Businesses today are challenged by globalization, price wars and volatile economic conditions as well as the need to accelerate time to market and meet service levels required by their customers.
Addressing these challenges puts immense pressure on supply chains to deliver products and services at the right time, in the right quantity, with the right quality, at the right place and the right cost. Managing these five “Rs” effectively is the primary task of enterprise supply chains. To maintain profitability, or even to survive, businesses and their supplier partners must be able to predict demand and be prepared to react quickly to change. Failure to do so results in costly inventory write-offs, stock outs, and loss of market share.
The Evolution of the Supply Chain
Historically, many companies built vertical supply chains within their organizations and/or created them through mergers and acquisitions. Take for example Ford Motor Company. Ford aggressively acquired companies, suppliers and distributors to build a highly integrated supply chain that tightly controlled business processes. The downside of this effort — as it is in many organizations — was the loss of competitive pricing and the ability to leverage skill sets available in the market.
Over the years, companies have implemented methodologies such as Kaizen, TQM and Six Sigma, where the emphasis is on local optimization, improving product quality and minimizing waste. This approach is effective in streamlining internal processes but does not extend beyond the “four walls” of the business.
Now, and going forward, businesses must create agile supply chains that optimize business processes and relationships with upstream suppliers and downstream distribution, logistics and retail partners. Building a flexible, efficient and agile supply chain depends on proactively managing three key elements: variability, visibility and velocity.
Demand and supply variability is a common supply chain problem. A small variation in demand at the point where the demand is created (e.g., retailers and customers) can cause significant variability in orders placed upstream. The reason is that any uncertainty in demand causes every supply chain partner to factor in a margin of safety — leading to a situation commonly known as the Bullwhip Effect — which creates excess inventory within the entire supply chain. Here are the causes of the Bullwhip effect:
Multiple node forecasts — Retailers, suppliers and every organization that stands between them creates independent, uncoordinated forecasts.
Long lead times — Retailers and distributors, fearing stock-outs from unplanned higher demand, add a small safety buffer in their orders.
Shortage gaming — Fear of product or component shortage or allocations forces supply chain partners to inflate their forecasts to their suppliers.
Price fluctuations — Speculation over future pricing and their ability to survive a price war cause retailers and distributors to artificially adjust orders.
Order inflation — Retailers and distributors increase order size, motivated by volatile market conditions and economic news.
Promotions and competition — Supply chain participants may significantly change their orders to take advantage of trade promotions or a competitor's promotion, causing perceived changes in demand downstream.
Poor communication and visibility — Loose coupling of dependent and independent demand as well as a dearth of real-time, actionable information contributes to inaccurate forecasting and poor purchasing patterns.
The Bullwhip effect impacts businesses in two significant ways. First, supply chain operation is less than optimal. Frequent ad hoc order and schedule changes add to the atmosphere of anxiety. One location may have excess inventory, while at another, customer demand is unsatisfied. Inventory carrying costs mount, and supply chain resources are not well utilized — ultimately leading to a loss of trust among supply chain partners. Second, disconnects between supply and demand affects delivery performance, negatively impacting sales, customer loyalty, revenue and market position.
Addressing variability, “cracking the code” of demand-supply imbalance, requires focused activity around implementing the right processes, gathering the right information and facilitating partner collaboration:
Implementing S&OP — Careful planning is vital to a demand-driven supply chain. S&OP requires capturing demand across various channels, analyzing it and creating feasible supply plans. S&OP requires top-down management support within an organization as well as buy-in across the entire supply chain. Without them, organizations will not be able to meet their financial commitments or end the perpetual tug of war between demand and supply.
Capturing real-time data — To minimize demand variability, businesses are moving toward collaborative planning. That is, they are involving retailers and distributors in the demand planning process and capturing point of sales (POS) data — often through the use of radio frequency identification (RFID) solutions. As a result, the entire supply chain has the accurate demand information on hand that is necessary to meet financial and order level commitments.
Statistics-based forecasting — The ability to analyze historical data for the presence of trends, seasonal fluctuations and causal relationships enables organizations to create more accurate forecasts.
Inventory policies — Companies can control supply variability by adjusting inventory stock norms and implementing push/pull strategies. Calculating inventory norms across the supply chain is critical, as is inventory positioning. Distributed vs. centralized inventory is a perennial issue, and strategy tends to be influenced by the nature of products or services and the supply chain network design. One way to address this is by pushing larger amount of inventory to the central distribution point where it can be pulled based on actual POS demand. This strategy facilitates overall lower inventory within the supply chain, reduces lost sales and increases inventory turns.
Balancing push and pull — There is no such thing as a “one size fits all” push/pull strategy for all products and services. In the case of commodity products, the focus should be on reducing supply chain inventory costs as much as possible. With innovative or much-demanded products, the right approach is to pick a model that accelerated availability.
Encouraging supplier collaboration — Creating long-term contracts with trusted suppliers strengthens the business relationship and makes the flow of products and services smoother, leading to lower supply variability.
Visibility across a supply chain into data such as demand, inventory levels and order/shipment status increases the agility and responsiveness to any changes in demand and supply. Identifying appropriate performance metrics and visibility into the metrics at various levels of detail using supply chain analytics ensures that the supply chain is functioning properly and enables continuous improvement.
Supply Chain Event Management solutions play a big role in improving supply chain visibility by enabling an organization to easily map, control, and check all key events for a business process that they want to monitor and share within the supply chain. Such a system continuously monitors the process for any events that need to be triggered based on the business rules and event triggers defined within the process. Once an event is triggered, the system identifies the various subscribers to that event, including supply chain partners and notifies them using various mechanisms such as email, phone call or a system alert. The triggered events serve as a collaboration mechanism between various stakeholders, as well as allow them to identify any exceptions in a timely manner and proactively react to them. Suddenly everyone within the supply chain is on the same page.
Both IT and business strategy play a pivotal role in ensuring smooth and quick flow of information within the supply chain, leading to increased velocity. It can be a challenge to smoothly integrate an enterprise's legacy systems with new supply chain solutions, while preserving historical data and continuing to capture real-time supply and demand information. New planning systems on the market have enabled companies to easily integrate planning and execution domains, prevent delay in deploying new planning models and processes due to their flexibility and ability to reconfigure and easily propagate relevant information to customers and suppliers. As a result, organizations are better prepared to meet this challenge while maintaining or improving speed to market.
Achieving a demand-driven supply chain organization requires managing variability, visibility and velocity. Each of these tasks is considerable, and fortunately, successful efforts in one area should feed into the others.
Companies that set themselves on the path to an optimally functioning supply chain will need to undertake initiatives that range from changing the mind sets of their supply chain partner, streamlining their various supply chain processes to implementing technology that makes the information flow between supply chain partners smooth, fast and accurate. The winners will be those who team with IT to get the job done.
Ashok Santhanam is CEO of Bristlecone (www.bcone.com), a supply chain consulting firm. Bristlecone brings expertise across the entire spectrum of supply chain including demand planning, supply planning, network collaboration, sourcing and analytics.