B Mahadevan
Associate Professor, Indian Institute of Management Bangalore

Why Supply Chain Management is important for SMEs?

Supply Chain Management, SCM as it is popularly known, is of considerable interest in recent years for manufacturing and services sector of our economy. A good supply chain management helps organisations in securing high quality input materials and purchased goods at competitive prices. It also allows organisations to respond to customer orders faster. Often, organisations have benefited from reduced costs throughout the supply chain.

What is SCM?

The recent competitive pressures have made several Indian organisations realise that individual companies by themselves can not face up to the competition. A well designed product and a good technology for manufacture may not ultimately deliver value to the customer because of a bad set of suppliers or an inefficient distribution network. For instance, a manufacturer of auto electrical components competes with a competitor on the basis of what he does in his factory as well as on the basis of his relationship with suppliers and customers, and on the strength of his distribution system.  In this case, the supplier, the customer, the logistics partner and the manufacturer together constitute the supply chain (see figure). The key requirement of SCM is the ability to network with a several other business entities having complimentary skill sets.

Every organisation has three types of flows, the material flow, the information flow and the fund flow. While the material flows from the back end (supplier) of the supply chain to the front end (customer), money flows in the reverse direction. The information flows on both directions. SCM involves developing a set of management practices that will ensure that these three flows are smooth. Faster material flow will greatly improve responsiveness to customer requirements and will in turn ensure faster money flow back into the supply chain. However, the information flow is the crucial determinant of the other two flows in a supply chain. Collaborative planning and information sharing practices will streamline the information flow in the supply chain. A good supply chain management will provide superior value to the ultimate customer. SCM is important for small and medium enterprises (SMEs) for several reasons.

Low cost technological solutions exist for streamlining information flow

SMEs can greatly exploit the web technology to streamline the information flow. In the pre-internet era, sharing information and business specific documents between supply chain partners was a very expensive proposition. The alternatives available were EDI and private communication networks. These were beyond the reach of SMEs. Due to high cost of communication, SMEs chose rather not to communicate and live with a multitude of problems associated with this. Planning disruptions, delayed delivery, missed opportunities to do more business are a few to mention. However, today, with desktop computers, internet connectivity and an internet browser, SMEs can hope to set up cost effective communication networks with their supply chain partners. Although there are bandwidth problems now, they will be sorted out in the near future. Improved communication will benefit all the supply chain partners in the long run.

Shifts in product cost structure

In the past ten years, the proportion of purchases to the total cost of goods manufactured in Indian organisations has significantly increased. Currently, on an average this proportion is more than 65%. This indicates the increasing willingness of many organisations to resort to outsourcing instead of manufacturing in-house. This is a huge opportunity for SMEs. Good SCM practices will make SMEs more attractive to such initiatives of the buying organisations.

Increased reach through the net

SMEs have traditionally suffered from their inability to reach a wider set of customers. Increasing the reach typically involves additional expenditure due to more manpower and better skill requirements. Geographical limitations and high costs of communication prevented many organisations from tapping a wider market. Internet based E Commerce is a boon for SMEs. Due to the ubiquitous nature of the net, SMEs are able to reach a wider audience without significant increase in cost. Internet has also dramatically reduced the search costs. For instances, at the click of a few mouse strokes, it is possible today to get a complete list of manufacturers of a specific component. In some cases, it is further possible to establish immediate contact and engage in additional business transactions. B2B portals, exchanges and new market makers have enabled SMEs to reach virtually unlimited market. Consequently, there is a level playing ground. SMEs having good SCM practices will be in a better position to tap the potentially large market unfolded by the net.

The information explosion and the inexpensive infrastructure offered by the net will play a central role in re-aligning the supply chain of many industries. Established supply chain partnerships will be examined afresh. New enterprises providing with good SCM capabilities will be constantly discovered through the net. The time is ripe for SMEs to exploit this opportunity and make lasting business gains.

You can send feedback / enquiry to Professor B Mahadevan at mahadev@iimb.ernet.in