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.
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
.