SCM is where the action will be in the next decade. But as the SCM industry grows, so does confusion over which software apps do what functions best. With a host of products for every task from forecasting and purchasing to warehousing and shipping, and with countless variations in the terms used for various supply chain functions, managers struggling to improve their SCM infrastructure find themselves wandering in the dark. In order to turn on the lights, we must first understand the basics of SCM. Thankfully, the basics are the same whether companies make PCs or conduct financial transactions.

SCM Requires Interenterprise Integration

Interenterprise integration is the core of SCM. As Figure illustrates, SCM is evolving from the current enterprise-centric models (e.g., Nabisco) to more collaborative, partnership-oriented models (e.g., the Proctor & Gamble and Wal-Mart continuous replenishment model in the consumer packaged goods industry). And leading-edge companies such as Intel and Dell in the high-tech industry have gone even further to create an increasingly streamlined supply chain model with mass-customization and customer-direct capabilities.

No company wants excess inventory. The rallying cry behind interenterprise integration is “drive down inventory, production, and distribution costs.” The basic economic reality, however, is that retail stores and distributors maximize profits by inventory turns – frequent delivery of goods to replace sales (order cycles of less than 18 hours), whereas manufacturers maximize profits by longer production lead times (production cycles of many days or weeks). To manage the mismatch between the two, companies create stores of inventory in the supply chain.