Supply Chain Management: How it Works & Why It’s Important

Supply chains have always been complex — with thousands of suppliers, partners and products spanning a footprint with hundreds of sites and markets. But complexity in the supply chain process is constantly increasing, wreaking havoc with the ability to implement change, service level, reliability and customer satisfaction. It’s critical that supply chain leaders evolve supply chain management to address persistent disruption. The project-based continuous improvement and transformation approaches we’ve traditionally used won’t work. We must experiment, pivot, scale and abandon new concepts to ensure effective supply chain management.

Complexity is not wholly “bad.” Though it challenges execution, it also underscores the importance of supply chain management.

• Supply chain complexity expands organizational capabilities: Though 53% of supply chain leaders say complexity in supply chain management reduces their ability to implement change, 47% say it also enhances their ability to innovate. 

• Supply chain complexity accelerates disruption handling: 41% of supply chain leaders say complexity is what drives resilience and agility — key benefits of supply chain management.

To tame complexity, the leading global chief supply chain officers are managing the life cycle of each aspect of the supply chain operating model (capabilities, technology, sites and partners). In this way, they create the space and resources to innovate supply chain management.

How to improve supply chain management

Tactic 1. Supply chain leaders are typically hesitant to end the use of a process or technology, which means complexity is added to the supply chain but never taken out. Gartner recommends establishing formal policies for retiring processes/technologies and regularly conducting reviews of the SCM system.

Today the top 3 trading partners supply chain leaders interact with are Tier 1 suppliers, 3PLs and technology vendors.

But to have effective supply chain management in the future, leaders need to engage the broader trading network, which includes startups, government agencies and even competitors. According to Gartner research, by next year, the top 3 trading partners supply chain leaders will interact with will be Tier 2 and beyond suppliers, end customers/consumers and contract manufacturers.

The shift toward Tier 2 and beyond suppliers is particularly significant. The number of supply chain leaders engaging this group come 2025 will be more than double what it was just three years ago. And the shift away from engaging with Tier 1 suppliers and 3PLs is also remarkable. The number of supply chain leaders engaging these groups come 2025 will be less than half of what it is today.

What do supply chain leaders expect to gain from engaging the broader trading network? At a high level, they expect a more cost-effective, end-to-end supply chain that supports new business model creation. More granular benefits include more effective supply chain risk management, enhanced customer experience and business growth.

The key question is: How will supply chain leaders shift the supply chain strategy away from Tier 1 suppliers and 3PLs toward Tier 2 and beyond suppliers?

The answer is, by crafting a supply chain ecosystem in which every participant in the SCM process is connected through one common data platform. This includes all internal functions (e.g., R&D, procurement, manufacturing, logistics management, marketing, sales) as well as all trading partners (e.g., suppliers across tiers, 3PLs, customers). Rather than a linear chain, where data is transferred from one stage of the supply chain management process to the next, data in a supply chain ecosystem is readily available to all, providing near-real-time access to critical information, supporting informed decision making and enabling process execution across the network.

For over two decades, it was enough to operate an efficient supply chain. But in just the past few years, supply chain leaders have been beset by one disruption after another — including geopolitical instability, climate change events, energy scarcity and hybrid work — and thus the importance of agility and resilience in supply chain management has risen. Gartner research identifies agility and resilience in the supply chain management strategy as the two main priorities for almost all organizations. 

But there is fear among supply chain leaders that prioritizing agility and resilience in supply chain strategy will increase supply chain costs. Over 30% refrain from investing in supply chain agility because they believe that agile supply chains are too costly to operate. Another 58% believe that resilience results in additional structural cost to the supply chain network.

Furthermore, unprecedented supply chain disruption has stretched supply management in ways few thought they would ever see. Modern global supply networks are complex, multitiered and often include highly specialized players that cannot be substituted easily. Global supply chain managers face myriad challenges, including global supply chain delays, capacity constraints, hyperinflation, material shortages, recession risk and new trade policies. Visibility into extended supply bases has generally been poor.

This is all an obstacle to effective supply chain management and creates a supply chain crisis for businesses across industries and across the globe. Only 21% of supply chain leaders believe they have a highly resilient supply chain management process today.

Balancing economic pressures with supply chain efficiency is no small feat. How can chief supply chain officers successfully navigate inflationary pressure, geopolitical escalation and energy constraints? 

First, make near-term reductions to maximize operating cash flow from supply chain management. Then invest in optimized network performance to generate operating margin. The key is to maintain service delivery and operating efficiency, while controlling inventory levels. Engage key financial and commercial stakeholders in process design changes to increase capacity and capability investments. Ultimately, supply chain management must enable profitable growth.

Tactics for improving cash flow from SCM

• Reduce duplicative roles and capitalize on low-cost locations.

• Simplify SCM by centralizing end-to-end supply chain processes.

• Patch time-consuming system inefficiencies with robotic process automation.

• Audit software license distributions to improve demand planning. 

• Invest in AI for spend analysis to identify opportunities for consolidation in spend data.

• Eliminate wasteful and redundant supply chain logistics processes.

• Invest in SCM software to help sourcing and procurement teams streamline processes, improve spend management and leverage extended supply networks.

Establishing KPIs enables the supply chain organization to justify, monitor and improve processes by balancing local and global performance improvements. KPIs are not the end of analysis, rather the beginning of identifying an issue’s root cause and targeting corrective action.

Supply management metrics are the top-level objectives for the supply chain and typically consist of cost and service. The goal is to balance total delivered cost, customer service and sustainability. 

But with these competing priorities, which KPIs should you focus on? How do you streamline the supply chain performance dashboard? To help supply chain leaders, Gartner has assembled this list of common supply management metrics.

SCM cost metrics

• Standard costing includes total delivered cost, cost and profitability at the producer/customer level, and plan/actual versus budget. It should be combined with activity-based costing, which accounts for a lower level of cost granularity — the activity-driven costs behind much of the true supply chain cost. Only with true supply chain cost measured can an enterprise effectively make the necessary trade-offs between total cost and service.

• Total cycle time is the total time for a product to pass through the supply chain, from start to finish. How you plan and flow products through the supply chain has a big impact on the true cost, and thereby the real profitability of a product, making total cycle time a good complement to the cost metric.

SCM customer service metrics

There are many different supply chain analytics strategies for measuring customer service, the most popular method being OTIF, or on-time-in-full deliveries, at the order or order-line level. It’s critical that the customer service metric relate to what is meaningful to the customer, so use external-facing measures, as well as internal measures such as OTIF, to derive a measure of competitive customer service.