Supply Management: How’s It Working for Your Organization?

The Institute for Supply Management (ISM) defines supply management as “the identification, acquisition, access, positioning, and management of resources and related capabilities the organization needs or potentially needs in the attainment of its strategic objectives.” ISM further identifies the specific components of supply management as disposition/inventory recovery, distribution, inventory control, logistics, materials management, packaging, product/service development, procurement/purchasing, quality, receiving, strategic sourcing, transportation, traffic/shipping, warehousing, and production management/manufacturing supervision.

This is certainly a lot of information to wrap your mind around. However, despite the number and complexity of these component disciplines, there are a few basic tenets or “building blocks” that can aid organizations in understanding and optimizing supply management functions and performance.

Why is supply management important to your company? The fact is that whether they are on your radar or not, these functions are occurring daily in every organization. The question is, “How effectively are these functions applied?” This is a critical question since supply management impacts nearly every facet of an organization from customer service levels to product quality to on-time delivery. Supply management will largely determine the ability of an organization to grow and is frequently the most substantive factor in profitability. In today’s competitive markets, inefficiencies cannot be offset with price increases, and profits cannot be driven by growth alone. Without effective supply management, companies will struggle to grow and retain quality customers.

This brings us back to the “building blocks.” Effective supply management organizations tend to be built upon and share these common principles:

  1. Supply Management Functions Are Inter-Related And Interdependent. Purchase quantities, for example, impact many other functional components (prices paid, lead-times, inventory space required, freight expense, receiving time/labor, etc.). Looking at just one of these components (purchase price for instance) without consideration of others seldom results in the best result.
  2. Supply Management Decisions Involve Trade-Offs Which Must Be Balanced For Optimum Results. A large volume purchase may provide “price-break” savings, but ultimately results in higher overall cost due to inventory carrying cost, extra handling/receiving labor, obsolescence, etc. It is a rare situation in which multiple competing effects can all be optimized. There is no “one size fits all” rule for such situations. Every company is different; every situation is different. However, good information and strong metrics lead to sound decisions in changing circumstances.
  3. Supply Management Optimization Is Enhanced Via Central Management Of The Component Disciplines. There are many organizations in which the separation of supply chain functions is so distinct that they actually work against each other. A fairly common situation is one in which procurement and transportation work entirely independently of one another and without common strategic service/cost objectives. In such a situation, overall cost is likely to be higher than necessary – usually a little lower than it should be for one function and much higher than it should be for the other. Such a scenario would be one in which procurement opts for very small, frequent, and rapid deliveries of key components to an assembly line. In this “JIT” environment, inventory is minimized and product quality issues are quickly realized. However, freight expense is often much higher on these small/light orders due to graduated freight rates. Additionally, receiving is burdened with continuous small receipts; administrative cost increases; and the lack of product could result in a line shut-down, which creates an extraordinary expense. Without central management/control of supply management (and company supply management strategies aligned with those of the organization) such inefficiencies are inevitable. It should be noted that central management of supply management disciplines is not to be confused with a “centralized” supply management location structure. An organization may opt for all relevant personnel to be located in a corporate location or have personnel at the plant/division level in accordance with what best fits the needs of the company. The important concern is that all report to a central management and work in unison towards common objectives.
  4. Effective Supply Management Professionals Must Have Working Knowledge and Understanding Of All Key Disciplines In The Organization. The types of decisions described here require a strong business background and working knowledge of sales, operations, accounting, and finance. These qualifications are a function of education (academic and professional), training, and experience. Talent and training should be combined with exposure and involvement in these disciplines. Standing committees and cross-functional teams are two ways to provide the necessary exposure.
  5. To Be Effective, Supply Management Professionals Must Have Both Responsibility And Authority. Most companies have no problem holding managers responsible and accountable, but are often reluctant to grant the authority required for meaningful impact. Managerial authority must be granted and supported by the highest levels of the organization. Otherwise, substantive initiatives are likely to fail.

Effective, professional supply management dramatically improves the performance of companies large and small – and often determines those that prosper vs. those that fail. Hopefully, these principles provide some insight into the importance of supply management and a starting point for internal discussion and evaluation. ISM can provide a wealth of free information to interested parties at or 800-888-6276.