time, calculated as customer lead time less the number of days required to manufacture, process, and deliver a product

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If the supplier lead time for a part is greater than the cutoff time, the part must usually be bought to stock (at least temporarily, until metrics improve or get updated). Otherwise, it can be bought to order. The lower the cutoff time, the higher the amount of parts to stock—and the higher the inventory-holding cost.

The exceptions to this rule are based on cost and quality. Companies may refrain from stocking very costly items, even if the algorithm points in that direction, because they lack sufficient cash or want to limit expenditures. Likewise, companies might choose to stock products that have traditionally suffered from quality issues, even if the algorithm says they can be bought to order. This strategy helps eliminate the production delays that can occur if a supplier ships a poor-quality part that must be returned.

Exhibit 1 shows how segmentation works (cost and quality are not factors in the example). For parts A and B, the supplier lead time is longer than the cutoff time, meaning they must be bought to stock. Part C, for which supplier lead time is shorter than the cutoff time, can be bought to order.

Segmentation must be dynamic. Ideally, companies should refresh it frequently to account for changes at suppliers (including productivity improvements that decrease delivery timeframes) and shifting market conditions (such as the introduction of tariffs or global shortages). For best results, companies should refresh their segmentation algorithms  every 15 to 20 days, since supplier lead times often change. (Of course, they should also conduct ad hoc updates if they become aware of major changes, such as declining supplier quality or on-time delivery).

Initially, the tools used for segmentation will be very basic models that can be updated with the click of a button, minimizing costs and IT involvement. After a few years, when companies are certain they have all the required people, systems, and historical data, they can move to a fully automated approach that will require more complex IT upgrades. Such systems cost more but also improve productivity.

One company that applied the SSP approach during segmentation recategorized almost 50 percent of its products (Exhibit 2). Others have found that even greater changes were needed. Overall, businesses that take the new approach see a 10 to 15 percent improvement in the number of on-time deliveries through only that lever (part segmentation). Inventory levels may also fall if companies discover that many parts classified as buy to stock can be recategorized as buy to order.

Enhanced stocking-algorithm accuracy

When deciding how many parts to keep in stock, most companies use an algorithm based solely on historical demand. While this method typically works well for businesses with low customization and high volume, it is much less suited to industrials with lower volumes and multiple product options—particularly those for which history is not a great predictor of future demand.

And it’s not just the algorithm that is problematic. As noted previously, current ERP and forecasting tools are often challenging to program and rely on specialized skills. Making manual overrides is time consuming and dependent on a handful of company experts, making frequent changes nearly impossible for businesses that stock thousands of different parts.

The SSP approach works to eliminate the issues that complicated past stocking methods by incorporating the following elements:

  • A limited forecast period. Every order cycle contains a period, called “known time,” in which a company cannot accept new orders or changes because it would not be able to meet the customer’s desired delivery date. Despite these limits, most stocking algorithms attempt to project potential new orders during known time. Under the SSP approach, the stocking algorithm only creates forecasts for later time periods—a strategy that minimizes errors and assumptions while increasing the accuracy of order quantities.
  • An embedded mechanism for scaling. If the sales forecast unexpectedly changes, the SSP stocking algorithm will automatically predict the necessary increases or decreases to the order level for all parts. Other algorithms do not typically make such adjustments, so employees must calculate changes manually for each product.
  • More accurate historical data. Unlike past algorithms, the new stocking algorithm does not measure historical demand and consumption by using an average across a few lead-time segments. For example, if the lead time is 30 days, typical algorithms will use 12 increments to cover a year’s worth of history (12 x 30 = 360 days). The new approach would suggest using daily increments of lead time; this is almost the same as looking at 360 increments and taking the average. In this example, the new algorithm would be 30 times more accurate than traditional algorithms, because it considers 360 increments rather than 12.

One company that switched from a traditional stocking algorithm to the SSP approach reduced the annual number of part shortages from 1000 to 495—around 51 percent—because it more accurately predicted the necessary stocking levels (Exhibit 3). For the same reason, it reduced inventory levels by around 42 percent and associated costs by around 6 percent.

Refined planning

At most companies, supply-chain planning works backward from customer demand. First, companies examine customer order volume or promised delivery dates. They then estimate the quantity of parts required. While this approach may work well for high-volume manufacturers with predicable demand, it is inherently reactive rather than proactive and does not consider supply-chain capabilities or constraints. For instance, an industrial-vehicle manufacturer might face higher-than-expected demand for nonstandard frames, only to find that supplies are limited or require a substantial time to manufacture. Lead times may then extend past those quoted to the customer.

The traditional planning approach also limits flexibility. If customer demand changes, or if the market shifts in other ways, companies will have to recalculate their purchase orders, and they may not be able to make timely changes. For industrials, where customization is common, the number of parts and raw materials involved in production may be higher than usual, making the task even more burdensome.

Under the new SSP approach, planning is a much more dynamic process that involves three steps: categorizing parts, creating flexible kits with the parts needed for specialized products, and developing a build plan. These three steps, in combination, allow companies to make better decisions about inventory levels and production targets.

Step 1: Categorizing parts

Companies are accustomed to classifying parts as buy to stock or buy to order. They then segment these classifications further into three categories within the inventory-management system:

  • standard parts suitable for any model, such as tires found on every vehicle
  • options for specialized models, such an enhanced control system for a specific vehicle type
  • parts only used rarely for one-off requests and typically not stocked, such as customer-specific colors for the bumpers and front grille

While most companies only review these part categories annually, the SSP approach calls for frequent updates to account for changes in demand, part supply, and business strategy. One company that followed the new approach found that it had to recategorize many parts (Exhibit 4). After this shift, it was better prepared to build specialized and one-off products.

Step 2: Creating flexible kits to improve decision making

The second step of the planning process involves classifying parts needed for specialized models into flexible kits. Initially, these kits will exist only as virtual categories within the inventory-control system. With a highly customized vehicle, for instance, a flexible kit might contain most standard parts plus 30 additional parts required for custom features not included in the base model. Companies should enlist engineers to help create the kit specifications because they often have the greatest familiarity with the bills of materials for different products.

Flexible kits will reduce the likelihood of shortages or excess inventory, since they show companies exactly what parts are necessary to create specialized models, as well as the lead time for each. These kits also help companies instantly determine their immediate production capacity. If the current inventory contains the parts needed to assemble only one flexible kit, companies can create only one specialized product.

Companies should incorporate the information about flexible kits into a decision-making tool that also contains data on current inventory levels and manufacturing schedules (ongoing and planned). The resulting insights will allow them to create more specialized products without incurring the costs traditionally associated with complexity.

Supply chain risk management is back

Supply chain risk management is back

Step 3: creating a build plan.

The third step involves setting production targets and creating a build plan. Leaders from all relevant departments—for instance, operations, engineering, sales, material planning, and sourcing—should meet at least monthly, under the guidance of the site general manager or business president, to set the base targets for the units that it would like to build. This target will include demand for all potential models—standard, specialized, and one-off requests. The team will establish these targets by reviewing the insights obtained from new and historical data. It must also establish an understanding of the company’s supply-chain capabilities, including clear visibility about how the accuracy of other decisions—for instance, sales forecasts—will affect performance.

This information will help the sales group clearly understand what the company can actually commit to building, based on the existing supply-chain capabilities. Without these insights, the sales group might overestimate what is possible.

To determine the period required to create a standard product, teams should look at the supplier lead times for all high-cost parts. The building period will be equal or similar to the longest lead time for any part in the group. Teams must also determine how many flexible kits they need (or else revise their past estimates to reflect changing circumstances).

While no forecast will ever be entirely accurate, companies can improve their predictions and achieve greater flexibility by following the ‘segment, stock, and plan’ approach.

If companies must order multiple parts to complete a kit, they should be strategic. Rather than ordering everything at once, they should use a staggered approach that considers supplier lead times, at least for high-cost parts. For instance, one part might have a supplier lead time of six months, while others require only three or four months. In this case, it would not make fiscal sense for a company to order every part six months in advance, because there is always a risk that a specialized order might get canceled, leaving excess parts on hand. The more parts sitting in inventory, the higher the holding costs.

Consider a team that has to set production targets for both standard and specialized vehicles, as shown in Exhibit 5. At the initial meeting, it decides how many standard vehicles it wants to build and looks at the lead times for obtaining the most high-cost parts. The team discovers that the longest lead time for obtaining one of those parts is seven months, so that is the period over which it will plan to build standard models.

For specialized vehicles, the lead times might be longer or shorter than seven months, depending on the parts required. (Remember, specialized vehicles may not contain all parts required for a standard model.) In the example in Exhibit 5, the longest lead time for a high-cost part in specialized vehicle 1 is eight months—and that means the team must decide how many flexible kits it needs to assemble for this model at least one month before it sets targets for standard vehicles. With specialized vehicle 2, the longest lead time for a high-cost part is only five months—and that means the team can decide how many flexible kits to assemble two months after it sets targets for the standard model. The shorter the decision time to production, the more accurate the forecast.

At most companies, the supply chain is shrouded in mystery, despite its importance to every group within the organization. Buyers charged with ordering parts have imperfect information, approaches, and tools, often resulting in shortages, excess inventory, and late customer deliveries. For industrials, these problems are especially severe. While no forecast will ever be entirely accurate, companies can improve their predictions and achieve greater flexibility by following the SSP approach to part segmentation, stocking, and planning. With supply-chain challenges becoming more intense each year, and with the demand for configured-to-order products increasing, high-mix, low-volume industrials should lead the way in implementation.

Ryan Fletcher is an associate partner in McKinsey’s Southern California office, where Abhijit Mahindroo is a partner; Nick Santhanam is a senior partner in the Silicon Valley office; and Mark Sawaya is a consultant in the Cleveland office.

The authors wish thank Bob Dvorak, director emeritus, Silicon Valley office, for his contributions to this article.

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Different Types Of Supply Chain Models Explained

by Deepika. | Nov 30, 2022 | Domestic Shipping , Supply Chain

On the surface, supply chain models are a lot like spreadsheets, but these models are the fundamentals of a supply chain. To build a supply chain, you need to understand all the supply chain models and know which models should be implemented and when. Then, a cross-functional team of experts creates them, and once they’re done, you can use them to determine where your performance stands concerning your competitors and where improvements can be made. The problem is that many different supply chain models are available, and there needs to be a clear roadmap for which is best for your business.

In this blog, we’ll explain seven different types of supply chain models and why you should use them. After reading this blog, your understanding of the term ‘Supply Chain Models’ will have increased substantially.

What are supply chain models, and why are they important?

An efficient supply chain is crucial for any business to succeed. And supply chain models can play a big role in ensuring that success. They are simply ways of organizing the various participants and processes within a supply chain, with each model offering unique benefits.

So why are supply chain models important? They help businesses streamline their supply chain operations, leading to reduced costs, improved customer satisfaction, and, ultimately, higher profits. Additionally, supply chain models allow a business to tailor its approach to meet its specific needs and goals. In short, having a well-developed supply chain model can make or break a business. Now let’s look at some examples of supply chain models and how they can benefit a company.

One popular supply chain model is the fast chain supply chain, which focuses on quickly and efficiently meeting customer demand. This model is particularly useful for businesses in industries with rapidly changing trends or high levels of competition, such as fashion or technology.

Another model is the agile supply chain, which prioritizes flexibility and quick adaptation to changing market conditions. Multiple companies may collaborate, sharing resources and information to achieve a common goal.

By carefully selecting and implementing the right supply chain model for their needs, businesses can greatly enhance their competitive edge and overall success. So, consider how supply chain models can benefit your organization.

Seven Different Supply Chain Models

Continuous flow model.

The Continuous Flow model is focused on maintaining consistent and smooth supply chain operations. This model maximizes efficiency by keeping supply steady and not allowing for supply or demand fluctuations. An example of a company using this supply chain model is Amazon. Their supply chain is designed to deliver products constantly, with little to no pauses in supply flow. This allows them to maintain their reputation as a quick and reliable delivery service.

Fast chain model

The Fast Chain supply chain model is all about speed. This model prioritizes quick delivery and timely responses to changes in supply or demand. An example of a company using this supply chain model is Zara, the clothing retailer. They are known for their speedy supply chain, and the ability to design and release new fashion trends within weeks instead of the typical six-month period other retailers follow.

Efficient chain model

The Efficient Chain supply chain model is focused on reducing waste and improving overall supply chain efficiency. Toyota, with its highly efficient and successful lean manufacturing system, is an example of a company using this supply chain model. They strive to eliminate unnecessary steps or resources in their supply chain operations to increase efficiency and reduce waste.

Agile supply network model

The Agile Supply Network model focuses on creating a supply chain that is responsive and able to adapt quickly to changes in supply or demand. This requires strong communication and collaboration within the supply chain network and flexibility in processes and technology. Nike is an example of a company using this supply chain model, being able to respond quickly to changes in consumer demand for its products.

Virtual supply chain model

The Virtual supply chain model is characterized by using virtual technology, such as cloud computing and data analysis, to improve supply chain operations. This allows for greater visibility and communication within the supply chain network and increased efficiency and flexibility. An example of a company using this supply chain model is Procter & Gamble, which implemented virtual supply chain technology to increase supply chain responsiveness and reduce costs.

Custom-configured supply chain model

The Custom-configured supply chain model involves customizing the supply chain according to specific customer demands or preferences. This requires strong communication with customers and a high level of customization in processes and products. Dell is an example of a company using this supply chain model, offering individualized computer configurations to meet their customers’ specific needs.

Flexible supply chain model

The Flexible supply chain model emphasizes flexibility in supply chain operations, adapting to changes and meeting varying customer demands. An example of a company using this supply chain model is Hewlett Packard, which implemented flexible supply chain processes to respond quickly to changing market conditions and customer preferences.

Trends in Supply Chain Management

  • Remember, we heard that technology would work side-by-side with humans one day. That is turning out to be true. Companies use technology in every step of their operations. AI and automation are replacing manual strengths to bring supply chain resiliency.
  • Companies are adopting customization for different parts of the supply chain rather than relying on standard processes. This is because, today, companies are fighting to offer more personalized services to their customers.
  • Today, brands believe in supply chain models that give them transparency and more visibility of supply chain operations.

Overall, supply chain models can greatly impact the success and efficiency of supply chain operations. Therefore, it’s important for businesses to carefully consider which supply chain model best fits their goals and strategies and continually adapt and improve their supply chain as needed. As you can see, each supply chain model has its strengths and drawbacks – there is no one-size-fits-all solution to supply chain management . However, by understanding these different supply chain models, you can make informed decisions on optimizing your supply chain operations.

What is return management in reverse logistics?

Return management in reverse logistics refers to managing the return of products and materials from customers, suppliers, or other external parties. This can involve anything from handling returns at a retail store to processing return requests online or even organizing the transportation of goods back to manufacturers or vendors.

Why is reverse logistics important in supply chain management?

Reverse logistics is an essential component of modern supply chain management. It refers to managing and optimizing the flow of goods and materials in reverse, from consumption to production. This involves such activities as reverse logistics planning, reverse supply chain management, reverse distribution strategies, and reverse auction logistics.

There are several key benefits of reverse logistics in supply chain management. For one, it can help companies minimize costs by using less energy, reducing waste, and reusing or repurposing goods.

What are the two major success factors of reverse logistics?

Reverse logistics is complex, but two key aspects contribute to its success. The first is an efficient reverse logistics network, which involves optimizing the flow of products throughout your supply chain and ensuring timely returns from customers. The second success factor is strong reverse logistics software, which can help automate the process and enable you to track and analyze your reverse supply chain in real-time.

What are the 5 Rs of reverse logistics?

The 5 R’s of reverse logistics are:

  • Repackaging
  • Courier Partner
  • Courier Service
  • Domestic Shipping
  • DropShipping
  • E-commerce Delivery
  • Global Shipping
  • Hyperlocal Delivery
  • Shipping Aggregator
  • Supply Chain
  • Warehouse & Fulfillment

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Six Types of Supply Chain Models

Six Types of Supply Chain Models featured image

Supply chain management is vital to any business. It’s defined as the system encompassing the logistics of producing and selling commercial goods, including resource acquisition, product development, and delivery.

Traditional Supply Chain Models (and Their Meaning)

supply chain business model example

Supply chain management is usually broken down into six separate categories. All six supply chain models have the same goal, rely on similar components, and fit into one of two categories: efficiency or responsiveness. Each supply chain model can have a primary focus on either. Understanding these different supply chain models makes it easier to manage and protect the supply chain within your organization.

The Continuous Flow Model

The continuous flow model or continuous model is best for mature industries that produce a uniform set of goods and expect demand stability from their market. Goods are in a continuous flow, and the entire chain is built for a continued, scheduled delivery of goods. 

A good example of the continuous flow model would be PepsiCo. This mature company has a large customer base with little variety in demand, regardless of market conditions. Logistics has been designed so that a continuous flow of ingredients is received to produce its products and restock its vendors continuously.

The Fast Chain Model

The fast chain model is used by businesses that manufacture finished products with a short market lifecycle. It’s a suitable model for businesses where products are changed frequently and delivered to the market quickly before customer demand drops, and the trend loses relevance, like budget fashion industries. 

Adidas is a prime example of this supply chain model. They set up new delivery systems and supply lines regularly and create new shoes and products as quickly as possible to sell apparel to meet high demand peaks before the trend changes. End-to-end supply chain efficiency is extremely important to managers in this field.

The Efficient Chain Model

The efficient chain model is used by supply chain managers operating in highly competitive markets. They must strive for high overall equipment efficiency at all times to retain their competitive advantage, which is why they opt for the most cost-effective model when determining their supply chain strategies. Emphasis is placed on proper inventory management and maximizing the outputs of the labor force and production processes. 

Nestlé is a good example of a brand that requires an efficient model. Because their margins are thin and the brand operates in very competitive markets, they must reduce costs and keep vendors well-stocked at all times.

The Agile Model

The agile model demands responsive supply chains to sell trendy products during peak demand. This model tracks market demand in real-time, co-manages its inventory, utilizes collaborative product designs, and emphasizes end-to-end efficiency. The agile model is suited to businesses that sell specialty products that require extra care in transportation or design, like luxury fashion items. 

Unlike the efficient chain model that requires high volumes, the agile model is only profitable until a threshold of volume is met. The market is highly sensitive and subject to unpredictable demand or demand variation in this case. The supply chain network has to remain flexible and alert at all times. ZARA is an example of a brand that follows the agile model. Designers are quick to spot trends, draw up new designs and ensure that the entire chain responds as quickly as possible.

The Custom-Configured Model

The custom-configured model combines the agile and continuous flow models. It’s used in industries where multiple custom configurations are required, e.g. brands like VANS that invite customers to log on to their site and design their own sneakers. The market remains fairly consistent, with a few predictable demand peaks throughout the year, but the company remains flexible just in case a particular customization falls out of vogue. 

Providing custom configurations means that the assembly and production plants must change their setup regularly, hence the need for agility. This model is sometimes used for prototype design and small batches, e.g. limited release products. Customer satisfaction remains one of the most important business objectives for this model.

The Flexible Model

The flexible model allows businesses to meet peaks of high demand and long periods of low demand. Suppliers are diversified and hired on a seasonal contract to ensure a steady flow of raw materials as required, and factories use automation wherever possible. 

Staples is a good example of a company that follows a flexible supply chain model. The company’s supply chain strategies reflect the high seasonal demand for school supplies after the summer vacation and ensure that stores are well-stocked during the rest of the year when demand is lower.

How Do I Choose the Right Supply Chain Model?

supply chain business model example

Supply chain modeling is complex. While the six basic supply chain models are good, the most productive supply chains are the ones that have been hybridized to meet the specific needs of the company and the customers they serve. Choosing the right supply chain model for your business means carefully evaluating various supply chains against your industry, value proposition, and business objectives.

Having the right supply chain model in place is an important aspect of your business. However, the people, technology, and processes that manage your supply chain should also be considered when selecting a model. By considering both, your business can foster resilience, mitigate risk exposure and improve your competitiveness in the market.

supply chain business model example

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How to build your supply chain operating model?

supply chain business model example

“There is nothing quite so useless, as doing with great efficiency, something that should not be done at all.”

― Peter Drucker

An operating model in supply chain is key to ensure everyone knows what to do, when and how. The operating model is the aggregation of all the business processes within a business . Supply chain models prevent any functional silo thinking applied against the selected Supply Chain organization archetype. It also includes key information such as how to resolve conflicts, escalation methods and SLA within and outside supply chain functions.

It takes effort to build and to continuously ensure its day to day adherence and integration. However, it is essential to ensure long term productivity, enable growth in your organization and a great working environment without unnecessary stress. A great way to shortcut the journey is to implement supply chain orchestration.

The core elements within a Supply Chain Operating Model

           1. Supply Chain Organizational Archetype (shape, size, etc.)

          2. Business Process Definition ( RACI Matrix , SIPOC diagram, etc.)

          3. SLAs (within internal functions and external partners)

          4. Skills Matrix (must haves, nice to haves)

          5. Decision Making & Escalation Authority Matrix

Table of Contents

       ► What is an operating model?

       ► Why do you need an operating model for supply chain?

       ► What should be included in a supply chain operating model?

What is an operating model?

First, let’s start with this quick paragraph from McKinsey:

“ Companies know where they want to go . They want to be more agile, quicker to react, and more effective. They want to deliver great customer experiences, take advantage of new technologies to cut costs, improve quality and transparency, and build value. The problem is that while most companies are trying to get better, the results tend to fall short: one-off initiatives in separate units that don’t have a big enterprise-wide impact; adoption of the improvement method of the day, which almost invariably yields disappointing results; and programs that provide temporary gains but aren’t sustainable .”

Essentially, it is about designing the executional layer to outline how the organization and each individual will contribute to delivering end to end and sustainable business value.

Again, according to Wikipedia, operating model and business model are often mistaken. Wikipedia’s definition of an operating model is the following:

“An operating model is both an abstract and visual representation (model) of how an organization delivers value to its customers or beneficiaries as well as how an organization actually runs itself.”

Thus, an Operating Model is a method to connect the gap between supply chain Strategy and Execution . It is a framework for a company, albeit typically used only by large ones, to organize resources and orchestrate the work activities to get an efficient and high performing organization from the short to the long term.

When applying this concept to supply chain operations , it becomes easier to distinguish business model and operating model .

Example : Amazon's supply chain operations

Let’s take the example of Amazon. One of its business models is to make profit from their platform connecting sellers and buyers (thus, I’m excluding here AWS and others business streams). They extract fees from each transaction.

To enable this, they’ve built a massive state of the art ecosystem combining digital technology as well as physical channels (manufacturing, inventory, logistics, delivery...) to deliver goods very quickly.

For Amazon, the operating model is describing how they are organized to ensure a turn key solution for the sellers and a very straight forward user experience for the buyers.

The supply chain model describes :

       ► what are the processes that need to happen

       ► their frequency

       ► what are the decisions required and what to do when things deviate from the plan

       ► without always having to reinvent the wheel

It includes at least the following elements (more details in the next chapter):

       1. Supply Chain Organizational Archetype (shape, size, etc.)

       2. Business Process Definition (RACI Matrix, SIPOC diagram, etc.)

       3. SLAs (within internal functions and external partners)

       4. Skills Matrix (must haves, nice to haves)

       5. Decision Making & Escalation Authority Matrix

Another way to distinguish the two is to take a global approach . Think about delivering the same business models but in two different cities , in different parts of the world. Let’s say London & Sao Paulo.

Clearly, while the same outputs are required, it will be two very different ways of delivering the outputs. There may be different activities required, some activities outsourced in one city and not the other one, the team capability and labor cost will impact the level of automation required, etc.

In summary, operating models are about turning a supply chain strategy into something practical and feasible in a particular context (here a context can be seen as time, geography, industry, people capability, partners available, etc.)

One of the challenges is to make sure that it is as simple as it needs to be, but not more.

Why do you need an operating model for supply chain?

► The Supply Chain Operating Model helps define the blueprint for:

► The structure, the location and the size of the supply chain function

► Where to draw the boundaries of the supply chain functions with other functions internally and with external providers

► How planners, supply chain managers and supply chain leaders work together within and across these boundaries?

► How will the business generate value through its integrated supply chain? And how to measure it?

► What skillsets and behaviors should be developed and encouraged?

If you are a large company, aspire to be or growing very fast, it is essential to have a supply chain management operating model.

We have listed below the 7 key reasons why an operating model for Supply Chain Management is a must . 

7 key reasons why you need an operating model for Strategic Supply Chain Management

1. to ensure everyone in the organization abides by the same playbook.

In any organization small or large there will be a number of people working on similar activities but in different contexts (e.g. geographies, customer, factories). Having an overarching framework (Supply Chain Integration) will avoid entropy across each business unit.

2. To save time defining your Key Performance Indicators (KPIs)

Having the right KPIs is difficult. Yet, it should not be massively different across your organization. Of course the target will change materially. Thus, leveraging an operating model that holistically defines the KPIs structure, rationale and method of calculation is essential. Then it is up to each part of the organization to know which data to use to derive the results and to define their respective KPI targets.

3. To leverage scaling opportunities

If you are in a large organization and you don’t leverage your scaling opportunities you will suffer from supply chain disruptions very quickly. Indeed, large companies are slower to react and have higher moments of inertia, but these are typically compensated by economies of scale that aren't available to smaller firms.

An operating model can help identify, integrate and merge across parts of the organization what can be combined – even outsourced – to focus on the core competency of the business.

4. To keep talent and harmonize desired skillsets

Supply Chain talent scarcity is high these days. Unfortunately too many business processes and too much knowledge often relies on a few key supply chain managers (and you know well what happens when they leave…).

Thanks to a standard cross-functional operating model across your organization, it will be easier to transfer people to other parts of the organization.

This will have a dual effect: first, it will help your organization offer a better variety of roles and responsibilities to your staff, without having a massive learning curve that impacts the business (a win-win for individuals and the business). And it will also help local parts of the organization benefit from receiving inputs from more mature parts of the business.

5. To make clear what are the "must haves" and the "nice to haves"

One key challenge faced by all companies is to find the right balance between too much prescription in how to perform the work needed and too much flexibility preventing any economy of scale and visibility on what is happening. A well-built operating model, will have a common trunk for 80% of the work to be done and some controlled flexibility left to the appreciation of the local needs.

6. To avoid reinventing the wheel all the time

Without an overarching operating standard, large organizations struggle to learn and disseminate know-how and capabilities across the business. An operating model can highlight how knowledge management is to be performed, how staff needs to collaborate across functions and have a set of basic guiding principles . The idea here is to make sure common ways of working, best practices and other elements are well communicated across teams.

7. To prevent different people from understanding different things from the same words and acronyms

Take one simple example, in Supply Chain Management different words and acronyms are used to mean different things. For example, some people call "S&OP" "IBP" and vice versa. In one part of the business a process may be called S&OP while the exact same one would be called IBP in another less sophisticated part of the business. The same applies for scheduling v master scheduling v short term planning, etc.

There are many other reasons why supply chain modelling is essential to building a resilient supply chain, I guess by now you get the point!

What should be included in a supply chain operating model?

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There is no one size fits all. And it should not be in a separated offline document produced by the central corporate team.

However, a mature operating model will cover with the right depth the following five elements.

1. Supply Chain Organizational Archetype (shape, size, etc.)

This one is all about defining the degree of centralization, shape, size, locations, capabilities and roles for the Supply Chain. This would also typically include the typical roles and their job descriptions to support the archetype.

See exhibit 1 from McKinsey for simple and crisp confirmation of what we are talking about here. The one selected would be deployed into practical details for your organization within the operating model.

2. Business Process Definition (RACI Matrix, SIPOC diagram, etc.)

Here we have written many articles on this blog about business processes. This section of the operating model would typically outline all activities that the company needs to do and allocate each activity and function into a matrix to cluster onto two axis:

       ► Operational, Tactical, Strategic

       ► From “just need doing” to “absolute competitive advantage”

Once done, a clear prioritization of the work appears. Each element can be mapped against the selected archetype associated with a detailed RACI matrix confirming the roles and responsibilities.

The learnings may require revisiting the choice and details of the Supply Chain Organizational Archetype selected in step 1.

3. SLAs (within internal functions and external partners)

This area is too often underappreciated in most companies from an internal point of view. Service Level Agreements (SLAs) are too often the remit of the relationship with external partners of the organization.

In fact, a mature operating model would outline equally the external SLAs and the ones between internal functions.

For instance:

       ► What is the delay for the Supply Chain team to confirm a last minute request from the sales operation team to ship stock to customers out of the standard lead time;

       ► What is the allowable range of KPIs deviation that the factory or the demand team will consider “normal” and what to do when it deviatse a lot in a short term, or a little but for too long;

Or what is the frozen period for the factories and what can be an exception to it, etc.

Of course, the SLAs should also be – and it’s typically what they cover first – about the lagging quantitative KPIs such as Supplier OTIF, Customer OTIF, Production Adherence, Forecast Accuracy, etc.

4. Skills Matrix (must haves, nice to haves)

The operating model should outline the different roles and responsibilities expected from the staff in the different part of the organization depending on their role and position in the Supply Chain Archetype.

Typically, everyone will need a basic end to end understanding of the supply chain strategies which then is augmented in set areas as per their local role and responsibilities

Doing this at company level avoids each pocket of the business having to reinvent the wheel with their own skillset, training initiatives and so on. Most importantly, a common platform allows a much easier movement of staff within the organization. Which is sometimes enough to keep the talent learning and working for the company longer, instead of seeing them leave as they find better career opportunities elsewhere. I believe this offsets the slower train when done centrally.

5. Decision Making & Escalation Authority Matrix

Finally, this last element is the least represented and in general not kept up to date.

It is in fact absolutely essential as it often avoids unnecessary slow mail exchanges and painful meetings where no one dares make a decision. And the decision ends up being pushed up the organization.

We typically see in mature organizations certain simple matrices outlining:

       ► The communication strategy : what is being communicated after each meeting, to customers when they order, if the order is late by x%, etc.

       ► Key points of contact : who to talk to internally or externally about specific topics to avoid the typical shout the most approach or preferred colleague

       ► Escalation matrix : who can decide up to what level and who is the next level up to go to after that

       ► Decision matrix : who get to decide about what topics, most elements are obvious, but think about nights where the typical staff is not present, do we follow the same principle or have a better approach?

There are many more elements and ramifications that can be added and detailed. It is important that the document is as digitalized as possible and does not stay on the shelf and gets deprecated as soon as published.

The way to manage this without relying heavily on management to manually make it happen is to use a supply chain process automation and orchestration tool like Process Metronome. 

Automation, orchestration, Intelligent Workflows and Supply chain Control Tower are all necessary ingredients for such tool, if you really want to connect the day to day execution with your standard operating model.

In fact, doing your work supporting by the solution will ensure the adherence to the operating model and a more efficient way to run it.

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Evaluating the 6 Supply Chain Models Powering Businesses Around the World

supply chain business model example

As a business, you understand that supply chain management is a key element in getting raw materials, making goods, and delivering new products to the end user. Having control over your supply chain helps you manage unpredictable demand and other procurement issues in order to meet your order fulfillment goals. Having control of your supply chain depends on supply chain modeling, and once you have a plan in place, you can improve customer satisfaction and upend the traditional supply chain process.

But what exactly is supply chain modeling? How does it improve end efficiency and responsiveness in your organization, and give you an advantage in different competitive markets? In this article, we’ll evaluate the six supply chain models to help you leverage the best supply chain model for your business.

What Is Supply Chain Modeling?

Supply chain modeling is an attempt to bring order to the general chaos of a supply chain to achieve specific business objectives. It can include everything from supply chain invoicing to warehousing to the distribution of finished products. When you have a supply chain model, you can use the process to plan and optimize the supply chain routes your business needs to succeed.

Without supply chain modeling, your processes wouldn’t be optimized to the level they need to be. Modeling is like having a well-oiled machine, and it can be used to help improve the logistics in your supply chain. Supply chain modeling helps you deliver a perfect product with on-time delivery and friendly service while effectively resolving any issues in the supply chain.

What Are the Benefits of Supply Chain Modeling?

There are many different benefits that supply chain modeling can bring to businesses. Having a supply chain model helps you control your inventory and know where it is at all times. It also helps you reduce your overall costs and overhead by giving you a bird’s-eye view of your supply chain. You can also increase the efficiency of your processes and respond to customer demand quicker in order to improve customer satisfaction.

To achieve these benefits, your supply chain model needs to be robust — and needs to be the right fit for your business. There are different types of models that will work well in different industries, so you need to make sure that you implement the best option for your organization. When you have the proper supply chain model for your business, you can gain a competitive advantage over others in your industry who don’t have the same processes and optimization strategies in place.

Supply chain models address many different questions and considerations, including:

  • What should be produced?
  • What market identification do you have?
  • What areas of your supply chain should be audited ?
  • How do you choose the best site for your production plants?
  • How can you find the best suppliers?
  • Where are your suppliers and plants located?
  • What are the best methods of transportation and inventory?
  • How should you go about distributing finished products?
  • Which warehousing strategies can help you grow?

What Are the 6 Supply Chain Models?

There are six main types of supply chain models that you can use in your organization. Let’s dive into them to give you the context you need to choose the best fit based on your business needs and your supply chain strategy goals.

1. The Continuous Flow Model

The continuous flow model is made for industries and manufacturing businesses that need to deliver continuously. When there is a continued, steady stream of products and resources going out to the customers, you need a supply chain that can meet those demands. This is best for established brands with strong supply chain networks and minimal variation between purchase orders. For example, Coca-Cola has a large customer base with little to no variety in the demand, even with changing seasons and markets.

Pros and Cons

  • Good for established commodity businesses
  • Bad for new businesses or small businesses that have changing demand

2. The Agile Model

The agile model requires the business to have four key components: virtual integration, process alignment, market sensitivity, and a network base. These elements work together to help a business find trends and quickly put together products that fit into the current market demand and customer need trends. It works well for brands that need to create custom products but also need to have core products, like specialty clothing companies such as ZARA.

  • Good for businesses that need to quickly adapt to new trends
  • Bad for businesses that have a high demand for the same products

3. The Fast Chain Model

The fast chain model is used by businesses that have products with a short lifespan, which need to be delivered frequently and may be considered trendy. This model helps businesses that need to change the types of products they send frequently and deliver to market before the product loses relevance. This might include clothing companies or sporting goods companies like Adidas, who need to get their products on the shelves before trends change.

  • Good for apparel and trendy brands
  • Bad for businesses that have established demand

4. The Efficient Chain Model

The next model is the efficient chain model which, as the name suggests, focuses on supply chain efficiency . It works for businesses that have highly competitive markets and that need to be highly efficient within their supply chain logistics. This model prioritizes inventory management and delivery of goods by making sure that all equipment and machines are working optimally to produce goods without any unnecessary waste. For example, General Mills sells products similar to its competitors and has a thin profit margin, making efficiency a key goal for manufacturing.

  • Good for businesses that need to increase efficiency in the manufacturing process
  • Bad for businesses that have custom products and goods that take time to make

5. The Flexible Model

The flexible model is a type of supply chain model built to accommodate peaks and dips in customer demand over the year. These models need to have part segmentation, accurate stocking algorithms, and flexible planning in order to work. This is apparent in companies like Office Depot, which have seasonal increases in demand during the fall for back-to-school shopping. This model helps the company predict upcoming demand and stock up inventory as needed for these shifts in demand.

  • Good for businesses that experience seasonal peaks in demand
  • Bad for businesses that have a steady demand

6. The Custom-Configured Model

The final model is the custom-configured model, which can be considered a combination of the agile model and the continuous flow model. This model works best when there is a need for multiple product configurations during the production or assembly of different goods within the factory. This can help customers get the products they need quickly while allowing them to customize the product as needed. A great example of a company that benefits from this process is L.L. Bean, a clothing manufacturer that has options for custom stitching and other customization options on items like backpacks and polo shirts.

  • Good for businesses that offer custom goods
  • Bad for businesses with a high demand for similar products

Efficiency vs. Responsive Supply Chain Models

Certain supply chain models are built for efficiency, and others are made to be responsive. There’s no right or wrong answer about which will work for you, but you should be aware of where the above models fall into the two approaches so you can figure out which is best for your organization.

Some of the best and strongest supply chain models will incorporate elements of both responsive and efficient models for the best results. Both categories focus on keeping costs down, reducing risks, making customers happy, and enhancing your supply chain’s productivity across the board. When you can combine the two strategies, you can integrate your supply chain models and elevate your entire business when it comes time for growth.

Efficiency Supply Chain Models

Supply chain models that fit into the efficiency category are made to reduce lead times and focus on the commodity that the manufacturer is making — and get that to the lowest cost possible. These models are made to improve speed and cut costs across the entire supply chain process. They focus on keeping things moving quickly and providing a clear and simple rhythm to the supply chain processes. However, efficiency models have a few negative points, like leading to excess inventory or increasing costs in other areas besides the product creation process.

Supply chain models that fit into the efficiency theory include:

  • Efficient chain model
  • Fast chain model
  • Continuous flow model

Responsive Supply Chain Models

Responsive chain supply models focus on flexibility for industries rather than on cutting unnecessary steps and reducing all costs. These models are great for businesses that deal with a level of uncertainty and need to have flexible supply chain strategies for managing these situations. These models rely more heavily on human intervention and less so on automation, as the circumstances around them can change frequently.

The most significant drawback of responsive supply chain models is the risk of human error, as there is more human input in these models. This includes the concern that untrained or undertrained staff members might negatively affect these models with their errors.

Supply chain models that fit into the responsive theory include:

  • Agile model
  • Flexible model
  • Custom-configured model

Empower Your Supply Chain With Anvyl

Improving your supply chain is essential to business growth and stability. Having a supply chain model helps you improve your manufacturing processes and improve forecast accuracy in order to lower costs and meet increasing customer demands. A strong supply chain strategy will help you develop an agile model that focuses on adaptability and automation to help you move forward with your organization.

Empowering your supply chain requires the help of digital tools. At Anvyl, we help organizations streamline production processes, provide a central source of truth for your order information, and manage supplier and retailer relations. If you want to optimize your supply chain process and get ahead of the competition, get a demo of Anvyl today and see what we can do for you.

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The Four Main Supply Chain Models

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supply chain business model example

While retail businesses, manufacturers, and other organizations depend on various factors for their success, choosing the right type of supply chain might be the most integral. Supply chains are systems of logistics that include every step necessary for converting a raw material to a finished product ready for consumer use. Entire teams are devoted to managing these phases and all the processes involved so that businesses can sell their products at a profit.

However, one type of supply chain doesn’t necessarily fit all organizations. Different supply chain models are used for different types of products or services to meet various customer needs. An efficient supply chain model can help an organization’s business operations reach or exceed their goals and keep consumers satisfied.

Read on to learn more about the different supply chain models, how they compare, and how to choose the right one for your business.

Understanding Supply Chain Models

There are four main supply chain models in use today: the continuous-flow model, fast model, efficient model, and custom-configured model. Each model plays a specific role in managing and optimizing the flow of a business’s products or services. Supply chain management in general aims to keep costs low, inventory levels stable, and delays minimized, and each model approaches these goals in a different way.

Understanding and implementing the right supply chain model can have a considerable impact on an organization’s bottom line. For example, a designer clothes manufacturer using a continuous-flow model might not be as effective as one using a fast model, as fashion trends come and go quickly. Both company and consumer benefit the most from the supply chain model that meets their unique specifications.

The Importance of Supply Chain Models

The overall efficiency and cost of a supply chain largely hinge on the type of model employed. Many moving parts make up a supply chain, including initial planning and budgeting, acquisition and storage of raw materials, manufacturing of goods, shipping and delivery, and the final sale of finished products. Each of the four supply chain models are designed to optimize these stages depending on the types of products made and their intended market.

A particularly slow turnaround time in the supply chain may hurt the organization’s financial well-being. Similarly, low-quality products or services might cause customers to take their business elsewhere. That’s why proper supply chain strategy is an important first step to identify which model will best serve the entire chain.

The Continuous-Flow Model

Many industries call for constant use and replenishment of specific products or services. These industries include pharmaceuticals, automotive manufacturing, food service, and more. Businesses and organizations involved in these types of supply chains typically adopt the continuous-flow model for maximum efficiency.

Perhaps the most traditional of the supply chain models, the continuous-flow model works well for organizations with high-volume production lines and mostly uniform goods. This model aims to keep each stage of the supply chain moving at a balanced, streamlined pace. Supply chain managers using the continuous-flow model typically emphasize high efficiency, standardization of operations, and quality control. Continuous-flow supply chains pair well with a stable demand for the products and services involved.

The Fast Model

Fast models are useful for businesses that, while still engaging in all the standard phases of the supply chain, need to keep up with shifting consumer demand. These businesses manufacture finished products that tend to have a short market life cycle. Fashion brands, electronics companies, and other consumer goods organizations benefit from the fast model since their products may be perceived as trendy and experience quick turnaround periods.

But it’s not always about trendiness. Many other businesses use the fast model if they focus on speed and responsiveness. Fast model strategies usually seek to maximize returns, minimize delivery times, and keep customers happy with their purchases. Product quality isn’t necessarily ignored, but it tends not to be the highest priority in this model.

The Efficient Model

Competitive industries stick to the efficient model so that their products and services can reach the market as quickly as possible, especially when demand is forecasted to be high. Since efficiency is their main goal, organizations using this model make sure to prepare raw materials and manufacturing processes well in advance to avoid delays.

Supply chain managers who operate under the efficient model keep a keen eye on inventory management and strive to get the most output from production equipment and labor. Additionally, these managers work to balance low costs with good product quality. The types of organizations that use the efficient model vary widely and may include anything from breakfast cereal manufacturers to asphalt companies.

The Custom-Configured Model

Some organizations deal with very specific types of products or have a customer base with unique needs. These organizations fare well with a custom-configured supply chain model. As its name implies, the custom-configured model is designed for customized scenarios in material acquisition, production assembly, and delivery of finished goods. This includes prototype products or products with multiple configurations. A prosthetics manufacturer, for instance, might use the custom-configured model to create and ship their products to hospitals or specialty care clinics.

More flexibility and, in some cases, more investment may be required under this model. Speed is not as important as careful, methodical management of the supply chain, often with specific customer input. Common examples of organizations that use the custom-configured model include furniture stores, computer manufacturers, and makers of musical instruments.

Choosing the Right Supply Chain Model

Selecting the appropriate model for any given supply chain should be a top priority for supply chain leaders and strategists. These professionals should base their choice on the nature of the industry, customer demand, and their overall business goals. But if you help oversee your organization’s supply chain, how exactly do you make the right choice?

First, understand the importance of being adaptable and flexible. Sometimes, businesses need to be prepared to switch models or adapt their existing one in response to market fluctuations. But even in a perfect market landscape, you should be aware of how each model works and tailor a model to your specific supply chain. Ask yourself what types of products or services you’re providing, what kinds of consumers are buying them, and how much your organization is willing to spend throughout each stage of the supply chain.

Leveraging Supply Chain Models for Competitive Advantage

Using the right supply chain model can potentially transform a business’s operations, improving efficiency and providing a competitive advantage. But being willing to switch, adjust, or reassess models when needed is just as important as using the right one. Fortunately, supply chain leaders don’t need to navigate these models alone, as advancements in technology like AI, machine learning, and blockchain are influencing how supply chains are managed. Dedicated software programs can also help determine the best supply chain models and aid in supervising the stages of the chain.

Planning out your ideal career in supply chain management? Consider studying at WGU, where you can enroll in an online, accredited bachelor’s program in business management or supply chain and operations management . Flexible programs like these can provide the skills you need to implement the best supply chain model for your organization. Plus, you can study at your own pace, with no set log-in times for coursework.

Our business programs are designed with input by industry experts and can be completed as fast as you master the material, so that you can potentially save time and money on your way to your dream supply chain management job. Get started today!

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6 Most Important Types of Supply Chain Management Models

Explore the "6 Most Important Types of Supply Chain Management Models" in this comprehensive blog. Delve into the intricacies of continuous flow, fast chain, efficient chain, agile, custom-configured, and flexible models. Whether you're a supply chain professional or someone interested in the field, this blog will provide valuable insights for you.

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According to Statista , the US only suffered the most from supply chain disruptions, with an average annual cost of 180 million GBP. Therefore, by using different Supply Chain models, you can avoid such disruptions and expenses. Want to know how? Read this blog to learn about the six most important Types of Supply Chain Management models. Let’s dive in to learn more about it! 

Table of C ontents  

1)  Six different Types of Supply Chain Management 

    a)  Continuous flow model 

    b)  Fast chain model 

    c)  Efficient chain model 

    d)  Agile model 

    e)  Custom-configured model 

    f)  Flexible model 

2)  Conclusion 

Six different Types of Supply Chain Management  

Supply Chain Management plays a vigorous role in the success of modern businesses, enabling the efficient transfer of services and goods from the point of origin to the end consumer. Various Supply Chain Management Processes and models have been developed to optimise operations and maximise efficiency. Let's explore the six most important Types of Supply Chain Management models:  

Continuous flow model  

The continuous flow model focuses on maintaining a smooth and uninterrupted flow of products from the point of origin to the end consumer, minimising bottlenecks and delays. It leads to reduced inventory levels, cost savings, and improved customer satisfaction. Let's explore the benefits of the continuous flow model:  

1)  Reduced inventory : Avoiding excess inventory through continuous flow leads to cost savings in warehousing and carrying costs.   

2)   Faster response time : Real-time data and streamlined production enable rapid adjustments to changes in demand.  

3)  Cost efficiency : Eliminating inefficiencies results in producing more with fewer resources, optimising costs. 

4)  Enhanced quality control : Rigorous quality control throughout the production process improves overall product quality.  

Implementing the continuous flow model requires careful planning, coordination, and investments in advanced technologies and automated systems. Collaborative relationships with suppliers and distributors are crucial for maintaining supply chain continuity.   

The continuous flow model is particularly effective in industries with high-demand variability and rapidly changing market conditions. By adopting this approach, businesses can gain a competitive edge and achieve long-term success in today's fast-paced business environment.

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Fast c hain m odel  

The fast chain model prioritises speed and responsiveness to meet customers' ever-changing demands promptly. It leverages technology, data analytics, and strategic partnerships for quick order fulfilment and delivery. Here are the benefits of the fast chain model:  

1)   Rapid order fulfilment : With efficient logistics and real-time tracking systems, companies can swiftly process and deliver orders to customers.  

2)   Agile inventory management : The fast chain model employs real-time data analysis to optimise inventory levels and ensure products are readily available.   

3)  C ustomer-centric approach : By focusing on meeting customer demands quickly, businesses can enhance customer satisfaction and loyalty.   

4)  C ollaborative partnerships : Strategic collaborations with suppliers and delivery partners enable seamless and expedited supply chain operations.   

Implementing the fast chain model requires a robust technological infrastructure and Agile business processes. Companies must invest in advanced Supply Chain Management software and collaborate closely with suppliers and delivery partners to ensure timely order fulfilment.   

The fast chain model is especially crucial in industries where fast product delivery and response times are critical for remaining competitive in the market. By adopting this model, businesses can position themselves as market leaders and gain a significant advantage in meeting the needs of today's fast-paced consumers.  

Efficient chain model  

The efficient chain model emphasises cost-effectiveness and resource optimisation throughout the Supply Chain. By implementing Lean principles and streamlining processes, this model aims to reduce waste and enhance overall operational efficiency. Key characteristics and benefits of the efficient chain model include:  

Types of Supply Chain Management

1) Lean manufacturing : The efficient chain model focuses on minimising excess inventory and non-value-added activities, leading to cost reductions and improved productivity.  

2)   Just-in-time (JIT) production : Adopting JIT principles ensures that production occurs only when there is actual demand . They reduce inventory carrying costs and minimises storage space requirements.  

3)  Collaborative supply chain partnerships : Close collaboration with suppliers and other stakeholders helps in improving demand forecasting accuracy and enhancing the overall efficiency of the supply chain.   

4)  C ontinuous process improvemen t: The efficient chain model encourages a culture of continuous improvement . It aims to identify and eliminate inefficiencies in the supply chain.  

Implementing the efficient chain model requires a systematic approach to identifying areas for improvement, implementing lean practices, and optimising processes. Companies need to adopt innovative technologies and data analytics to drive informed decision-making and enhance supply chain visibility.   

The efficient chain model is particularly beneficial for companies operating in cost-sensitive industries or facing fierce competition. By adopting this model, businesses can achieve cost savings, enhance operational efficiency, and create a competitive advantage in the market.   

Agile model  

The Agile model is a Supply Chain Management approach that prioritises adaptability and responsiveness in a rapidly changing business environment. This model allows companies to quickly adjust their plans and operations to meet changing customer demands and market dynamics. Here are the benefits of the Agile model:  

1)  Real-time data and analytics : The Agile model relies on real-time information and analytics to make informed decisions swiftly. This enables companies to stay updated on market trends and customer preferences. 

2)  Collaboration and communication : Close collaboration with suppliers, partners, and stakeholders is essential for the effective implementation of the Agile model. Clear and timely communication ensures seamless coordination throughout the supply chain. 

3)  Inventory optimisation : By closely monitoring demand and adjusting inventory levels accordingly, companies can avoid excess stock and reduce carrying costs. 

4)  Risk mitigation : The Agile model enables companies to identify potential risks and proactively implement contingency plans to mitigate disruptions. 

Implementing the Agile model requires a flexible organisational structure and a culture that encourages innovation and adaptability. Technology plays a crucial role in providing real-time data, facilitating communication, and automating processes.   

The Agile model is particularly effective in industries with short product lifecycles, unpredictable demand patterns, and rapidly changing consumer preferences. By adopting this model, businesses can enhance their ability to respond quickly to market changes. They can also capitalise on new opportunities and uphold a competitive edge in today's dynamic business landscape.   

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Custom-configured model  

The custom-configured model is a Supply Chain Management approach that focuses on providing personalised products or services to meet individual customer requirements. This model is particularly prevalent in industries where customisation is a key differentiator, such as fashion, technology, and luxury goods. Let’s take a look at the benefits of the custom-configured model:  

Types of Supply Chain Management: Benefits of the custom-configured model

1) Tailored solutions : The custom-configured model allows companies to offer products or services that are uniquely tailored to each customer's preferences and specifications.   

2)  F lexibility and variety : Companies adopting this model must have a flexible Supply Chain capable of accommodating a wide variety of product configurations and options.  

3)  Enhanced customer experience : By providing personalised solutions, companies can boost the overall customer experience and build stronger brand loyalty.  

4)  Efficient coordination : Effective coordination between suppliers, manufacturers, and retailers is crucial to ensure smooth production and delivery of custom-configured products.   

Implementing the custom-configured model requires advanced technology and efficient data management systems to handle the complexity of customisation. Additionally, companies need to collaborate closely with customers to understand their individual needs and preferences accurately .   

The custom-configured model is a strategic choice for businesses seeking to differentiate themselves in competitive markets and cater to the growing demand for personalised products or services. By adopting this model, companies can gain a viable advantage and build long-lasting relationships with their customers.   

Flexible model   

The flexible Supply Chain Management model incorporates elements from various other models and allows companies to adapt their strategies based on specific situations. By combining aspects of continuous flow, fast chain, efficient chain, agile, and custom-configured models, businesses can tailor their approach to suit their changing needs. Let’s take a look at the key characteristics and benefits of the flexible model:  

1)   Adaptable strategies : The flexible model enables companies to adjust their supply chain strategies in response to changing market conditions, customer demands, or unforeseen disruptions.   

2)  Address risks : By having a flexible supply chain, companies can proactively address potential risks and implement contingency plans to minimise the impact of disruptions.   

3)  Scalability : The flexible model allows companies to scale their businesses up or down quickly to meet fluctuating demand and optimise resource utilisation.   

4)   Customer-centric approach : By combining elements of the custom-configured model, companies can offer personalised solutions while maintaining operational efficiency.  

Implementing the flexible model requires a dynamic and responsive organisational culture. Companies must invest in technologies that provide real-time data and analytics to support decision-making. Collaborative relationships with suppliers and partners are also essential to ensure smooth coordination and communication throughout the supply chain.   

The flexible model is especially advantageous for companies operating in industries with volatile market conditions and rapidly changing customer preferences. By adopting this model, businesses can stay agile and resilient, positioning themselves for success in a dynamic and ever-evolving business landscape. 

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Conclusion  

We hope you read and understand the Types of Supply Chain Management Models. These models offer unique advantages for businesses. Choosing the right model can optimise operations, reduce costs, and enhance customer satisfaction in today's competitive market. 

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In today’s complex global business environment, effective supply chain management (SCM) is crucial for maintaining a competitive advantage. The pandemic and its aftermath highlighted the importance of having a robust supply chain strategy , with many companies facing disruptions due to shortages in raw materials and fluctuations in customer demand. The challenges continue: one 2023 survey found 44% of companies had to make changes in the past year due to issues with their supply chain footprint, and 49% said supply chain disruptions had caused planning problems.

But with the right tools and priorities, each step in the process can run smoothly. Here’s how companies are using different strategies to address supply chain management and meet their business goals.

Why supply chain management matters

Supply chain management involves coordinating and managing all the activities involved in sourcing , procurement, conversion and logistics . It includes everything from product development and strategic decision-making to information systems and new technologies. But perhaps most relevant today are the capabilities within SCM to help mitigate disruption.

Supply chain disruptions are caused by a variety of factors, from pandemics, natural disasters and political instability to supplier bankruptcy and IT failures. To mitigate these risks , companies need the resources and technology to develop robust contingency plans.

On top of disruption, companies with global supply chains must also deal with different regulatory environments, cultural norms and market conditions. They need strong SCM practices to help work out the logistics of transporting goods across long distances and through multiple countries without creating longer lead times or delays.

Effective SCM initiatives offer several benefits:

  • Lower operational costs : By optimizing inventory levels , improving warehousing efficiency and streamlining order fulfillment processes, companies can save on storage, labor and transportation expenses.
  • Better customer satisfaction : An optimized supply chain allows businesses to make sure products are available when and where people want them—which can improve relationships and loyalty with customers.
  • Fewer disruptions : A healthy supply chain mitigates risks and protects against inevitable disruption. By developing contingency plans and resilient supply chains, companies can continue to operate even when unexpected events occur.

Key strategies for effective supply chain management

There are a number of ways that companies can better optimize and manage their supply chains. Here are the areas some businesses are focusing on as they refine their overall approach:

Forecasting and demand planning

Companies can reduce storage costs and avoid stockouts or overstock with help from accurate demand forecasting , which uses historical sales data, market research and economic trends to predict future market demand for products or services.

Big data and predictive analytics are increasingly being used to improve forecasting accuracy, allowing businesses to respond more effectively to changes in customer needs. Advanced software tools can automate some parts of forecasting, providing real-time updates and alerts when inventory levels are too high or low.

Automation can streamline supply chain operations, from order fulfillment to inventory tracking. It can take many forms, from automated warehouse systems that pick and pack orders, to blockchain-based smart contracts to software that automates purchasing and invoicing processes . These technologies can significantly reduce manual labor, minimize errors and speed up processes, leading to increased efficiency and cost savings.

Technology-driven visibility

AI and machine learning can be used to analyze large amounts of data quickly and accurately, providing insights that can improve forecasting, inventory management, and customer service. A 2023 survey found that a third of businesses are using artificial intelligence (AI) to improve resource and supply chain planning, and more than a third said using digital tools for inventory management was the most effective strategy in cutting overall supply chain costs.

Real-time tracking systems, often enabled by Internet of Things (IoT) devices, help companies monitor their supply chain accurately and immediately. Having visibility into the status and location of goods as they move through the supply chain helps companies monitor supplier performance, identify bottlenecks and respond quickly to disruptions. A supply chain control tower can connect many sources of data-driven information and improve end-to-end visibility.

Moreover, enterprise resource planning (ERP) software can integrate different aspects of a business into one system, providing a holistic view of operations and the metrics needed to streamline supply chain processes. Integrated supply chain analytics software, such as IBM Planning Analytics , connect complex data sets for more insightful analytics and scenario analysis that can help avoid demand-and-supply mismatches or fulfillment delays.

Sustainable and ethical sourcing

Companies are trying to ensure that every stage of their supply chains is adhering to responsible practices. This not only helps satisfy customer desire for sustainability and ethical products but also helps mitigate risks, such as regulatory penalties or reputational damage.

Ethical sourcing involves ensuring that the products and services a company procures are produced under fair, safe and environmentally friendly conditions. This may involve conducting audits of suppliers, implementing codes of conduct and using certification schemes to verify compliance. Sustainable sourcing, meanwhile, focuses on minimizing the environmental impact of the supply chain. This might involve partnering with suppliers who use renewable energy , reducing packaging or implementing recycling programs.

Blockchain technologies can increase transparency and traceability in the supply chain, helping to prevent fraud and ensure product authenticity. For example, IBM Food Trust® , a collaborative network of growers, processors, wholesalers, distributors, manufacturers, retailers and others, uses blockchain technology to improve visibility and accountability across the food supply chain.

Building strong partnerships

Strong relationships are a key part of any business strategy. When it comes to supply chains, strong connections with providers, distributors and other key stakeholders in the supply network can help companies improve resilience. Partnerships can facilitate better communication, collaboration and responsiveness, particularly in times of disruption. They can also provide access to new markets, technologies, and expertise, offering a competitive advantage.

Because finding the right suppliers can be challenging, some businesses turn to technology to help. For example, IBM® Trust Your Supplier , a supply chain risk management software solution, helps ensure suppliers and other partners in the supply chain meet global and industry standards, provides continuous monitoring and risk assessment and uses blockchain-based information management to ensure transparency and traceability.

Effective supply chain strategy for the future

Whether it’s through forecasting, automation, sustainable sourcing, strong partnerships or new technologies, there are numerous strategies companies can employ to optimize supply chain planning and execution. By doing so, they can improve profitability, meet customer demand and ensure their business is resilient in the face of disruptions.

To learn more about how a technology-enabled supply chain can support your business goals, explore the IBM Sterling® Supply Chain Intelligence Suite.

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Supply Chain Design and Analysis: Models and Methods

For years, researchers and practitioners have primarily investigated the various processes within manufacturing supply chains individually. Recently, however, there has been increasing attention placed on the performance, design, and analysis of the supply chain as a whole.

This attention is largely a result of the rising costs of manufacturing, the shrinking resources of manufacturing bases, shortened product life cycles, the leveling of the playing field within manufacturing, and the globalization of market economies.

The objectives of this paper are to:

  • provide a focused review of literature in multi-stage supply chain modeling
  • define a research agenda for future research in this area.

A supply chain may be defined as an integrated process wherein a number of various business entities (i.e., suppliers, manufacturers, distributors, and retailers) work together in an effort to:

  • acquire raw materials,
  • convert these raw materials into specified final products,
  • deliver these final products to retailers

This chain is traditionally characterized by a forward flow of materials and a backward flow of information. For years, researchers and practitioners have primarily investigated the various processes of the supply chain individually. Recently, however, there has been increasing attention placed on the performance, design, and analysis of the supply chain as a whole.

From a practical standpoint, the supply chain concept arose from a number of changes in the manufacturing environment, including the rising costs of manufacturing, the shrinking resources of manufacturing bases, shortened product life cycles, the leveling of the playing field within manufacturing, and the globalization of market economies.

The current interest has sought to extend the traditional supply chain to include “reverse logistics”, to include product recovery for the purposes of recycling, re-manufacturing, and re-use. Within manufacturing research, the supply chain concept grew largely out of two-stage multi-echelon inventory models, and it is important to note that considerable progress has been made in the design and analysis of two-echelon systems.

Most of the research in this area is based on the classic work of Clark and Scarf (1960) and Clark and Scarf (1962). The interested reader is referred to Federgruen (1993) and Bhatnagar, et. al. (1993) for comprehensive reviews of models of this type. More recent discussions of two-echelon models may be found in Diks, et. al. (1996) and van Houtum, et. al. (1996). The objectives of this paper are to:

  • provide a focused review of literature in the area of multi-stage supply chain design and analysis
  • develop a research agenda that may serve as a basis for future supply chain research.

The Supply Chain Defined

As mentioned above, a supply chain is an integrated manufacturing process wherein raw materials are converted into final products, then delivered to customers. At its highest level, a supply chain is comprised of two basic, integrated processes:

  • the Production Planning and Inventory Control Process,
  • the Distribution and Logistics Process.

These Processes illustrated below in Figure 1, provide the basic framework for the conversion and movement of raw materials into final products.

The Supply Chain Process

Figure 1. The Supply Chain Process

The Production Planning and Inventory Control Process encompass the manufacturing and storage sub-processes, and their interface(s). More specifically, production planning describes the design and management of the entire manufacturing process (including raw material scheduling and acquisition, manufacturing process design and scheduling, and material handling design and control). Inventory control describes the design and management of the storage policies and procedures for raw materials, work-in-process inventories, and usually, final products.

The Distribution and Logistics Process determines how products are retrieved and transported from the warehouse to retailers. These products may be transported to retailers directly, or may first be moved to distribution facilities, which, in turn, transport products to retailers. This process includes the management of inventory retrieval, transportation, and final product delivery.

These processes interact with one another to produce an integrated supply chain. The design and management of these processes determine the extent to which the supply chain works as a unit to meet required performance objectives.

Literature Review

The supply chain in Figure 1 consists of five stages. Generally, multi-stage models for supply chain design and analysis can be divided into four categories, by modeling approach. In the cases included here, the modeling approach is driven by the nature of the inputs and the objective of the study.

The four categories are:

  • deterministic analytical models , in which the variables are known and specified
  • stochastic analytical models , where at least one of the variables is unknown and is assumed to follow a particular probability distribution
  • economic models
  • simulation models

Deterministic Analytical Models

Williams (1981) presents seven heuristic algorithms for scheduling production and distribution operations in an assembly supply chain network (i.e., each station has at most one immediate successor, but any number of immediate predecessors). The objective of each heuristic is to determine a minimum-cost production and/or product distribution schedule that satisfies final product demand.

The total cost is a sum of average inventory holding and fixed (ordering, delivery, or set-up) costs. Finally, the performance of each heuristic is compared using a wide range of empirical experiments, and recommendations are made on the bases of solution quality and network structure.

Williams (1983) develops a dynamic programming algorithm for simultaneously determining the production and distribution batch sizes at each node within a supply chain network . As in Williams (1981), it is assumed that the production process is an assembly process. The objective of the heuristic is to minimize the average cost per period over an infinite horizon, where the average cost is a function of processing costs and inventory holding costs for each node in the network.

Ishii, et. al (1988) develop a deterministic model for determining the base stock levels and lead times associated with the lowest cost solution for an integrated supply chain on a finite horizon. The stock levels and lead times are determined in such a way as to prevent stockout, and to minimize the amount of obsolete (“dead”) inventory at each stock point. Their model utilizes a pull-type ordering system which is driven by, in this case, linear (and known) demand processes.

Cohen and Lee (1989) present a deterministic , mixed-integer, non-linear mathematical programming model, based on economic order quantity (EOQ) techniques, to develop what the authors refer to as a “global resource deployment” policy. More specifically, the objective function used in their model maximizes the total after-tax profit for the manufacturing facilities and distribution centers (total revenue less total before-tax costs less taxes due). This objective function is subject to a number of constraints, including “managerial constraints” (resource and production constraints) and “logical consistency constraints” (feasibility, availability, demand limits, and variable non-negativity).

The outputs resulting from their model include:

  • Assignments for finished products and subassemblies to manufacturing plants, vendors to distribution centers, distribution centers to market regions.
  • Amounts of components , subassemblies, and final products to be shipped among the vendors, manufacturing facilities, and distribution centers.
  • Amounts of components, subassemblies, and final products to be manufactured at the manufacturing facilities.

Moreover, this model develops material requirements and assignments for all products, while maximizing after-tax profits.

Cohen and Moon (1990) extend Cohen and Lee (1989) by developing a constrained optimization model, called PILOT, to investigate the effects of various parameters on supply chain cost, and consider the additional problem of determining which manufacturing facilities and distribution centers should be open. More specifically, the authors consider a supply chain consisting of raw material suppliers, manufacturing facilities, distribution centers, and retailers. This system produces final products and intermediate products, using various types of raw materials.

Using this particular system, the PILOT model accepts as input various production and transportation costs, and consequently outputs:

  • Which of the available manufacturing facilities and distribution centers should be open.
  • Raw material and intermediate order quantities for vendors and manufacturing facilities.
  • Production quantities by-product by the manufacturing facility.
  • Product-specific shipping quantities from manufacturing facility to distribution center to the customer.

The objective function of the PILOT model is a cost function, consisting of fixed and variable production and transportation costs, subject to supply, capacity, assignment, demand, and raw material requirement constraints. Based on the results of their example supply chain system, the authors conclude that there are a number of factors that may dominate supply chain costs under a variety of situations and that transportation costs play a significant role in the overall costs of supply chain operations.

Newhart, et. al. (1993) design an optimal supply chain using a two-phase approach. The first phase is a combination of a mathematical program and heuristic model, with the objective of minimizing the number of distinct product types held in inventory throughout the supply chain. This is accomplished by consolidating substitutable product types into single SKUs.

The second phase is a spreadsheet-based inventory model, which determines the minimum amount of safety stock required to absorb demand and lead time fluctuations. The authors considered four facility location alternatives for the placement of the various facilities within the supply chain. The next step is to calculate the amount of inventory investment under each alternative, given a set of demand requirements, and then select the minimum cost alternative.

Arntzen, et. al. (1995) develop a mixed integer programming model, called  Global Supply Chain Model  (GSCM), that can accommodate multiple products, facilities, stages (echelons), time periods, and transportation modes. More specifically, the  Global Supply Chain Model  (GSCM) minimizes a composite function of:

  • activity days
  • total (fixed and variable)cost of production, inventory, material handling, overhead, and transportation costs.

The model requires, as input, bills of materials, demand volumes, costs and taxes, and activity day requirements and provides, as output:

  • the number and location of distribution centers
  • the customer-distribution center assignment
  • the number of echelons (amount of vertical integration)
  • the product-plant assignment.

Voudouris (1996) develops a mathematical model designed to improve efficiency and responsiveness in a supply chain. The model maximizes system flexibility, as measured by the time-based sum of instantaneous differences between the capacities and utilization of two types of resources: inventory resources and activity resources. Inventory resources are resources directly associated with the amount of inventory held; activity resources, then, are resources that are required to maintain material flow.

The model requires, as input, product-based resource consumption data and bill-of-material information, and generates, as output:

  • a production, shipping, and delivery schedule for each product
  • target inventory levels for each product.

Camm, et. al. (1997) develop an integer programming model, based on an uncapacitated facility location formulation, for Procter and Gamble Company. The purpose of the model is to: (1) determine the location of distribution centers (DCs) and (2) assign those selected DCs to customer zones. The objective function of the model minimizes the total cost of the DC location selection and the DC-customer assignment, subject to constraints governing DC-customer assignments and the maximum number of DCs allowed.

Stochastic Analytical Models

Cohen and Lee (1988) develop a model for establishing a material requirements policy for all materials for every stage in the supply chain production system. In this work, the authors use four different cost-based sub-models (there is one stochastic sub-model for each production stage considered).

Each of these sub-models is listed and described below :

  • Material Control: Establishes material ordering quantities, reorder intervals, and estimated response times for all supply chain facilities, given lead times, fill rates, bills of material, cost data, and production requirements.
  • Production Control:  Determines production lot sizes and lead times for each product, given material response times.
  • Finished Goods Stockpile (Warehouse): Determines the economic order size and quantity for each product, using cost data, fill rate objectives, production lead times, and demand data.
  • Distribution: Establishes inventory ordering policies for each distribution facility, based on transportation time requirements, demand data, cost data, network data, and fill rate objectives.

Each of these sub-models is based on a minimum-cost objective. In the final computational step, the authors determine approximate optimal ordering policies using a mathematical program, which minimizes the total sum of the costs for each of the four sub-models.

Svoronos and Zipkin (1991) consider multi-echelon, distribution-type supply chain systems (i.e., each facility has at most one direct predecessor, but any number of direct successors). In this research, the authors assume a base stock, one-for-one (S-1, S) replenishment policy for each facility, and that demands for each facility follow an independent Poisson process.

The authors obtain steady-state approximations for the average inventory level and the average number of outstanding backorders at each location for any choice of base stock level. Finally, using these approximations, the authors propose the construction of an optimization model that determines the minimum-cost base stock level.

Lee and Billington (1993) develop a heuristic stochastic model for managing material flows on a site-by-site basis. Specifically, the authors model a pull-type, periodic, order- up-to inventory system, and determine the review period (by product type) and the order- up-to quantity (by product type) as model outputs.

The authors develop a model which will either:

  • determine the material ordering policy by calculating the required stock levels to achieve a given target service level for each product at each facility
  • determine the service level for each product at each facility, given a material ordering policy.

Lee, et. al. (1993), develop a stochastic, periodic-review, order-up-to inventory model to develop a procedure for process localization in the supply chain. That is, the authors propose an approach to operational and delivery processes that consider differences in target market structures (e.g., differences in language, environment, or governments).

Thus, the objective of this research is to design the product and production processes that are suitable for different market segments that result in the lowest cost and highest customer service levels overall.

Pyke and Cohen (1993) develop a mathematical programming model for an integrated supply chain, using stochastic sub-models to calculate the values of the included random variables included in the mathematical program. The authors consider a three-level supply chain, consisting of one product, one manufacturing facility, one warehousing facility, and one retailer. The model minimizes total cost, subject to a service level constraint, and holds the set-up times, processing times, and replenishment lead times constant. The model yields the approximate economic (minimum cost) reorder interval, replenishment batch sizes, and the order-up-to product levels (for the retailer) for a particular production network.

Pyke and Cohen (1994) follow Pyke and Cohen (1993) research by including a more complicated production network. In Pyke and Cohen (1994), the authors again consider an integrated supply chain with one manufacturing facility, one warehouse, and one retailer, but now consider multiple product types. The new model yields similar outputs; however, it determines the key decision variables for each product type. More specifically, this model yields the approximate economic (minimum cost) reorder interval (for each product type), replenishment batch sizes (for each product type), and the order- up-to product levels (for the retailer, for each product type) for a particular supply chain network.

Tzafestas and Kapsiotis (1994) utilize a deterministic mathematical programming approach to optimize a supply chain, then use simulation techniques to analyze a numerical example of their optimization model.

In this work, the authors perform the optimization under three different scenarios :

  • Manufacturing Facility Optimization:  Under this scenario, the objective is to minimize the total cost incurred by the manufacturing facility only; the costs experienced by other facilities are ignored.
  • Global Supply Chain Optimization:  This scenario assumes a cooperative relationship among all stages of the supply chain, and therefore minimizes the total operational costs of the chain as a whole.
  • Decentralized Optimization: This scenario optimizes each of the supply chain components individually, and thus minimizes the cost experienced by each level.

The authors observe that for their chosen example, the differences in total costs among the three scenarios are very close.

Towill and Del Vecchio (1994) consider the application of filter theory and simulation to the study of supply chains. In their research, the authors compare the filter characteristics of supply chains to analyze various supply chain responses to randomness in the demand pattern. These responses are then compared using simulation, in order to specify the minimum safety stock requirements that achieve a particular desired service level.

Lee and Feitzinger (1995) develop an analytical model to analyze product configuration for postponement (i.e., determining the optimal production step for product differentiation), assuming stochastic product demands . The authors assume a manufacturing process with I production steps that may be performed at a factory or at one of the M distribution centers (DCs).

The problem is to determine a step P such that steps 1 through P will be performed at the factory and steps (P+1) to I will be performed at the DCs. The authors solve this problem by calculating an expected cost for the various product configurations, as a sum of inventory, freight, customs, setup, and processing costs. The optimal value of P is the one that minimizes the sum of these costs.

Altiok and Ranjan (1995) consider a generalized production/inventory system with: M

( M > 1) stages ( j = 1,...M), one type of final product, random processing times (FIFO, for all stages) and set-up times, and intermediate buffers. The system experiences demand for finished products according to a compound Poisson process, and the inventory levels for inventories (intermediate buffers and finished goods) are controlled according to a continuous review (R,r) inventory policy, and backorders are allowed.

The authors develop an iterative procedure wherein each of the two-node sub-systems is analyzed individually; the procedure terminates once the estimate average throughput for each sub-system is all approximately equal. Once the termination condition is met, the procedure allows for the calculation of approximate values for the two performance measures:

  • the inventory levels in each buffer j,
  • the backorder probability.

The authors conclude that their approximation is acceptable as long as the P(backorder) does not exceed 0.30, in which cases the system is failing to effectively accommodate demand volumes.

Finally, Lee, et. al. (1997) develop stochastic mathematical models describing “ The Bullwhip Effect ”, which is defined as the phenomenon in which the variance of buyer demand becomes increasingly amplified and distorted at each echelon upwards throughout the supply chain. That is, the actual variance and magnitude of the orders at each echelon is increasingly higher than the variance and magnitude of the sales, and that this phenomenon propagates upstream within the chain. In this research, the authors develop stochastic analytical models describing the four causes of the bullwhip effect (demand signal processing, rationing game, order batching, and price variations), and show how these causes contribute to the effect.

Economic Models

Christy and Grout (1994) develop an economic, game-theoretic framework for modeling the buyer-supplier relationship in a supply chain. The basis of this work is a 2 x 2 supply chain “relationship matrix”, which may be used to identify conditions under which each type of relationship is desired. These conditions range from high to low process specificity, and from high to low product specificity.

Thus, the relative risks assumed by the buyer and the supplier are captured within the matrix. For example, if the process specificity is low, then the buyer assumes the risk; if the product specificity is low, then the supplier assumes the risk. For each of the four quadrants (and therefore, each of the four risk categories), the authors go on to assign appropriate techniques for modeling the buyer-supplier relationship. For the two-echelon case, the interested reader is referred to Cachon and Zipkin (1997).

Simulation Models

Towill (1991) and Towill, et. al. (1992) use simulation techniques to evaluate the effects of various supply chain strategies on demand amplification. The strategies investigated are as follows :

  • Eliminating the distribution echelon of the supply chain, by including the distribution function in the manufacturing echelon.
  • Integrating the flow of information throughout the chain.
  • Implementing a Just-In-Time (JIT) inventory policy to reduce time delays.
  • Improving the movement of intermediate products and materials by modifying the order quantity procedures.
  • Modifying the parameters of the existing order quantity procedures.

The objective of the simulation model is to determine which strategies are the most effective in smoothing the variations in the demand pattern. The just-in-time strategy (strategy (3) above) and the echelon removal strategy (strategy (1) above) were observed to be the most effective in smoothing demand variations.

Wikner, et. al. (1991) examine five supply chain improvement strategies, then implement these strategies on a three-stage reference supply chain model. The five strategies are :

  • Fine-tuning the existing decision rules.
  • Reducing time delays at and within each stage of the supply chain.
  • Eliminating the distribution stage from the supply chain.
  • Improving the decision rules at each stage of the supply chain.
  • Integrating the flow of information, and separating demands into “real” orders, which are true market demands, and “cover” orders, which are orders that bolster safety stocks.

Their reference model includes a single factory (with an on-site warehouse), distribution facilities, and retailers. Thus, it is assumed that every facility within the chain houses some inventory. The implementation of each of the five different strategies is carried out using simulation , the results of which are then used to determine the effects of the various strategies on minimizing demand fluctuations. The authors conclude that the most effective improvement strategy is strategy (5), improving the flow of information at all levels throughout the chain, and separating orders.

Supply Chain Performance Measures

An important component in supply chain design and analysis is the establishment of appropriate performance measures. A performance measure, or a set of performance measures, is used to determine the efficiency and/or effectiveness of an existing system, or to compare competing alternative systems. Performance measures are also used to design proposed systems, by determining the values of the decision variables that yield the most desirable level(s) of performance. Available literature identifies a number of performance measures as important in the evaluation of supply chain effectiveness and efficiency. These measures, described in this Section, may be categorized as either qualitative or quantitative.

Qualitative Performance Measures

Qualitative performance measures are those measures for which there is no single direct numerical measurement, although some aspects of them may be quantified. These objectives have been identified as important, but are not used in the models reviewed here:

Customer Satisfaction: The degree to which customers are satisfied with the product and/or service received, and may apply to internal customers or external customers. Customer satisfaction is comprised of three elements :

  • Pre-Transaction Satisfaction : satisfaction associated with service elements occurring prior to product purchase.
  • Transaction Satisfaction : satisfaction associated with service elements directly involved in the physical distribution of products.
  • Post-Transaction Satisfaction : satisfaction associated with support provided for products while in use.

Flexibility: The degree to which the supply chain can respond to random fluctuations in the demand pattern.

Information and Material Flow Integration:  The extent to which all functions within the supply chain communicate information and transport materials.

Effective Risk Management:   All of the relationships within the supply chain contain inherent risk. Effective risk management describes the degree to which the effects of these risks is minimized.

Supplier Performance:   With what consistency suppliers deliver raw materials to production facilities on time and in good condition.

Quantitative Performance Measures

Quantitative performance measures are those measures that may be directly described numerically. Quantitative supply chain performance measures may be categorized by:

  • objectives that are based directly on cost or profit
  • objectives that are based on some measure of customer responsiveness.

Measures Based on Cost

  • Cost Minimization: The most widely used objective. Cost is typically minimized for an entire supply chain (total cost), or is minimized for particular business units or stages.
  • Sales Maximization:  Maximize the amount of sales dollars or units sold.
  • Profit Maximization : Maximize revenues less costs.
  • Inventory Investment Minimization:  Minimize the amount of inventory costs (including product costs and holding costs)
  • Return on Investment Maximization:  Maximize the ratio of net profit to capital that was employed to produce that profit.

Measures Based on Customer Responsiveness

  • Fill Rate Maximization:  Maximize the fraction of customer orders filled on time.
  • Product Lateness Minimization:  Minimize the amount of time between the promised product delivery date and the actual product delivery date.
  • Customer Response Time Minimization:  Minimize the amount of time required from the time an order is placed until the time the order is received by the customer. Usually refers to external customers only.
  • Lead Time Minimization : Minimize the amount of time required from the time a product has begun its manufacture until the time it is completely processed.
  • Function Duplication Minimization : Minimize the number of business functions that are provided by more than one business entity.

Performance Measures Used in Supply Chain Modeling

As mentioned above, an important element in supply chain modeling is the establishment of appropriate performance measures. Each of the models reviewed in Section 3 sought to optimize one or more measures of supply chain performance, given a set of physical or operational system constraints. Table 1 below summarizes the performance measures used in the reviewed research.

Table 1. Performance Measures in Supply Chain Modeling

Decision Variables in Supply Chain Modeling

In supply chain modeling , the performance measures (such as those described in Section 4) are expressed as functions of one or more decision variables. These decision variables are then chosen in such a way as to optimize one or more performance measures.

The decision variables used in the reviewed models are described below.

  • Production/Distribution Scheduling:  Scheduling the manufacturing and/or distribution.
  • Inventory Levels:  Determining the amount and location of every raw material, subassembly, and final assembly storage.
  • Number of Stages (Echelons): Determining the number of stages (or echelons) that will comprise the supply chain. This involves either increasing or decreasing the chain’s level of vertical integration by combining (or eliminating) stages or separating (or adding) stages, respectively.
  • Distribution Center (DC) - Customer Assignment: Determining which DC(s) will serve which customer(s).
  • Plant - Product Assignment: Determining which plant(s) will manufacture which product(s).
  • Buyer-Supplier Relationships: Determining and developing critical aspects of the buyer-supplier relationship.
  • Product Differentiation Step Specification: Determining the step within the process of product manufacturing at which the product should be differentiated (or specialized).
  • The number of Product Types Held in Inventory: Determining the number of different product types that will be held in finished goods inventory.

Research Agenda

The models reviewed here, and summarized above in Table 1, utilize a number of the performance measures identified in Sections 4.1 and 4.2. Table 2 summarizes the reviewed research.

For each of the models studied, the table illustrates:

  • the type(s) of modeling methodology used
  • the performance measure(s) used,
  • the decision variable(s) used to optimize the associated performance measure(s).

The approach and scope of existing research in the design and analysis of supply chains illustrate a number of issues that have not yet been addressed in the literature. This section suggests a research agenda for supply chain design and analysis in:

  • the evaluation and development of supply chain performance measures,
  • the development of models and procedures to relate decision variables to the performance measures,
  • consideration of issues affecting supply chain modeling ,
  • the classification of supply chain systems to allow for the development of rules-of-thumb or general techniques to aid in the design and analysis of manufacturing supply chains.

Table 1 identifies the performance measures that have been used in the literature. These measures and others may be appropriate for supply chain design and analysis.

Available research has not specifically addressed the adequacy or appropriateness of existing supply chain performance measures.

More specifically, the research questions that may be answered are:

Are the existing performance measures appropriate for supply chains? It is unlikely that a single performance measure will be adequate for an entire supply chain (the interested reader is referred to Beamon (1996) for an evaluation of supply chain performance measures). It is more likely that a system or function of performance measures will be necessary for the accurate and inclusive measurement of supply chain systems.

What are the appropriate performance measures for supply chains? That is, what types of performance measures or performance measurement systems are appropriate for supply chain performance analysis, and why?

Supply Chain Optimization

An important component in supply chain design is determining how an effective supply chain design is achieved, given a performance measure, or a set of performance measures. Research in supply chain modeling has only scratched the surface of how supply chain strategies (or decision variables) may affect a given performance measure, or a set of performance measures. Lee and Whang (1993) and Chen (1997) are examples of such research.

Lee and Whang (1993) develop a performance measurement system that attempts to match the performance metric of individual supply chain managers with those of the entire supply chain, in an attempt to minimize the total loss associated with conflicting goals. Similarly, Chen (1997) also investigates the relationship between individual supply chain managers and the supply chain as a whole, but does so on the basis of inventory costs. In this work, Chen (1997) seeks to develop optimal inventory decision rules for managers (who have only local information) that result in the minimum long-run average holding and backorder costs for the entire system.

Table 2 indicates that the majority of the models use the inventory level as a decision variable and cost as a performance measure. However, as also indicated in Table 2, there are a number of other decision variables (and perhaps others that have not yet been studied) that may be appropriately linked to a system of performance measures comprised of measures listed in Table 2 and perhaps others that have not yet been studied. Thus, research is needed that associates appropriate performance measurement systems to critical supply chain decision variables.

Supply Chain Modeling Issues

In supply chain modeling , there are a number of issues that are receiving increasing attention, as evidenced by their prevalent consideration in the work reviewed here.

These issues are:

  • product postponement,
  • global versus single-nation supply chain modeling
  • demand distortion and variance amplification.

Product Postponement

Product postponement is the practice of delaying one or more operations to a later point in the supply chain, thus delaying the point of product differentiation. There are numerous potential benefits to be realized from postponement, one of the most compelling of which is the reduction in the value and amount of held inventory, resulting in lower holding costs.

There are two primary considerations in developing a postponement strategy for a particular end-item:

  • determining how many steps to postpone
  • determining which steps to postpone.

Current research addressing postponement strategy includes Lee and Feitzinger (1995) and Johnson and Davis (1995).

Global vs. Single-Nation Supply Chain Modeling

Global Supply Chains (GSC) are supply chains that operate (i.e., contain facilities) in multiple nations. When modeling GSCs, there are additional considerations affecting SC performance that are not present in supply chains operating in a single nation. Export regulations, duty rates, and exchange rates are a few of the additional necessary considerations when modeling GSCs. Kouvelis and Gutierrez (1997), Arntzen, et. al. (1995) and Cohen and Lee (1989) address modeling issues associated with GSCs.

Demand Distortion and Variance Amplification

Demand distortion is the phenomenon in which “ orders to the supplier have a larger variance than sales to the buyer” and variance amplification occurs when the distortion of the demand “propagates upstream in the amplified form ”.   These phenomena (also known collectively as the “bullwhip effect” or “whiplash effect”) are common in supply chain systems and were observed as early as Forrester (1961). The consequences of the bullwhip effect on the supply chain may be severe, the most serious of which is excess inventory costs.

As a result, a number of strategies have been developed to counteract the effects of demand distortion and variance amplification. A detailed discussion of the issues and strategies associated with the bullwhip effect may be found in Lee, et. al. (1997), Towill (1996), Newhart, et. al. (1993), Towill, et. al. (1992), Towill (1991), Wikner, et. al. (1991), and Houlihan (1987).

Supply Chain Classification

Supply chain systems are inherently complex. Thus, the models and methods used to accurately study these systems are, expectedly, also complex. However, if supply chain systems could be classified on the bases of specific characteristics, such as uncertainty or volume of demand, number of echelons, or number of items produced, there may be rule-of-thumb techniques that suggest operational characteristics that may achieve a certain objective (or set of objectives). Thus, research that develops a meaningful classification scheme for supply chain systems that leads to rules-of-thumb associations between decision variables and performance objectives is needed.

A supply chain is defined as a set of relationships among suppliers, manufacturers, distributors, and retailers that facilitates the transformation of raw materials into final products. Although the supply chain is comprised of a number of business components, the chain itself is viewed as a single entity. Traditionally, practitioners and researchers have limited their analyses and scope to individual stages within the larger chain, but have recently identified a need for a more integrated approach to manufacturing system design. Consequently, the supply chain framework has emerged as an important component of this new, integrated approach.

The objective of this paper was twofold:

  • to provide a focused review of literature in supply chain modeling
  • to identify a research agenda for future research in this area.

More specifically, this paper reviewed the available supply chain models and methods and identified topics for future research consideration that will facilitate the advancement of knowledge and practice in the area of supply chain design and analysis. Based on the existing body of research in supply chain modeling , suggestions were made for future research in the following four areas:

  • evaluation and development of supply chain performance measures,
  • development of models and procedures to relate decision variables to the performance measures,
  • classification of supply chain systems to allow for the development of rules-of-thumb or general techniques to aid in the design and analysis of manufacturing supply chains.
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What is SCOR? A model for improving supply chain management

The supply chain operations reference (SCOR) model helps businesses evaluate and perfect supply chain management for reliability, consistency, and efficiency.

container shipping port

Supply chain management (SCM) is a critical focus for companies that sell products, services, hardware, and software. The supply chain includes everything involved in the flow of goods from a business to its customers, clients, or other businesses. It’s not something that can be set up and left alone — your supply chain needs to be regularly evaluated so it stays efficient and productive. That’s where the SCOR model comes in.

SCOR model definition

The supply chain operations reference (SCOR) model is designed to evaluate your supply chain for effectiveness and efficiency of sales and operational planning (S&OP). SCM is complex, and S&OP implementation can be difficult, but the SCOR model is intended to help standardize the process and create a measurable way to track results. It works across industries using common definitions that apply to any supply chain process. Using the SCOR model, businesses can judge how advanced or mature a supply chain process is and how well it aligns with business goals.

Originally developed in 1996 by management consulting firm PRTM, SCOR is endorsed by the Supply-Chain Council, which is now part of the Association for Supply Chain Management (ASCM), formerly known as APICS. The original SCOR framework was developed by AMR Research and consulting firm Pitiglio, Rabin, Todd and McGrath (PRTM); and it was vetted by companies such as Intel, IBM, Rockwell Semiconductor, and Proctor and Gamble. The SCOR framework was designed to help streamline the language used to describe supply chain management, categorizing it into four processes: plan, source, make, and deliver — the return and enable steps were added later. The most recent version of the framework, SCOR 12.0, was released in 2017 by ASCM.

The updated version includes more “emerging drivers of supply chain success,” covering topics such as omnichannel, metadata, and blockchain , according to the ACSM. The framework was modernized so that best practices better align with digital strategies, including new training information and integrated sustainability standards using the Global Reporting Initiative (GRI). The Digital Capabilities Model (DCM) and the SCOR digital standard (SCOR DS) were also released in 2019 to address the growing need for digitization in the SCOR model.

SCOR’s six primary processes

As a framework, SCOR focuses on all customer interactions from the moment an order is placed until the invoice is paid. That includes all material and services needed to complete transactions, including supplies, parts, software, and equipment. Market interactions are also considered a part of the model because they help establish demand.

The processes defined in the SCOR framework are examples of what commonly takes place in SCM. Your business priorities might differ, and some steps may be redundant or irrelevant to your goals. But most businesses should find SCOR useful in organizing their supply chain — the framework uses standardized, common definitions so it can be adapted for simple or complex supply chains across any industry.

The SCOR model is based on six management processes:

Plan: Planning processes include determining resources, requirements, and the chain of communication for a process to ensure it aligns with business goals. This includes developing best practices for supply chain efficiency while considering compliance, transportation, assets, inventory, and other required elements of SCM.

Source: Source processes involve obtaining goods and services to meet planned or actual market demand. This includes purchasing, receipt, assay, and the supply of incoming material and supplier agreements.

Make: This includes processes that take finished products and make them market-ready to meet planned or actual demand. It defines when orders need to be made to order, made to stock, or engineered to order and includes production management and bill of materials, as well as all necessary equipment and facilities.

Deliver: Any processes involved in delivering finished products and services to meet either planned or actual demand fall under this heading, including order, transportation, and distribution management.

Return: Return processes are involved with returning or receiving returned products, either from customers or suppliers. This includes post-delivery customer support processes.

Enable: This includes processes associated with SCM such as business rules, facilities performance, data resources, contracts, compliance, and risk management.

SCOR model metrics and performance measurements

There are three levels used to measure supply chain performance. These levels help standardize supply chain performance metrics so that companies can be evaluated against other businesses, even if they’re operating differently. A smaller organization can be compared to a bigger organization, or businesses can judge supply chain performance against companies in other industries.

There are over 250 SCOR metrics in the framework, categorized against five performance attributes: reliability, responsiveness, agility, costs, and asset management efficiency. Businesses use these to establish requirements for the supply chain by figuring out which performance attributes to prioritize and which areas the business can perform at an average pace.

The three levels include:

  • Level 1: Defining scope, including geographies, segments, and context. At this level, the focus is on the six main process configurations: plan, source, make, deliver, return, and enable.
  • Level 2: Configuration of the supply chain, including geographies, segments, and products. At Level 2, metrics are high level and evaluated across multiple SCOR processes. This level includes subtype categories that fall under the “parent” categories found in Level 1.
  • Level 3: Process element details, identifying key business activities within the chain. At this level, you can associate any Level 2 process or subcategory with a Level 3 process.

SCOR Digital Capabilities Model and Digital Standard

In 2019, the ASCM, along with Deloitte Consulting, released Version 1 of the Digital Capabilities Model (DCM), the objective of which is to help supply chain professionals develop digital supply networks using a reference model. The DCM helps organizations build and design the digitally enabled capabilities they need in order to “transform their linear supply chains into a set of dynamic networks.”

Each digital DCM capability is mapped to elements in the SCOR Digital Standard (SCOR DS), a platform-agnostic framework that links business processes, metrics, best practices, and technology into one streamlined format. The SCOR DS introduced 19 emerging practices to the SCOR 12.0 model to further address the “growing need for digitization of supply chains.” Digital capabilities have complicated supply chain networks, requiring a shift from focusing on “sequential chains” to “concurrent networks.” With the DCM, linear supply chains can be transformed into sets of dynamic networks using digitally enabled solutions.

The DCM’s six main capabilities:

  • Connected customer: This capability enables companies to improve customer engagement throughout customer, product, and service life cycles. It includes customer experience, connected field services, monitoring and insights, intelligent product tracking, customer issue management, and product as a service.
  • Product development : This capability includes developing and managing products and services that adapt to the customer experience and can be transformed based on real-time data. It also includes product and portfolio management, product platform architecture and systems engineering, digital development, product development collaboration, and configuration management.
  • Synchronized planning: This capability integrates strategic business goals, financial objectives, and tactical supply network plans to “create a connected, concurrent, and synchronized business plan.” It’s aimed at creating faster cross-functional decision-making, enhanced customer service, and real-time collaboration. It includes enterprise plan reconciliation, supply network design, portfolio life cycle planning, intelligent demand management, responsive demand-supply matching (RDSM), and dynamic flow optimization.
  • Intelligent supply: Intelligent supply focuses on driving better efficiency in procurement operations by improving supplier relations and mitigating any potential risks. It includes capabilities such as intelligent supply analytics, category management, source execution, digital contract management, invoice and payments processing, supplier collaboration and procurement, and compliance.
  • Smart operations: This capability focuses on performance and safety improvements in production and synchronizes all steps of production and operations. It includes capabilities such as augmented workforce, total operations synchronization, agile operations execution, efficient operations support, operations command center, and operations strategy.
  • Dynamic fulfillment: This network of interconnected cross-enterprise systems is aimed at enhancing customer experience by delivering quality products and services on time and in good condition. It includes capabilities such as automated fulfillment signals, chain of custody and integrity, omnichannel order fulfillment, efficient warehouse operations, optimal path selection, adaptive network response, and efficient transportation operations.

SCOR best practices

There are four types of SCOR best practices:

  • Emerging practice: a process that involves new technology, knowledge or new approaches to organizing processes
  • Best practices: up-to-date practices that produce consistent and reliable results with supply chain performance
  • Standard: typical practices used throughout the years by multiple businesses across different industries that have produced consistent results
  • Declining: out-of-date practices that have been used consistently but are now redundant or obsolete and act as roadblocks to supply chain performance

Once the performance of your supply chain operations has been measured, you’ll be able to find any inefficiencies or gaps. A good SCOR process needs to be current, structured, proven, and repeatable. That means it’s not cutting-edge but it’s not obsolete; the process has clear goals, scope, and procedure; and it’s proven to be successful in multiple environments repeatedly.

SCOR certification and training

The ASCM offers a Supply Chain Operations Reference Professional (SCOR-P) certification that validates your skills and abilities with using the SCOR model. You can take the SCOR Professional Program to prepare for the exam — it’s designed for “supply chain professionals seeking to understand how to apply the SCOR model, how to use and interpret SCOR metrics, and how to organize a typical SCOR project.” The three-day program will prepare you for the SCOR-P exam and you can attend public training sessions, or your organization can opt for the in-house corporate training option.

You can search for a SCOR professional training course in your area. Pricing varies depending on location.

More on supply chain management:

  • What is supply chain management? Mastering logistics end to end
  • Sourcemap expands to meet demand for supply chain management
  • The top 12 supply chain management certifications
  • 5 keys to supply chain management success

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Vertically Integrated Supply Chain Business Model

Every entrepreneur’s dream is to reduce business costs while controlling the quality of products and services they are offering to their customers. They do this by integrating and being in charge of different stages of their business.

Through this approach, they have the power to determine the quality of raw materials, production standards, storage, and distribution of the finished goods. Also, they gain a competitive advantage since they control all activities taking place in their venture. One approach the entrepreneurs use is the vertically integrated supply chain.

So, what is it, and how does it work? Keep reading to learn more. 

What is the Vertically Integrated Supply Chain business model?

The vertically integrated supply chain is a business model where the company takes charge of its production and distribution processes instead of outsourcing these tasks. This means that the company sources the raw materials, processes, and delivers the products to the users without using third parties.

A business can achieve this goal by directly owning various production and distribution channels. This aspect can occur through direct investing in the establishment of suppliers, production and manufacturing factories, warehouses, and distribution facilities, or acquiring external companies involved in their supply chain. In other words, the company control and own the entire supply chain.

How does it work?

The main goal of the vertically integrated supply chain is to reduce business costs and control the quality of products offered. This goal is achievable if the company can control the quality of the raw materials used in the production processes. Also, it must set the production standards in the manufacturing factories and control the storage and distribution channels.

For this to happen, company management must make all decisions. This aspect would be impossible if the company does not own the supply chain fully. It is hard to make decisions when relying on outsourcing to run your supply chain and distribution processes.

To gain control, a company can follow one of the two approaches: forward and backward integration. Forward integration is where the company takes charge of the distribution and sales processes. This means that it is responsible for taking its finished products to the customers’ doorsteps. The company runs its stores and sells the finished products to the customers directly rather than through third parties.

On the other hand, backward integration seeks to control the production process. It focuses on determining the quality of the finished products by taking charge of the raw material sourcing by establishing and owning suppliers. Hence, the company owns the production process and the source of raw materials, which guarantee quality final products.

Examples of Vertically integrated supply chain business model

Vertically integrated supply chain business model is one of the oldest approaches. For this reason, many companies have been using it.

A good example of these companies is ExxonMobil which operates in the fossil fuel industry. The company has an exploration arm responsible for searching for new oil sources. Also, it has refining divisions, logistics, and retail points. The company owns and controls these processes.

Netflix is another excellent example of a company using this approach. The company started selling DVDs from other producers. With time, it established its own studios and started to produce movies and films. The company runs a platform where target consumers can access the movies directly from Netflix. Hence, it controls all the movie production and delivery process.  

Other companies using this model are footwear and apparel manufacturers, Google, Amazon, Target, and others. 

Pros and Cons of the Vertically integrated supply chain business model

Vertically integrated supply chain business model is a powerful strategy that can help a company gain a competitive advantage. By using it, you control every aspect of your business. However, like other models, it has its benefits and shortfalls. Here are some of its pros and cons:

Enhances efficiency in the business processes

Cost is a major challenge for many businesses. With increased costs, businesses seek ways to lower costs and enhance efficiency. By adopting this model, companies can control the entire business process from material sourcing to delivering products to the consumers.

Taking control helps your business control costs as it eliminates the outsourcing and distribution expenses going to the players in this process.

Strengthens the company’s competitive advantage

Being ahead of your competitors is the desire of every entrepreneur. It feels good when you stand out as the pacesetter in your niche. However, gaining a competitive edge is not always an easy aspect.

Using the vertically integrated supply chain business model helps you get a competitive advantage. Your business has the power to determine the quality of materials, products, and the level of the customer experience offered. So, you will have a stronger relationship with your customers than your competitors.

Boost the business profits

The main goal of running a business is to remain profitable. By controlling the entire supply chain, you eliminate and reduce costs. By lowering costs, you boost your profitability and pass the same to the customers by offering them lower prices. 

Eliminates the disruptions in the supply chain

One of the challenges companies face is the disruption of their supply chains. Sometimes, the suppliers may delay in delivering raw materials. This aspect affects all other processes and can affect the performance of your business.

With vertically integrated supply chain, you eliminate such disruptions as you are in charge of the whole supply chain. This ensures the seamless flow of all the business processes, which enhances the reliability and credibility of your brand.

Require high initial investment

While this model is effective, it can be a challenge for many businesses. The model requires huge investment, which many companies cannot afford.

It fails to benefit from supply chain experts

By centralizing the control of your supply chain processes, your business misses the benefit of experts. Outsourcing helps you access experts in each area freely or at lower costs. This is impossible when you use the vertically integrated supply chain model.

In a word, the vertically integrated supply chain is a powerful business model. Using this model can enhance your competitiveness in your niche. The model helps you lower costs and improve efficiency. However, it requires huge capital investment. Nonetheless, it is a perfect idea.

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IMAGES

  1. A strategic Supply Chain model for your organisation

    supply chain business model example

  2. How to develop a Supply Chain Strategy?

    supply chain business model example

  3. Supply Chain Modeling and Business Process Improvement

    supply chain business model example

  4. Supply Chain Strategy & Strategic Supply Chain

    supply chain business model example

  5. Supply Chain Modeling: Types, Models and Best Practices

    supply chain business model example

  6. An Introduction to Supply Chain Diagram with Editable Templates

    supply chain business model example

COMMENTS

  1. Supply Chain Modeling: Types, Models and Best Practices

    The most popular models are the bullwhip effect, the Beer Game and the newsvendor model. This blog post will explore each of these models and explore some of the best practices for supply chain modelling. What Is Supply Chain Modeling? Supply chain modeling is designing and analyzing a supply chain to identify potential improvements.

  2. A Simpler Way to Modernize Your Supply Chain

    From the Magazine (September-October 2021) Bernhard Lang Summary. Conventional wisdom says it takes three to five years and tens of millions of dollars to digitize a corporation's supply chain....

  3. The Supply Chain: From Raw Materials to Order Fulfillment

    Here are a few examples: Continuous Flow Model: This traditional supply chain model works well for companies that produce the same products with little variation. The products should be in...

  4. Supply Chain Management: Principles, Examples & Templates

    Here are three examples from well-known masters of supply chains: Example: Walmart and "Big Box" Retailers The "Big Box" store, which represents one of the major disruptions of the retail model from the last century, thrives on size, ubiquity, and well-planned supply chains to drive out the competition.

  5. PDF Supply Chain: the big picture

    of supply chain leaders think that an Internet-/platform-based approach is the most critical new business model to support post-pandemic recovery. Source: Gartner®, "Future of Supply Chain 2021" GARTNER is the registered trademark and service mark of Gartner Inc., in the U.S. and internationally and has been used herein with permission.

  6. What is supply chain and how does it function?

    (6 pages) A supply chain is made up of interconnected parts of a whole, all of which add up to finished products bought by customers. Take automobiles, for example. Before a consumer buys a car, iron ore is extracted from the earth. The ore is transported to a plant, where it's turned into steel, which is made into the chassis of the automobile.

  7. Supply Chain Modeling: Here's What You Need To Know

    Supply chain modeling represents a conscious attempt to bring order into a supply chain to achieve certain business objectives, such as lowest supply cost, on-time delivery and an ability to cope with disruption. It deals with questions such as: What to produce Market identification Siting of production plants Finding the best suppliers

  8. Is your supply-chain operating model right for you?

    What are its strategic ambitions? What are its desired commercial outcomes, and what will internal and external stakeholders require from the supply chain in order to bring about those outcomes? One manufacturer's strategy, for example, might be to win in the marketplace through premium products and brands.

  9. Supply Chain

    A supply chain is an entire system of producing and delivering a product or service, from the very beginning stage of sourcing the raw materials to the final delivery of the product or service to end-users. The supply chain lays out all aspects of the production process, including the activities involved at each stage, information that is being ...

  10. Understanding the Most Common Supply Chain Models

    Supply chain management is critical to every business, large or small, and it is generally broken down into six different models. These six models all have some of the same basic tenets, goals, and rely on similar components of the supply chain. Understanding the differences in each can help to determine which method is the best model for your ...

  11. Supply Chain Planning

    From there, take these three actions to secure business buy-in for your supply chain planning transformation: Create a business case for change. Highlight how improvements in the process will enable the organization to achieve strategic goals. Calculate improvement potential. Use quantifiable business and supply chain metrics.

  12. Supply Chain Management (SCM): How It Works & Why It's Important

    Supply Chain Management - SCM: Supply chain management (SCM) is the active streamlining of a business' supply-side activities to maximize customer value and gain a competitive advantage in the ...

  13. Building a flexible supply chain

    Step 1: Categorizing parts. Companies are accustomed to classifying parts as buy to stock or buy to order. They then segment these classifications further into three categories within the inventory-management system: standard parts suitable for any model, such as tires found on every vehicle.

  14. Different Types Of Supply Chain Models Explained

    Now let's look at some examples of supply chain models and how they can benefit a company. One popular supply chain model is the fast chain supply chain, which focuses on quickly and efficiently meeting customer demand.

  15. Six Types of Supply Chain Models

    Adidas is a prime example of this supply chain model. They set up new delivery systems and supply lines regularly and create new shoes and products as quickly as possible to sell apparel to meet high demand peaks before the trend changes. End-to-end supply chain efficiency is extremely important to managers in this field.

  16. How to build your supply chain operating model?

    However, a mature operating model will cover with the right depth the following five elements. ‍. 1. Supply Chain Organizational Archetype (shape, size, etc.) This one is all about defining the degree of centralization, shape, size, locations, capabilities and roles for the Supply Chain.

  17. Evaluating the 6 Supply Chain Models Powering Businesses Around the

    Pros and Cons. Good for businesses that need to increase efficiency in the manufacturing process. Bad for businesses that have custom products and goods that take time to make. 5. The Flexible Model. The flexible model is a type of supply chain model built to accommodate peaks and dips in customer demand over the year.

  18. The Four Main Supply Chain Models

    There are four main supply chain models in use today: the continuous-flow model, fast model, efficient model, and custom-configured model. Each model plays a specific role in managing and optimizing the flow of a business's products or services.

  19. 6 Most Important Types of Supply Chain Management Models

    a) Continuous flow model b) Fast chain model c) Efficient chain model d) Agile model e) Custom-configured model f) Flexible model 2) Conclusion Six different Types of Supply Chain Management

  20. What is supply chain management?

    Planning Plan and manage all resources required to meet customer demand for a company's product or service. When the supply chain is established, determine metrics to measure whether the supply chain is efficient, effective, delivers value to customers and meets company goals. Sourcing

  21. Streamlining supply chain management: Strategies for the future

    In today's complex global business environment, effective supply chain management (SCM) is crucial for maintaining a competitive advantage. The pandemic and its aftermath highlighted the importance of having a robust supply chain strategy, with many companies facing disruptions due to shortages in raw materials and fluctuations in customer demand.. The challenges continue: one 2023 survey ...

  22. Supply Chain Design and Analysis: Models and Methods

    Literature Review. The supply chain in Figure 1 consists of five stages. Generally, multi-stage models for supply chain design and analysis can be divided into four categories, by modeling approach. In the cases included here, the modeling approach is driven by the nature of the inputs and the objective of the study.

  23. What is SCOR? A model for improving supply chain management

    IDC reports on how to measure business impact. The supply chain operations reference (SCOR) model helps businesses evaluate and perfect supply chain management for reliability, consistency, and ...

  24. Vertically Integrated Supply Chain Business Model

    The vertically integrated supply chain is a business model where the company takes charge of its production and distribution processes instead of outsourcing these tasks. This means that the company sources the raw materials, processes, and delivers the products to the users without using third parties. A business can achieve this goal by ...

  25. Top Supply Chain Innovations of 2024

    The Top Supply Chain Innovations of the Year. It was a banner year for supply chain innovations with companies from multiple industries making substantial and impactful breakthroughs. Learn from these best-in-class supply chain orgs how to build a culture of continuous improvement and elevate the function's C-suite influence.

  26. Small Changes, Big Impact: Optimizing Sustainability In Supply Chains

    Take a holistic approach to supply chain management by examining all of your processes from end to end. Identify bottlenecks, gaps and redundancies, and look for ways to leverage technology to ...