Demand Driven Supply II: Stages and Implications

Yesterday we introduced you to demand driven supply, succinctly defined as a pull-based customer-centric approach to supply planning that allows demand to drive the process. We emphasized its importance by way of an AMR Research statistic that found 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. In addition, AMR Research has found that the distortion in non-demand driven forecasts can often cost a manufacturer more then 10% of the COGS.

Today we are going to talk about the stages of demand driven supply and AMR Research’s DDS(N) implications for manufacturers, retailers, and software providers for 2007, as noted in a recent article (and a corresponding report). But first, we are going to review some compelling statistics that serve to stress the rising importance of demand driven supply and why you should take it seriously.

According to the Demand Management Benchmark Report issued in December 2004 by Aberdeen Group, companies that are best in class in Demand Driven Supply outperform their competitors according to the following table:

               Gross Margin   Inventory as % of Sales   Forecast Accuracy
Industry Norm  12%            15%                       17%
Laggards       16%            20%                       26%

Furthermore, more then 85% of all companies that have implemented a program to improve demand management have generated significant improvements in performance across the board, including average improvements of 4.7% in gross margin, 24% in inventory turns, and 13% in forecast accuracy. In addition, you can expect to realize in-stock improvements of 2 to 8% (significant when the average stock-out rate is 8%, or higher), customer service improvements of 18 to 25%, productivity improvements of 13 to 20%, and purchase cost reductions of 9 to 13%.

A review of the literature indicates that there are essentially four steps or stages to DDS proficiency. Although each research group (Aberdeen, AMR Research, etc.) has their own set of terminology for the stages, they essentially agree on the definitions. We will use a generic categorization of novice, beginner, intermediate, and advanced, which will be sufficient for our purposes.

Novices have not yet begun the identification and integration of DDS processes and strategies into their supply chain planning and sourcing function. They still use traditional stovepipe forecasting techniques and are constantly having to react to stock outs and stale inventories.

Beginners have just set out on the DDS journey. They are still in the process of implementing basic (e-)sourcing best practices, they have just completed integration of their enterprise systems, and all key divisions, namely product management / production / R&D, sales and marketing, and sourcing, and are all starting to work collaboratively as a well-oiled team. Although they are still using traditional forecasting methods, each department is working off of the same forecasts and they are updating those forecasts before every pull cycle. Although they have yet to realize significant benefits, they are beginning to notice improvements in inventory turns, productivity, and customer service.

Intermediates have been on the DDS journey for some time. In addition to having interconnected enterprise systems and corporate experience working as one team, they are also externally connected to business partners with whom they are starting to collaborate. Specifically, they are working closely with key suppliers to insure that the suppliers can respond quickly to changes in demand forecasts and with their major distributors and / or customers to collect actual sales data on a regular basis. If necessary, they can shorten or lengthen their pull cycles to minimize the chances of stock outs or stale inventories. Intermediates notice a number of improvements from their demand-driven processes that include improved forecast accuracy, inventory turns, productivity, and margins, although these returns are not as good as their-best in class peers, who are at the advanced stage.

Advanced Practitioners have mastered DDS and have tight interconnected systems with their suppliers, distributors, and major customers with whom they collaborate on a regular basis. They have supply chain visibility on a daily basis and monitors in place that capture significant, unexpected, spikes or drops in demands and automatically alert the sourcing team that they might need to take action, which could be a combination of forecast updates, pull modifications, and / or cycle length updates. They are maintaining significant double-digit percentage improvements across the board.

In tomorrow’s post, we will describe the challenges you will face on your demand driven journey, some best practices that you can use to begin updating your traditional (e-)sourcing process to a demand driven one, and the major changes that will occur in each major phase of the sourcing cycle. But first, we would like to discus the recent article from AMR Research that summarizes DDS(N) implications for manufacturers and retailers in the year ahead.

In 2007, DDS(N) Manufacturers:

  • will be focused on customer service,
  • will face increasing supply network complexity,
  • will still be more confident in supply processes than demand processes,
  • will see supply chains as more strategic, and
  • will have a DDS(N) maturity based on their application deployment.

In 2007, DDS(N) Retailers:

  • will continue to be slightly better than manufacturers at demand sensing,
  • will forecast more frequently, and
  • will continue to focus on DDS strategies to cut costs.

Furthermore, in 2007 demand-driven strategies are expected to fuel a 4% increase in SCM spending and companies with >1B in revenue will fund 34% of software purchases in the UK and 27% in the US. Furthermore, the market is shifting towards best-of-breed products that support an ERP backbone.

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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