Hi Friends. I am back with my second article after huge response and accolades given to my first article. This article concerns about the real meaning of SCM function of an entity. I know we have read SCM so many times whether for exam purpose or for any other reason but I am sure you will definitely learn many new concepts and will feel more comfortable with SCM topic for whole life after reading this article.
Why a firm exists and what is its purpose?
A firm exists to earn profit. Profit making is the sole objective of a firm and this goal is the driving force of a firm’s growth and success.
What is Value?
This is the most important aspect of SCM function. In fact, SCM is all about creating value to customers. It is the customer who gives business/money to the firm and if customer doesn’t get value then SCM function will go invisible very soon. Value means the Utility customer gets against the price that he pays for product/service. If the customer feels that he gets much utility against a very low price then the value will be very high and vice-versa. Through this we can say:-
Value = Utility Cost
More utility & Low Cost = high Value
Low Utility & High Cost = Low Value
This value was used to be determined by the firm itself but until late 1600 but with increased competition, global business scenarios, customer rationalism & some other factors, value is now determined by Customer. Market fixes the price now and the firm has to accept this big reality. Creating value is a significant process called SMDC i.e supplier, Manufacturer, Distributor, and Customer. Customer will get the value if the right product reaches at right time to the right customer at right price. This is a brief SCM function.
Product/Service? Whether same or different thing?
People link the products with Manufacturing Industry and Services with Service Industry but these days these 2 are used interchangeably. I explain it why so? Think, when you go to a restaurant say McDonalds. You order one burger and 1 coke and you have your meal at McDonalds itself. What if the seat you have been offered with is not clean and what if your order takes so long to reach up to you say after 20 minutes. Will you get Value? Definitely not. And why so? Because you are having some hidden services along with some products (burger, coke in our example) and these services will indirectly define the Value and ultimately the Price you will be willing to pay. In today’s competitive world, products carry many services like After Sales Services in Car Industry. So there is no big difference between products and services these days. You buy a Car or you buy a water purifier R. O system, you will be having/receiving many services apart from your product (car or R.O system)
Resources, Processes and Capabilities
Every firm has some resources whether self generated or purchased. These resources are transformed into final product/service with the help of some processes/tests. But this is now a days not enough in order to create value over and above your competitors. This is because, if money is not a constraint then every firm can buy as many resources as it wants and can transform those resources into final product/service with the help of some pre-defined tests/processes but there is one more thing which is as important as other components of SCM function are and that is Capabilities. Suppose, there are two firms A, & B. Both are manufacturing same product. Both are having same resources and same processes in place. This can be a practical case these days as One entity can hire people of another entity in order to know the business information, secrets and most importantly processes. So if both entities A & B are having same resources and processes but their final product may not be same in all aspects. This is because; the capabilities/business ethics may not be same of both the entities. Thus, we can not ignore the concept of capabilities now and forever.
Inter Firm Co-ordination
This is another important aspect of SCM function as each every entity is dependent upon another entity for its inputs, processes etc. If we talk about Car Industry and we take Maruti as our example then the situation will be like Maruti company acts like an assembler only. This is so because almost every part like tyre, glasses, AC, Seat etc. are supplied by some other entities. So this becomes very clear that if these suppliers (entities) do not supply the right material at right time and at right price to Maruti then Maruti company won’t be able to deliver a better Car to its customers hence the entire SCM function will have a poor ranking and Maruti company will be failed to create to value for its customers and then the Maruti company will incur loss and ultimately will be shut down. Therefore if all these suppliers do not act efficiently and effectively then the final product cant be manufactured efficiently and effectively. So Inter firm Co-ordination is a must in order to have a strong SCM function. These suppliers are part of Maruti company’s SCM function as price of Car will be reflected by price of different article/input supplied by different supplier.
This is a very short article on SCM and there are other lots of other things which I will be writing in my other article. Hope you enjoy reading my article. Thank you.
CAclubindia
