This is supply chain management. I know most of you have spent your childhood evenings dreaming of studying supply chain management, but for those of you who might not know what supply chain management is: let me provide you a brief explanation.
Let’s take a simple product like a bottle of clean water, a plastic bottle, a plastic cap and a label to bind them at the store or vending machine. It might cost you about a $1.50. How much of that do you think is profit? It’s not likely that water in a plastic bottle and a label could cost more than 50 cents. If you buy them in bulk, how could each bottle not give you at least a dollar and profit? Seriously, if you think you can make $1.00 per bottle you should drop out of college right now and get into the bottled water business you see how this right here illustrates one of the most common consumer misconceptions. Product cost is not equal to material cost and in business you don’t have the luxury of thinking only as a consumer.
You need to think like a business executive or better yet, an entrepreneur. So, in order to figure out where all that profit went, we need to imagine what it took for that bottle of water to get into your hands. First, you need to negotiate the purchase of the empty bottles and caps; those bottles will be much easier to transport. If they’re in boxes, we’ll need to shrink wrap those bottles, so they don’t fall out of the box. We can move a whole lot of boxes quickly if they’re all put on pallets. In order to move the pallets, you’ll need a forklift, which means you’ll need a forklift driver. That forklift will then take the pallet and put it into a truck, which will require a truck driver, fuel and insurance. Also, you’ll need a label for that bottle of water; therefore, you need to design the label print, the label and get the label shipped to the plant. This means another truck driver, more fuel, and insurance. Our water bottling plant won’t be free and neither will the energy it uses in our bottling plant. We’ll have employees and bottling machines and let’s not forget day-to-day items like light bulbs, garbage bags, machine parts, janitorial supplies, toilet paper, and anything else that will be used at the plant by the employees. Oh yeah! and we’ll also need access to the drinking water machines, which will then purify the water. Other machines will bottle the water and a fix the labels to the bottles, another set of machines will box shrink wrap and then palletize the bottles in order to move those pallets again. You’ll need a forklift, which means we’ll need another forklift driver. That forklift will then take the pallets and put them into trucks, which are headed to the distribution centers; as we’ve seen, those trucks will require drivers fuel and insurance. Those distribution centers will also require employees, forklifts and energy from the distribution center. They’ll head out to retail stores and another truck which will require some driver fuel and insurance. That store will need employees to unload the truck stock, the bottles of water on the shelf, or refrigerator.
If you have a refrigerator, you’ll of course need energy. If we want to secure our stock, we may get a security guard or a security system and of course the store will likely get insurance. Also, imagine the cost associated with returning and replacing bottles that are damaged. Oh and for some reason even bottles of water sometimes have 1-800 numbers, which means you’ll need a staffed call center to answer the customers questions about your bottle of water. Wow! All those materials, boxes, people, machines, buildings, energy, fuel and vehicles. They cost money! Those things aren’t free and they probably weren’t used efficiently; it’s likely that several bottles didn’t survive the journey to the consumer. Oh and by the way, the employees at the water company, you know the ones that work in finance and accounting and marketing and human resources, they want to paycheck too. So, through that simple example of a super simple product, we’re beginning to see that the companies face challenges when they buy things, make things, move things, sell things and service things. Let’s not forget that companies need to do all these things using sustainable materials, energy, and methods. Guess whose job it is to make sure that all these things happen, flawlessly, with minimal effort and of course a minimal cost? You guessed it! The supply chain managers.
The supply chain manager needs to be able to do all of these things. They need to give the customer the product they want, when they want it, as often as they want it for a reasonable price; whilst still managing to make a profit – this requires world-class skills and knowledge in the study of supply chain management. There’s that scary term again “supply chain management,” when we try to make it friendlier by shuffling around the words.
The “management of the chain of supplies” for some reason, saying it like that just seems a whole lot easier to understand, doesn’t it? Yet, it also helps us understand the complex nature of supply chain management. I mean, the management of the chain of supplies? Now, let’s think of other products and what their supply chains might encompass: Hamburgers, sweaters, coffee tables, cars, and airplanes. I know many of you are saying, “but I live in a service economy, I won’t be manufacturing anything wrong again as of 2008! the US was still the number one exporter of manufactured goods!” Okay, maybe not for long. So, let’s talk about service economy supply chains. Let’s think of something you’re probably familiar with. The hotel industry, what do hotels manufacture? They do lodging experiences, dining experiences, spy experiences, which altogether make up vacation and conference experiences. In order to do all these things effectively and efficiently, it’s required that hotels need to buy things like beds, furniture, televisions, cable, food, soaps and towels. They also make things (or in this case) manufacture services like, housekeeping, meals, massages, and special events. Hotels also move things like transporting clean towels and food to and from the rooms, as well as transporting guests and their luggage to and from the airport. They even sell things like in-room movies, internet services and tickets to events. Finally, they also provide services such as, making reservations, organizing events, making wake-up calls, and even cleaning and pressing clothes.
Once again, we see that the fundamental skills learned in supply chain management can be used to manufacture service experiences as much as they aid in manufacturing products. Well, I hope that this has given you an idea of what supply chain management is all about. You see, this is the reason why little kids, all around the world, want to be supply chain managers. They want to take part in manufacturing the best products and services on earth. So again, welcome to supply chain management! Where all of your childhood supply chain dreams are about to come true.