· Demand-side initiatives focus on better ways to capture the demand signal closer to the source, analyze the demand to sense the latest and most accurate demand signal, and shape the demand by executing and tracking promotional and pricing strategies to steer demand in line with business objectives.
· Supply-side initiatives generally have to do with lessening reliance on the forecast, by becoming more agile with faster response, when actual demand is known.
· The most common demand-side initiative, which has been in use for over two decades, is a customer collaboration replenishment strategy. This includes techniques such as vendor managed inventory (VMI) and CPFR. Such techniques allow CPG manufacturers to get closer to the demand signal by gaining visibility to retailer inventory, forecasts, and shipments from DCs to stores. Such initiatives have and continue to deliver significant value in terms of reducing inventory and enhancing service.
· Over the past 10-20 years, CPG companies have started to go a step further. By tapping into POS data directly from the retailer, CPG companies can get clear visibility into actual demand, rather than using distribution center shipments as a proxy. Such clear visibility allows CPG manufacturers to see what consumers are actually buying, with minimum latency, allowing them to adjust their supply plans quickly and accurately.
· Furthermore, by modeling demand characteristics such as order volume over time, and correlations of what products sell together, CPG companies are able to understand demand patterns to enhance short term forecasts (demand sensing). In these demand sensing applications, the emphasis is on separating and analyzing both the normal demand flow, as well as any incremental promotional lift. Demand modeling also allows CPG manufacturers to work with retailers to optimize merchandising strategies
· Access to POS data is also used by CPG marketing teams to better understand the correlation between promotional strategies they deployed and resulting change in sales volume. These activities provide them the insights they need to increase the effectiveness of their promotions and pricing actions. Armed with actual impact on sales from promotional pricing, CPG companies are better equipped to deploy demand shaping strategies that work.
· Point-of-Sale information capture also allows CPG companies can gain better visibility into where the downstream inventory is: at the retailers DC, in the store back room, or on the shelf, and allows them to infer out-of-stock conditions. Such information is not only useful as a real-time alert to trigger replenishment, but also allows them to collaborate with retailers in measuring and improving sales execution.
· Demand-driven strategies in high technology start with product design, where companies strive to use a a common product platform in their engineering designs, so they can maximize the use of standard components and aggregate capacity. This strategy enables them to delay the final SKU configuration until the demand is better established.
· High technology companies have made great strides in reducing the planning cycles and increasing planning frequencies to become more responsive. Given the demand volatility due to ecommerce models and continuous competitor leapfrogging, it is not uncommon to see weekly tactical (S&OP) planning cycles with daily and even sub-daily updates.
· With different go-to-market channels, demand-driven is not just about finished goods inventory in the high technology segment. In many cases, the high technology companies implement build-to-order or configure-to-order strategies, where they forecast at the level of options or subassemblies that they require. This leads to collaborative planning processes, where the forecast is sent to suppliers and contract manufacturers for their commitment, and then a constrained plan is agreed-to and locked in.
· When the plan is constrained, companies are driven to allocate their supply to various demand channels and priorities in order to protect their strategic goals, and their key accounts. As a result, advanced demand prioritization methods are used to plan what demand will be fulfilled, and to enforce these allocation decisions as orders are received and fulfilled. In such scenarios, it is critical that once supply commitments are made, it is possible to re-plan to capture tomorrow’s demand, while still protecting the prior commitments for strategically important accounts. Such rules-based advanced commitment management processes are a central element of a high-tech demand-driven supply chain.
· Even though the high technology supply chain plan is “locked in”, it must respond to demand changes. This is a key challenge in engineering the high technology segment’s demand-driven supply chain. Hence companies are implementing collaboration processes to achieve upstream visibility to material and capacity situations, and developing simulation-based what-if replanning scenarios, often called “shadow planning” to be able to quickly determine if a plan change is feasible and desirable.
· Lastly, we are seeing some companies adopt the ultimate demand-driven supply initiative, consumption-based pull planning. In this scenario, inventory buffers are placed at critical points in the supply chain to decouple processes and minimize lead times, and supply actions (deployment, production, and procurement) are triggered by consumption-based replenishment. This affords protection against demand uncertainty by only building to a replenishment signal - not to a forecast.
Demand-side Initiative | CPG Industry | High-Tech Industry |
---|---|---|
Customer collaboration, VMI, CPFR | Yes | Yes |
POS demand capture at source | Yes | Emerging |
Downstream inventory visibility / Out of stock analysis | Yes | |
Demand modeling / demand sensing | Yes | |
Demand shaping, promotion and pricing analysis | Yes | |
Sales execution analysis | Yes |
Supply-side Initiative | CPG Industry | High-Tech Industry |
---|---|---|
Shorten planning cycles and frozen periods | Emerging | Yes |
Smaller batch sizes and change-overs | Emerging | Yes |
Late stage differentiation / postponement | Emerging | Yes |
Demand prioritization / commitment management | Yes | |
Upstream inventory visibility / supplier collaboration | Yes | |
Consumption-based pull planning | Emerging | Yes |
Figure 1 - Use of Demand-side and Supply-Side Initiatives
· Multi-tier connectivity and collaboration: Information is integral to implementing a Demand-driven Supply Chain, either downstream to distributors and retailers, and/or upstream to contract manufacturers and suppliers . Organizations need to coordinate the design, manufacturing, and supply of complex and long lead-time end products within their supply chain network. Visibility into and collaboration with the extended supply network across multiple tiers is essential. CPG companies use such technology to access POS data from various retail customers, while high technology companies can use it to share demand and supply plans within the extended supply chain.
· Data Timeliness and Granularity: Most companies, who are trying to become demand-driven, need to collect and share data on demand and supply more frequently and increase the degree of data granularity they analyze. For example, supply-constrained high technology manufacturers require visibility into finished goods and work-in-process inventory at plants, while CPG companies need visibility into SKU-level detail on items in stores, on warehouse shelves, and in distribution centers.
· Agility and flexibility: The classic elements of flexible manufacturing—such as short changeover times, access to temporary labor and external capacity, and the ability to produce small batches cost-effectively—make it easier to respond quickly to spikes and dips in demand, a key aspect of DDSC success. Agility is a key capability within the extended value chain.
· Fast Replanning and What-if Analysis: With demand volatility, and more demand requiring same-day fulfillment, fast re-planning and simulation are of growing importance in all industries. Increasingly, these models are extending upstream and downstream to trading partners to accomplish multi-tier replanning scenarios.
· Alignment of metrics and incentives: The ultimate goal of being demand driven is to ensure the best service at the lowest cost. Hence the performance metrics and incentives of all supply-chain players must be aligned so that everyone is marching in the same direction. The classic silo’ed supply chain organization, where manufacturing watches production economics; distribution monitors finished goods and service, logistics optimizes transportation costs, and procurement primarily evaluates landed material cost, is unlikely to achieve success. Leading demand-driven companies focus on the end-to-end process, and develop a balanced scorecard of metrics to achieve overall competitive advantage.
While the concept of demand-driven supply chains is relevant to all industries, the methods to get there can be quite different for different industries, with varying degrees of emphasis placed on demand-side and supply-side initiatives. Despite such a variation, there are many commonalities in the core IT and operational capabilities these companies need to develop .
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