Learning Objectives
By the end of this chapter, you will be able to:
- Define Supply Chain Management (SCM).
- Identify and describe the five basic components of SCM.
- Differentiate between the push model (make-to-stock) and the pull model (make-to-order) of supply chain management.
- Provide examples of companies that use each model.
What is Supply Chain Management (SCM)?
Supply Chain Management (SCM) is the active and strategic coordination of all the activities involved in a supply chain. The goal of SCM is to improve the efficiency and effectiveness of the supply chain in order to reduce costs, increase customer satisfaction, and gain a competitive advantage.
Figure 1: Supply Chain Management Overview
SCM is not just about logistics; it is a holistic management discipline that involves planning and managing all three of the supply chain flows: material, information, and financial.
The Five Components of SCM
A common framework breaks SCM down into five basic components:
flowchart LR
PLAN["📋 1. Plan\nStrategy &\nForecasting"]
SOURCE["🏭 2. Source\nSupplier\nManagement"]
MAKE["⚙️ 3. Make\nManufacturing\n& Production"]
DELIVER["🚚 4. Deliver\nLogistics &\nDistribution"]
RETURN["🔄 5. Return\nReverse\nLogistics"]
PLAN --> SOURCE --> MAKE --> DELIVER
DELIVER -.-> RETURN
RETURN -.-> MAKE
style PLAN fill:#6a1b9a,color:#fff
style MAKE fill:#1565c0,color:#fff
style DELIVER fill:#2e7d32,color:#fff
Figure 2: The Five Components of SCM
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Plan: This is the strategic component of SCM. It involves developing a set of metrics to monitor the supply chain so that it is efficient, costs less, and delivers high quality and value to customers. The planning phase is focused on creating a strategy that balances demand and supply.
-
Source: This component involves identifying, evaluating, and selecting the suppliers who will provide the raw materials and services needed to create the product. This includes negotiating contracts, managing supplier relationships, and scheduling deliveries.
-
Make: This is the manufacturing or production component. It involves scheduling the activities necessary for production, testing, packaging, and preparation for delivery. This is where the raw materials are transformed into a finished product.
-
Deliver (Logistics): This component is responsible for getting the finished product to the customer. It involves managing customer orders, scheduling deliveries, dispatching loads, invoicing customers, and managing a network of warehouses.
-
Return (Reverse Logistics): This is the component that deals with the reverse flow of goods. It involves creating a process for customers to return defective, excess, or unwanted products. This includes managing returns, processing refunds, and determining what to do with the returned items (e.g., restock, repair, or recycle).
Push vs. Pull Models of Supply Chain Management
There are two primary models for how a supply chain can operate:
flowchart TB
subgraph PUSH["👉 PUSH Model (Make-to-Stock)"]
direction LR
PF["📊 Forecast"] --> PP["Produce"] --> PI["📦 Inventory"] --> PC["👤 Customer"]
end
subgraph PULL["👈 PULL Model (Make-to-Order)"]
direction RL
PLC["👤 Customer\nOrder"] --> PLP["Produce"] --> PLD["🚚 Deliver"]
end
PUSH --> PUSHPRO["✅ Immediate availability\n❌ Inventory risk"]
PULL --> PULLPRO["✅ No excess inventory\n❌ Longer wait times"]
style PUSH fill:#1565c0,color:#fff
style PULL fill:#2e7d32,color:#fff
Figure 3: Push vs Pull Supply Chain Models
- Push Model (Make-to-Stock): In a push-based model, production decisions are based on forecasts of customer demand. The company produces goods in anticipation of future orders and pushes them down the supply chain to be stored as inventory.
- Advantage: Ensures that products are immediately available to meet customer demand.
- Disadvantage: Relies on accurate forecasting. If the forecast is wrong, it can lead to either excess inventory (which is costly) or stockouts (which result in lost sales).
- Example: A company that manufactures consumer packaged goods like toothpaste or soda operates on a push model.
- Pull Model (Make-to-Order): In a pull-based model, production begins only after a customer places an order. The customer’s order “pulls” the product through the supply chain.
- Advantage: Eliminates the risk of carrying excess inventory and allows for a high degree of product customization.
- Disadvantage: Can lead to longer wait times for the customer.
- Example: A company like Dell that builds computers to a customer’s specific configuration operates on a pull model.
Many modern companies use a hybrid model, where they might stock basic components (push) but perform the final assembly only after receiving a customer order (pull).
Summary
Supply Chain Management is the strategic coordination of all activities required to get a product to the customer. It is composed of five key components: Plan, Source, Make, Deliver, and Return. SCM strategies typically follow either a push model, where production is based on forecasts, or a pull model, where production is triggered by customer orders. Understanding and effectively managing these components and models is key to creating an efficient and competitive supply chain.
Key Takeaways
- SCM is the strategic management of all supply chain activities.
- The five components of SCM are Plan, Source, Make, Deliver, and Return.
- The push model is based on forecasts, while the pull model is based on actual customer orders.
- The push model risks inventory problems, while the pull model can lead to longer customer wait times.
Discussion Questions
- Is a push or a pull model more appropriate for a company that sells fresh, perishable food? Why?
- What are the main challenges in managing the “Return” component of a supply chain?
- How can information technology help a company improve its demand forecasting in a push model?
