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Demand Driven Supply Networks DDSN

by Enrique De Argaez

There has been much talk about demand-driven supply networks (DDSN) since two years ago. Search on Google for "demand driven supply network" or "DDSN model" will return millions of pages of information regarding DDSN. Despite all the noise about small and medium business (SMB) in the enterprise applications arena, information about DDSN for SMBs is virtually nonexistent. The irony of this is that SMBs constitute the majority of the supply chain and yet case studies and reports make little or no mention of them...

DDSN is an IT strategy for large enterprises as well as SMBs also that offers many benefits for any size business. In this article, the concepts of DDSN are explored in simple terms and how SMBs have the possibility to employ DDSN as a strategic competitive direction is discussed, from which to cultivate new growth as apposed to just striving for lowered costs.


DDSN Definition


The Advantages


DDSN Implementation


DDSN Methods

1 - DDSN Definition

Traditionally the supply chain has been driven from the back, by producers and manufacturers "driving products to market." The dominant action in a traditional supply chain was to push products downstream towards end customers. This model was linear in its approach. Businesses in the supply chain were merely acceptant of demand based on the orders received from businesses in front of them. They rarely had any visibility into the true market demand for a product. To maintain downstream momentum in order to reduce inventory investments, upstream businesses constantly had to exert pressure on the downstream businesses to place orders. In this environment, demand could often be erratic and therefore hard to predict. Items could go from a situation of under-stock to over-stock in very short spaces of time, and businesses across the supply chain did not have timely and accurate information in order to balance the turbulence.

In contrast, demand-driven supply networks are driven from the front by customer demand. Instead products being pushed to market, they are pulled to market by customers. Is the once dominant force of pushing, merely substituted for a dominant force of pulling? Not entirely. DDSN does not remove the ability of a company to push product to market. It merely defines that companies in a supply chain will work more closely to shape market demand by sharing and collaborating information. In doing so, they will have greater and more timely visibility into demand. The aim of this collaboration is to better position everyone with the ability to more closely follow market demand and produce, in tandem, with what the market wants. Rather than replace the force of pushing, product to market, the DDSN strategy is to match a pull from customers with an equal and opposite push from supply chain members. Instead of leading the market from a push and artificially inducing unsustainable market demand, the concept behind DDSN is to react in tandem with demand. The methodology behind DDSN is to bring the supply chain eco-system into balance.

2 - The Advantages

The three main advantages to DDSN as a supply chain strategy are:

A. Participants in the supply chain are all able to take part in shaping demand as apposed to merely accepting it. Where businesses traditionally had little or latent visibility into market demand, the collaborative technologies employed in implementing DDSN have the overall effect of reducing and even eliminating the gap between upstream businesses and the end customer. This gives them a more accurate and timely insight into market trends to increase the accuracy of their forecasts and hence their ability to interpret and respond to demand fluctuation.

This type of market intelligence impacts more than just a business' ability to plan operations; it translates directly into reduced inventory holdings across the supply chain, which, in turn, means an overall reduction in the amount of capital invested therein and the associated risks.

B. The customer centric approach, as apposed to the factory-centric approach of DDSN accepts that product design and ongoing product innovation are key requirements in creating competitive advantage and shaping demand. Early feedback from customers can help product designers better understand what customers like and don't like about their products. In addition, product designers can also interface more readily with manufacturing facilities to assist in solving production problems that may arise, especially in the early stages of production setup.

C. Deterministic optimization is replaced with probabilistic optimization that uses stochastic optimization methods to handle variability. Probabilistic models do a better job of accounting for the uncertainties that exist in the supply and demand equation. Probabilistic modeling also enables simulation of "what-if" scenarios so managers can randomly vary their initial conditions.

The combination of these three factors drives growth through the constant interaction between supply (push) and demand (pull). Research in North America indicates that participation in DDSN directly translates into improved business performance. Research shows that the main impact of DDSN participation is in the critical area of demand forecast accuracy, which directly impacts key metrics such as perfect-order fulfillment, supply chain cost and cash-to-cash cycle time.

Research shows that the improvements in demand forecast accuracy instill increased levels of responsiveness and cuts costs throughout those members of a supply chain who participate using the DDSN model. Companies that are best at demand forecasting average 15% less inventory, 17% stronger perfect-order fulfillment, and 35% shorter cash-to-cash cycle times, while having a tenth of the stockouts of their peers.

3 - DDSN Implementation

Most small and medium businesses do not have the budgets required to deploy all the IT systems needed to support a DDSN strategy. For this reason, especially in the early stages of a technological development, uptake is mostly led by enterprise-level early-adopters such as Wal-Mart. As with many technologies that are in the early stages of development, small and medium businesses have to wait for the time when adoption increases and costs come down. Being in this position often means that SMB are rarely in a position to employ many technologies for their competitive advantage. In the case of DDSN this is not necessarily the case since it is possible for businesses to adopt a modular approach to building their DDSN infrastructures.

Step by Step DDSN

For small and medium businesses, the best approach toward a DDSN strategy is to identify small targets that require small investments but have a much larger potential for return.

A recent article published in Harvard Business Review, "The 21st-Century Supply Chain," Hau L. Lee gives a hint on how large and small businesses can go about building a DDSN. Although Hau's article does not speak directly about DDSN, many of the tasks he recommends are directly inline with the process of building DDSN capabilities. Hau's article aligns the planning process into three objectives on which businesses should focus in their quest for DDSN capabilities:

* Agility - The ability to respond quickly to short-term change in the demand and supply equation and manage external disruptions more effectively.

* Adaptability - The ability to adjust the design of the supply chain to meet structural shifts in markets and modify supply network strategies, products, and technologies.

* Alignment - The ability to create shared incentives that aligns the interests of businesses across the supply chain.

When focusing on these objectives, small and medium businesses must research methods that will enable them to attain the objectives. For each objective, there are a number of methods that may serve the purpose. We discuss these below, in the Methods section of this article. However, in a small and medium business scenario, the trick is to identify those methods that require the least investment but deliver the greatest returns.

Not all methods need to be implemented at once. Planning around methods with a low investment to return ratio enables the business to "eat the elephant one bite at a time"—in other words, tackle large problems manageably. As the project develops, savings from the implementation of these initial methods can be used to finance methods that require greater investment and have lesser returns. In this way, it is possible for small and medium businesses to capitalize early on DDSN and its technologies, while in their early stages, and gain competitive advantage.

In many instances methods that present a low investment to return ratio are easily identified by examining the most important supplier and customer relationships of the business.

4 - DDSN Methods

The methods businesses can use to promote adaptability include

1. Monitor economies all over the world to spot new supply bases and markets.

2. Create flexible product designs.

3. Use intermediaries to develop fresh suppliers and logistics infrastructure.

4. Evaluate the needs of ultimate consumers—not just immediate customers.

5. Determine where companies' products stand in terms of technology and product life cycles.

Alignment is Key

One of the greatest challenges businesses face when embarking on the road to DDSN is that of alignment. After decades where each business took care only of its own affairs, maximizing its own interests, guarding its own data and sometimes spying to acquire the knowledge of competitors, collaborating and sharing is not something to which business owners take an immediate liking. Yet, by its very definition DDSN is not something one company can do in isolation.

A major motivator in getting individual businesses in a supply chain to collaborate is to get them to see a greater alignment. Most business owners are aware that aligning supply chain interests with their own is beneficial to their business. Business owners know first hand that a lack of alignment causes many problems. Here are some of the methods businesses can use to promote alignment:

1. Exchange information and knowledge freely with vendors and customers.

2. Lay down roles, tasks, and responsibilities clearly for suppliers and customers.

3. Equitably share risks, costs, and gains of improvement initiatives.

In conclusion, selective implementation of high return methods can promote agility, adaptability, and alignment , enabling SMBs to successfully implement and participate in DDSNs. It is not necessary for small and medium businesses to implement demand-driven supply networks with all the “bells and whistles” from the very beginning. They should initially implement those parts with higher returns.

About the Author:
Enrique de Argaez is the webmaster of twelve International websites and the author of four newsletters. He is fluent in English and Spanish, at present he is active in Internet Marketing and Internet Market Research. Visit his new market research website at
http://www.allaboutmarketresearch.com .

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