Demand Driven Supply I: An Introduction

Demand Driven Supply (DDS) is supply management with a heightened focus on customer demand. Unlike the traditional push-driven model where manufacturers plan their operations based on factory capacity and asset utilization, the demand driven supply model operates on a pull-based customer-centric approach and allows demand to drive supply chain planning and execution.

Demand Driven Supply is a model of supply chain planning that is an extension of the Demand-Driven Supply Network (DDSN) model pioneered by AMR Research over the last few years applied to a Total Value Management (e-)sourcing process (see Purchasing Innovation VI: Crowdsourcing). AMR Research defines a Demand-Driven Supply Network as a system of technologies and processes that sense and react to real-time demand across a network of customers, suppliers, and employees.

This is the first post in a three-part post on demand driven supply and the impact that it will have on your supply chain planning and sourcing cycle. Collectively, the three-parts will form a mini-white paper that you could use as your introduction to demand driven supply and its associated benefits. The three-part post is organized as follows:

  1. Introduction
    • Demand Driven Supply Focus
    • Why Demand Driven Supply?
  2. Stages and Implications
    • DDS Statistics
    • DDS Stages
    • AMR’s DDS(N) Implications for 2007
  3. Challenges and Implementation
    • Challenges
    • Best Practices
    • The New Sourcing Cycle

The ultimate goal of Demand Driven Supply is the management, selection, and shaping of the best mix of customers, products, channels, geographies, and prices for the dynamic marketplace. This requires the identification of emerging, as well as existing, customer and product winners for maximum market penetration.

Companies with a Demand Driven Supply focus often use advanced forecasting applications to improve forecast accuracy and reforecast frequently. They will run what-if scenarios on multiple demand forecast variations to identify market risks and opportunities and determine an overall “best” buy from a value-based perspective. They will continually re-asses the criteria they use for forecasting, product prioritization, and market segmentation to insure that they are using the best criteria possible.

The simultaneous convergence of a large number of market forces and supply pressures are increasing the stresses on a business across the board. The increasing globalization of the marketplace, the constant uncertainty of the global economic outlook, rampant inflation in energy and raw material costs, increased product customizations, SKU proliferation, and the ever-increasing rate of new product introductions are all driving a need to improve operations across the board. Add to this shorter product cycles, limited global transportation capacity, increased outsourcing, constrained market capacity, and a plethora of opportunities for supply disruption that include, but are not limited to terrorism, natural disasters, strikes, slowdowns, geopolitical events, and supplier financial failure, and the need for constant supply chain improvements becomes critical. Especially when today’s consumer expects that the prices of products and services should continue to decrease.

Traditional Supply Chain Management (SCM), tailored for steady state demand periods of a product life cycle, deals poorly with rapid change. In today’s market, supply chain variability is a major threat to profit margins. When you consider AMR Research’s finding that companies who fail to adequately focus on customer demand incur an average cost disadvantage of 5 percent of revenue due to poor forecast accuracy, which typically has a large double digit impact on profit margins, the importance of demand driven supply strategies is rising rapidly.

Simply put, traditional SCM, which relies heavily on up-front forecasts, does not incorporate regular forecast revisions or the demand signals necessary to determine when a shift in demand is needed. (This is why I promote Total Value Management and regular demand forecast updates.) A revised sourcing cycle that accounts for variable demand and incorporates demand oriented processes, technologies, and cross-functional teams is needed. As we hinted at in our purchasing innovation series, SCM is no longer a four-walls activity – it encompasses every area of the business, including suppliers, distributors, and/or retailers. Only your retailers can tell you how fast your product is, or is not, moving and how likely demand is to change as a result of promotions and only your suppliers can tell you how long they need to accommodate variances in demand. Demand Driven Supply can then be viewed as the balancing act of having enough inventory to meet demand spikes but not so much that you are eventually forced to mark-down a significant amount of inventory to move it.

For more information on demand driven supply, see the Demand Driven Supply: A pull-based customer-centric approach to supply chain planning and execution wiki-paper over on the e-Sourcing Wiki.

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