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Demand-driven supply networks are replacing factory-based push supply chains of the 20th century as leading companies learn how customer-centered businesses operate differently. The change is bigger than you think.
Demand-driven supply networks are replacing factory-based push supply chains of the 20th century as leading companies learn how customer-centered businesses operate differently. The changed is bigger than you think.
Demand-driven supply network (DDSN) may seem like just another term for supply chain management. Don't be fooled. DDSN attacks areas of business overlooked by traditional supply chain management and that promise huge new efficiencies and growth. Proclaiming that the customer is king is not enough. Rebuilding the old push supply chain is essential to compete for profitable growth in the 21st-century business world (Figure 1).
[FIGURE 1 OMITTED]
20th-century supply chains The last century was all about the factory What marvelous advances were possible through the application of mass production techniques. Henry Ford's fabled River Rouge auto plant was a legend of productive efficiency--rubber, glass, and iron in one end and cars out the other. The offer to consumers was "Any color you want,
as long as it's black."
The biggest oversight of this 20th-century factory-centered supply chain was managing consumer demand. The efficiency of the chain remains limited by this oversight as current key metrics of supply chain performance indicate. Consider the following data:
* Median time to market for a new product in consumer packaged goods is 27.5 months.
* Median days of supply on hand for semiconductor manufacturers is 190 days.
* Median order error rate for industrial electronic equipment suppliers is 26 percent.
Today's supply chain still mostly serves the factory, not the consumer. As a result, several critical deficiencies persist:
* The bullwhip effect: Disruptions downstream ripple back ever more loudly, creating tremendous demand uncertainty Result: about $3 trillion worth of inventory locked in the U.S. and European supply chain as of October 2004.
* Linear optimization techniques: Failing to account for variability is fine in a factory with known task cycle times but no good across a network of flexible productive nodes. Result: 20 percent order error rate across U.S. industry
* No support for product innovation: The black box approach to research and development assumes that new products go through the same chain as existing ones. This is slow, wasteful, and error prone. Result: 75 percent new product failure rate globally
One big food and beverage company exemplifies what is wrong: Asked about measurement, this company's supply chain leader described a rich set of manufacturing utilization and throughput metrics but little or nothing tied to commercialization. What suffers is not just efficiency but growth. New products are hard to launch, promotions are impossible to coordinate, and margins shrink in a deflationary spiral.
Industrial engineering for the 21st century
The genius of early 20th-century industrial engineering was to harness such fundamental innovations as interchangeable parts and the moving assembly line to drive productivity gains that were breathtaking.
Consider the following:
* Average task cycle time for Ford assemblers reduced from 514 minutes to 2.3 minutes between 1908 and 1913 via perfect part interchangeability--a 99.6 percent improvement in productivity.
* Total assembly cycle time for complete vehicle was reduced from 750 minutes in 1913 to 93 minutes in 1914 via the moving assembly line--an 88 percent improvement in productivity
* Annual physical production in the United States increased by 160 percent between 1899 and 1926 while population increased only 55 percent.
The underlying technologies and standards that made these innovations practical include basic engineering advances of the day such as hardened steel, universal measurements, and standard thread dimensions. These core technologies found their killer application in the mass production factories that defined American society and economics.
The emergence since 1995 of such information technologies as Internet connectivity, massively parallel processing, and wireless messaging is the 21st-century successor to the advances made in steel almost 100 years ago. Just as those changes drove huge productivity gains in the 1920s, we have seen for the past 10 years unprecedented growth in core productivity.
Research into the emergence of demand-driven supply networks based on these technologies suggests that business leaders who want to harness this productivity revolution must redesign their supply chains around new principles. Pioneers are already making headway.
AMR'S benchmark research proves that laggards have an overall cost disadvantage of 5 percent of revenues. Such businesses are still serving the factory first and consumers second. These businesses are losing market share and burning up cash with underperforming assets.
Meanwhile, leaders' return on assets, earnings per share, and profit margin all correlate with the ultimate measure of customer satisfaction--the perfect order. In addition to cost advantages, these businesses can leverage superior responsiveness to market opportunity to grow--and in many cases, acquire or destroy the laggards. The time to change traditional supply chain practices is now.
It's all about the consumer
The next century is all about the consumer. Dell is everyone's favorite example of modern supply chain best practices because it has built a $40 billion business that is fundamentally make-to-order--the exact opposite of the 1920s era Ford Motor Co.
Demand drives a network of 25 key suppliers that account for 75 percent to 80 percent of total spending and provide 80 percent of the R&D effort that gets new product to market. Dell ships 20 million products per quarter with only three days' of inventory. Inventory in this model is a liability (0.6 percent component price declines per week), not an asset.
The business is based on three master performance metrics: growth, profitability, and liquidity. The first two measure consumer value, the third measures Dell's independence from physical assets. It's a perfect business dashboard for the 21st century. Dell is the world's best-known example of a demand-driven supply network.
AMR's definition of the demand driven supply network: A system of technologies and processes that senses and reacts to real-time demand across a network of customers, suppliers, and employees.
The key elements of this definition are:
* System. To be effective, the next-generation supply chain must be scalable. Making use of technology such as software applications and databases with business processes, DDSN needs a system architecture to scale without compromising flexibility.
* Demand. Is demand an order? A forecast? An opportunity? For DDSN to take root, companies must learn to see demand at many levels, complete with buyers' willingness to trade off one benefit (say, availability) for another (such as price). Sensing and reacting to real-time demand does not simply mean fill the order. It means applying business judgment quickly across all demand.
* Network. Contract manufacturers, outsourced design and development, and third-party logistics providers are all part of the rapid transformation of the supply chain away from vertically integrated corporations toward core competence-based networks of businesses. For a network to succeed, standards and communication must be pervasive and reliable. The Internet has kicked off this transformation, but its effects have only just started to be felt.
DDSN is about starting at the moment of truth and working backward to create the supply network that best meets demand. The moment of truth may be a consumer at the supermarket shelf making a choice, it may be a replacement part for a commercial jet waiting for clearance to fly, or it may be full-volume production readiness with the hot toy for Christmas this year.
Unlike the left-to-right linear chain based on hard assets, DDSN looks more like a self-renewing interaction among three strategic business domains--demand, supply, and product. Visibility and freedom to act in all three domains at once defines the demand-driven business of the 21st century.
Organization and process first
In nearly 20 years of working with companies on supply chain strategies AMR Research has heard the truism "Process is more important than technology" thousands of times. Running a close second is "Organizational barriers derail supply chain projects." So let's start here.
Processes such as order-to-cash and procure-to-pay are red herrings in the design of a DDSN. Although they are operational requirements, they provide no strategic direction. Rather, they are essential composite applications to deploy and change as needed.
The things that determine where a business will compete and how it will gain share and grow profits are really more domains than processes. They also naturally tie to three traditional poles of organizational power: sales, manufacturing, and engineering.
The three strategic business domains of a DDSN are demand management, supply management, and product management (Figure 2).
[FIGURE 2 OMITTED]
Demand management. Traditional supply chain has largely overlooked demand management, which is defined as the processes required to shape, sense, and respond to demand. These processes include functions in marketing, sales, service, price management, and demand forecasting/ planning. Half of the supply/demand balancing problem is demand management.
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