Many companies say they are demand driven. However, in practice, they manage their supply chains using a process from a bygone era that is totally dependent on error-prone forecasts instead of actual demand
An emerging paradigm shift in supply chain management is allowing companies to become truly demand driven and achieve their planned service levels at lower costs from up to half the average stock and with no requirement for highly accurate forecasts.
However, the vast majority of fast-moving consumer goods, life-science, and other manufacturing and distribution supply chains are currently being managed using a wholly ineffective process through very expensive, so-called advanced planning and/or enterprise requirements planning software systems.
The process uses forecasts of future demand to tell suppliers and factories what, when and how much to supply, make and move. But these forecasts are always wrong and for most products by more than 50 per cent, according to Dr Josef Packowski, chief executive of CAMELOT Management Consultants, specialists in value chain management.
“Consequently, the wrong quantities are sourced, made or shipped to the wrong places. As a result, stock levels are very poorly balanced and customers don’t get the service they want,” says Dr Packowski.
To try and avoid such problems, companies spend an inordinate amount of time expediting materials and products through their factories and supply chain, which is very expensive, wastes huge amounts of capacity, causes stocks to be far higher than needed and, very often, fails to solve the service problem. Even if it does, the cost and cash-flow implications are enormous.
While the majority of enterprises are still struggling with the impact of inaccurate forecasts on their supply chains, an increasing number of well-known companies are adopting an alternative, demand-driven supply chain management (SCM).
“Demand-driven SCM is a remarkably simple way of managing supply chains,” explains Simon Eagle, author and an instructor with the Demand Driven Institute. “The rationale for demand-driven SCM is based on what supply chains really are – flows of materials through several conversion processes that are prone to develop into inventory queues and time delays whenever there is variability.
“Forecast errors are the greatest source of this supply chain variability, but in today’s complex
and volatile markets, attempts at significantly improving forecast accuracy are doomed to expensive failure. The demand-driven SCM concept therefore uses actual demand instead of error-prone forecasts to drive replenishment through a decoupled supply chain, which is a genuine paradigm shift.”
Demand-driven SCM involves positioning the right quantities of stock where they are needed up and down the decoupled supply chain and topping them up, as they are consumed, in a stable and repetitive sequence. In this way materials and products are pulled through the supply chain using a simple “make to replace” and “ship to replace” mechanism in line with actual demand without any need for expensive and disruptive expediting and intervention.
As replenishment is driven by demand, not the forecast, it is always accurate so service-saving schedule changes are eliminated, supply is stabilised and inventories stay both right sized and balanced.
“In a demand-driven supply chain, forecasting is still important for sales and operations planning, stock target sizing and genuine event management, but high levels of time-phased item-level forecast accuracy are no longer required,” says Mr Eagle.
According to Dr Packowski, the new demand-driven SCM concept works with any demand pattern, even those with lots of promotional activity, bar those exceptional and highly extreme events that can be anticipated and managed with an advance stock build-up.
The demand-driven supply chain management concept uses actual demand instead of error-prone forecasts to drive replenishment through a decoupled supply chain
“We have already seen in client projects, improvements in supply chain and operations performance that are a quantum leap. Planned service levels are consistently achieved with reductions in average inventories of up to 50 per cent and, due to the avoidance of unplanned overtime and higher levels of capacity utilisation, costs are reduced by around 20 per cent with planning lead-times cut by up to 85 per cent,” he says.
“And that is all achieved without the continuous expediting and fire-fighting that is typically experienced by many planners and operations. Furthermore, of course, there is no longer any need for all that wasted effort trying to achieve high levels of forecast accuracy. It is little wonder that companies such as Unilever, Nestlé, BT and PZ Cussons have been quietly piloting demand-driven SCM and are embarking on rollouts across their global supply chain networks.”
Implementation of demand-driven SCM is technically quite simple, the new planning and replenishment processes are very straightforward and easy to operate with the new wave of demand-driven software systems that operate in conjunction with legacy enterprise resource planning.
Implementation is helped by the fact that it doesn’t require a large-scale or “big bang” conversion. It can be gradually phased in across a supply network, which also has the benefit of assisting with the change management process.
Dr Packowski says: “The most important enabler of demand-driven SCM is actually the supply chain people and their leadership. Without the right ‘thought-ware’ or understanding of how supply chains should be run, companies are unable to trust the relatively simple demand-driven process and miss out on its transformational benefits.”
With these rather low entry barriers and the corporate, let alone supply chain, performance benefits from demand driven SCM, it could be that this supply chain revolution will be quick as well as permanent – and very painful for those companies that come to it late.
For more information please visit www.camelot-mc.com
The book, Demand-Driven Supply Chain Management, by Simon Eagle, explains why demand-driven supply chain management is the correct process for managing supply chains, how it works and how it can be inexpensively phased into your company with no risk
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