What Is Supply Chain Management?

Supply chain organizations aim to plan the resources and capacity they will need to meet customer needs, while optimizing for cost, service, inventory, resilience, sustainability or other objectives. The key supply chain processes are:

• Sourcing and procurement
• Supply chain planning, which includes production planning, demand forecasting, network modeling, and supply and demand optimization
• Transportation (inbound and outbound), which spans importing, cross-border and exporting (global trade management (GTM)) falls under importing or exporting)
• Warehousing and distribution, which includes receiving, stocking, picking, packing and shipping inventory
• Manufacturing (some enterprises include production in their supply chain scope)
• Store operations
• Services such as aftermarket, returns, repair and upgrades of physical and digital products

Through these processes, supply chain organizations manage demand forecasting, choose and manage suppliers (including contract manufacturers), plan for and manufacture products (having acquired the raw materials), store and deliver finished goods (using logistics or third-party logistics providers (3PLs) to coordinate and schedule orders and deliveries), and manage products that are returned, defective or excess to needs.

Supply chains get the right goods and services to the right customers at the right time via a network of linked activities. As such, they are a powerful engine of economic activity.

When supply chains falter, economic activity and business results can suffer. The COVID-19 crisis exposed the fragility of global supply chains that have long been optimized solely for cost efficiency. To contain cost and improve efficiency, supply chain management has historically focused on lean and just-in-time principles, which means placing new orders only when inventory gets low. This reduces the so-called waste of spare capacity and stocks on hand, but it also eliminates the buffer against unforeseen shortages. 

The pandemic pushed supply and demand patterns far from what organizations had predicted or planned for. Global supply chains have traditionally suffered other disruptions from factors such as trade wars and inflation, but the size and extent of pandemic shocks created extensive delays and shortages within them — rendering them unable to meet customer demand. 

The COVID-19 pandemic also fundamentally shifted the retail landscape, accelerating the need for retail supply chain transformation. 

Responding effectively to disruption and managing trade-offs between cost-efficiency and resilience will be key to the future of supply chains as organizations strive to protect their brands and retain a competitive edge with customers. (Also see “What is supply chain resilience?” and “What is a digital supply chain?”)

The ultimate goal of supply chain management strategy is to contribute to enterprise goals, drive enterprise ambitions and create competitive advantage. This involves more than optimizing end-to-end supply chain processes; it also means adapting to and potentially transforming business and operating models. 

In 2022 and beyond, supply chain management strategy must account for ongoing and as-yet-unimagined disruption to global networks, operating models and stakeholder demands. 

Recent drivers of supply chain change include expanding digital business models, the shift to selling solutions rather than just products, diverse customer expectations and the increasing rate of disruptions. In this volatile environment, supply chain strategy can contribute value by making it easier, faster, safer and less costly for the enterprise to change its operating model.

Some supply chains may adopt modular operating models that can assemble and rearrange components and capabilities to pivot as conditions dictate. Gartner describes this evolution to greater flexibility as becoming more composable. Other supply chain managers may focus on developing an integrated, end-to-end digital roadmap (see also “What is a digital supply chain?”) 

Supply chain management contributes to a number of enterprise goals, such as sustainability and diversity, equity and inclusion. But regardless of the specific initiatives — and their breadth — organizations need to assess the current and future state of their supply chains and prioritize the actions needed to close the gaps.

Logistics plans and manages transportation from sources of supply to manufacturing sites, distribution centers, stores or other points in the supply chain where materials will be processed further and advanced down the supply chain to the enterprise's ultimate customer.

Increasingly, logistics is integrated with customer fulfillment as both together form the part of supply chain management most directly impacted by shifting customer expectations. But logistics cannot simply deliver to meet all customer service expectations irrespective of how much it costs to do so. 

Logistics costs include the costs to deliver, such as transportation and warehousing, staff productivity, process efficiency, inventory holding, assets, and resource utilization costs across the logistics network. But logistics must also account for today’s more complicated product portfolios, challenging routes to market, growing network complexity and disruptions to the supply chain overall. 

Measuring logistics performance, then, becomes a balancing act of delivering perfect order performance and maintaining sufficient resilience while optimizing the cost to do so — or consistently and profitably delivering to meet customer expectations.

A resilient supply chain is able to avoid, absorb and recover from the business impact of major disruptions and continue to operate under stress. 

To ensure resilience, supply chain leaders must balance the risks and costs across supply chain strategy, product and network design to ensure the system can function under stress and bounce back from disruption. 

Gartner argues that supply chain resilience can be achieved in six ways:

1. Inventory and capacity buffers. Add production facilities or surge capacity with external manufacturing partners and warehoused stockpiles.

2. Manufacturing network diversification. Achieve agility with nearshoring or regional strategies that add suppliers or factories in new locations, and conduct make vs. buy evaluations. 

3. Optimize the sourcing network. Expand the network to include alternative qualified suppliers or secondary locations used by existing suppliers or add regional sources. 

4. Optimize distribution networks. Balance the warehousing footprint and transportation alternatives to achieve agility and flexibility.

5. Product portfolio design. Design the manufacturing process using standard parts or platforms across a product range to simplify sourcing without losing the benefits of scale.

6. Ecosystem partnerships. Coordinate data sharing, risk monitoring, crisis response and diversification measures with contract manufacturers and logistics providers. 

Supply chain management must account for a range of risks, from those created internally, such as workforce and enterprise operational dynamics, to those created externally, such as social and demographic shifts, and environment and climate dynamics. 

These disruptions can have a significant impact on organizational performance, cause reputational and financial damage, and threaten organizational viability.

Supply chain risk management has typically relied on visibility, resilience and agility to improve the response to disruptions, but during the pandemic, volatility overwhelmed many such strategies. And even before that, supply chains were under stress. 

In evolving to become innovative and responsive to customer needs, most supply chains also increased massively in size, complexity and globality. This has left organizations vulnerable to an even wider range of risks, including those over which they have very little control. The rate and types of disruption have also increased, so supply chains can barely recover from one shock (such as a trade dispute) before being hit by another (such as a natural disaster).

Gartner argues that a more effective supply chain management approach is to reduce the size of the risk target that the supply chain organization has become — its “surface area.” Supply chains that do this are likely to experience less than one-third of the disruptions their response-focused peers experience.

A supply chain network comprises the organizations and facilities that conduct supply chain activities — from the upstream sourcing of components to the distribution of final products. The network may therefore include locations and product flows across a single or multiple entities. 

A critical goal of supply chain management is to optimize the location of sites and the flow of products through this network to achieve the right balance of cost, customer experience, resilience and other objectives. Advanced analytics may be deployed to achieve this balance.

Gartner argues that supply chain networks will need to integrate many trading partners within a broader (and less linear) ecosystem and at the same time, have to optimize the total surface area in the network to be resilient. This ecosystem goes beyond direct suppliers to Tier 2 suppliers and beyond, direct and indirect logistics partners, end customers, government agencies and industry organizations. 

A supply chain ecosystem shares and combines capabilities among participants in the supply chain network and develops equitable relationships to generate and exchange value to all participants. Digital connections are key to ecosystems. (See also “What is digital supply chain?”)

Gartner predicts that by 2026, more than 50% of large organizations will compete as collaborative digital ecosystems rather than discrete firms, sharing inputs, assets and innovations. This will help create supply chain resilience, especially during disruption.

Digital supply chains leverage digital capabilities, information technology, analytics and web-enabled processes to improve visibility (ideally in real time) and efficiency across all the activities and organizations in the supply chain — and ultimately create value for the business.. 

Digitalization is revolutionizing the level and intensity of connections among trading partners in the supply chain, making it easier for organizations to create and participate in value-creating supply chain ecosystems. (See also “What is a supply chain network?”) 

But digital supply chains also need to serve a growing range of digital products — and machine customers. Supply chains must, for example, be prepared to replenish digital orders directly from printers that sense low ink, as well as an increasing number of “equipment as a service” and “product as a service” offerings.

The more autonomous the world becomes, the more supply chains will need to mature digitally and be connected end to end. All internal functions, including research and development (R&D) and procurement, through manufacturing, logistics, marketing and sales, as well as all trading partners, will use a common data platform. 

To capture the opportunities of digitalization, supply chain leaders must understand and prioritize the technologies that can speed supply chain transformation. Digital initiatives should be prioritized to create value for the business, which will likely require supply chain leaders to get the CEO’s buy-in for digitalization efforts. (See also “What is supply chain technology?”)

Some organizations are also creating a digital supply chain — a digital representation of their real-world supply chain built from granular data. This digital twin can reflect real-world activities and connections in near real time to improve planning and decision making. 

Supply chain analytics are essential to all supply chain management decisions (e.g., What will I sell? What do I need to make? How much? When? Where?), but especially to digital twins. (See also “What are supply chain analytics?”)

Supply chain technologies and solutions include established applications, such as supply chain planning and transportation management tools, but also extend to emerging and evolving technologies such as artificial intelligence, machine learning and robotics.

Technology is especially critical to the future of digital supply chains and ecosystems, where innovation and collaboration drive competitive advantage. As supply chain leaders look to identify, evaluate, select and deploy technology investments that further transform their supply chains, they must focus their choices on the potential impact to their organizations. 

Certain sets of technologies help organizations reach out to new customers or markets, for example, while also maturing the supply chain organization itself. But overall supply chain maturity, organizational risk culture, industry sector and other factors will influence the role of technologies in a given organization’s transformation journey. That is what should drive investment priorities.

The key is to bundle innovative technologies together to solve specific problems and improve outcomes in a way that differentiates your organization from competitors. Emerging technologies will play an important role. For example, AI is becoming a foundational catalyst for advanced process automation and human augmentation and engagement. Other relevant technology trends include hyperautomation and digital twins of the supply chain.

Ultimately, though, supply chain technology requirements must align with the company’s overall enterprise IT and business strategy to ensure that chosen technology investments fuel growth and improve profitability while managing risk and cost.

Supply chain analytics generate data-driven insights that can be descriptive (what is happening or has happened), diagnostic (the why), predictive (for future scenarios) and prescriptive (actionable insights). 

The overarching benefit of supply chain analytics is that they provide the insight required to make better decisions and can therefore create a powerful competitive advantage. By improving the quality of their decisions, supply chain managers create more value for the business, because executable plans use resources more effectively to support corporate goals. 

Showing financial improvements, such as growth in market share, revenue and return on assets or a reduction in working capital, is typically the most compelling way to demonstrate the success of analytics initiatives to business leaders. But there are other benefits. These include:

• Supply chain improvements, such as shorter order cycle times that provide customers with more timely service. Improved forecast accuracy can also demonstrate benefits to capacity utilization, changeovers, production schedule changes and inventory turns.

• Process improvements. Analytics, by increasing the speed and accuracy of decisions, can reduce the time needed to generate reports, prepare for business reviews or provide customers with order updates.

Supply chain management leaders will need to work with data and analytics leaders across the business to ensure alignment on both data strategy and platforms, and with IT leaders to ensure the right technologies are in place. Optimization and simulation capabilities can enable what-if scenario planning while AI capabilities can enhance or replace human decision making through machine learning and natural language techniques in all areas of analytics. (See also “What is supply chain technology?”)