What Is Supply Management?

We have all heard the buzzwords supply management, supply chain management, value chain management, just-in-time, kaizen, lean, and so on. But what is supply management really? I define it as a system or process that supports an organization's total needs for the supply of goods, services, and processes required to accomplish the goals and tasks established by the organization. It is the optimization of material costs, transportation, handling, quality, reliability, and service to internal and external customers. Supply management involves the consolidation of certain business activities such as purchasing, transportation, warehousing, inventory control, quality assurance, and materials distribution into one management department. Strategic supply management, as referred to throughout this book, refers to the various tools, techniques, philosophies, and concepts that can be utilized in striving for a greater level of achievement and efficiency in a supply management and procurement environment.

But do most people really understand what these terms mean from an operational and process standpoint or from a value opportunity standpoint? Basic procurement practices of soliciting a minimum of three bids and writing a purchase order for the cheapest price may have the appearance of bringing value to an organization, and in many cases it does. However, there are risks with this type of procurement system, and an organization is most assuredly missing opportunities for increased or maximum value.

Even if your organization incorporates some or all of the concepts and philosophies available through strategic supply management, do you fully understand their implications to the success of your endeavors, the quality of your decisions, and the success of your organization? In this book we discuss supply management from a procurement perspective and focus on two of its key components: (1) supply chain management and (2) value chain management. We look at specific tools, processes, and skill sets that can be used to move individuals and organizations from basic procurement and supply activities to best-in-class strategic supply management. The concepts demonstrated here will help you achieve improved economies of scale, lower operation costs, higher profit margins, and an advantage over your competition.

Supply management is a concept and philosophy, within and of itself, that uses specialized tools and focuses on specific techniques and processes to maximize effectiveness and add value to an organization's procurement services. These activities produce increased profitability for an organization. Supply management and procurement are both cost centers in an organization's operational hierarchy, but strategic supply management and procurement also adds to an organization's profitability by engaging in processes beyond just basic procurement. Every dollar saved through effective procurement and supply management goes directly to the organization's bottom line.

You probably have heard the rule of thumb that the selling price of goods and services would have to be increased by five dollars to equal every dollar saved by procurement. The assumption for this statement is true; the amount would depend on how efficient an organization was and how effectively they practiced strategic supply management. Less efficient organizations would realize less benefit and more efficient organizations would realize more benefit. The beauty of this phenomenon is that less efficient organizations can become more efficient and profitable by changing their philosophies and culture and begin practicing strategic supply management and procurement. As the title suggests — Supply Management and Procurement: From the Basics to Best-in-Class — this book describes current basic procurement processes and operations. Additionally, it presents the tools and techniques that can be used to move to a strategic supply management and procurement role that will allow any organization to become best-in-class.

Supply management can be both tactical and strategic. Tactical procurement is a reaction to a need or requirement. Examples of tactical procurement are buying to replenish inventory or fulfill specific organizational requirements. Strategic procurement goes further by analyzing what the need is, how it fits into the organizational structure, and, most importantly, whether opportunities exist that might add extra value through operational reorganization and process improvement.

There are five main components of supply management and procurement that are the key performance drivers:

1. Cost

2. Quality

3. Time

4. Reliability

5. Technology

For an organization to realize and maximize the greatest value opportunity potential, it must consider all key performance drivers before making any decision regarding the selection of activities and processes that will be used in the strategy.

You may be asking 'Isn't supply management and purchasing the same thing?' Not necessarily. Supply management and purchasing are two different concepts although there can be some overlap. Supply management can be a separate business unit or it can be incorporated into the procurement business unit. Supply management encompasses much more than just purchasing. It can also involve logistics. Broadly defined, logistics is the management of the procurement and flow of goods and services along the supply chain from the point of origin to the point of consumption. This includes systems and infrastructure required for movement (transportation and material handling) and storage (inventory) of raw materials. It also includes parts, services, and finished goods that move through an organization and its outside channels to maximize performance and effectiveness. For the purpose of this book we approach supply management from the...