Strategies for Demand-Driven Supply Chains
The recent supply chain disruptions have set out a general red alert to all operation leaders. The risk of missing demand due to stock-outs is signalling that the best strategy is to stock up to deal with any further unpredictable events. This is the ‘just-in-case' mindset. However, are leaders willing to take on the cost of this approach? High investment in stock does not guarantee to have what the client wants, but it does represent a big liability for the business. It’s time to rethink supply chains with a strategy that does not compromise business profitability while ensuring demand response.
What is a demand-driven supply chain?
A demand-driven supply chain takes the real demand from the consumer as a trigger to plan production and stocks through all the links in the supply chain. This includes the distribution warehouses, the production facilities, and the different supplier tiers.
This is a customer-focused strategy as it points all the operations in the direction of the customers’ needs, in contrast to producing and stocking what is best for efficiency, or what better utilises the raw material that was purchased.
This all sounds perfect, however, how can one align production with demand while delivering with short Lead Times? In a demand-driven approach, the S&OP capacity planning process uses forecasts to set up the capacity needed: plants, distribution centres and resources. This capacity is reviewed every month to make sure the supply chain is following the demand patterns. However, when it comes to S&OE, the actual customer orders will be the trigger - not the forecasts. This guarantees that the supply chain has the capacity to absorb the demand pattern, but the investment to manufacture is only fixed once the order is confirmed. Being able to operate efficiently in small batches is key for speed and cost.
Main differences to other supply chain planning strategies
In traditional supply chains, forecasts are the driver of all the operations' facets: capacity planning, production planning and stock management. In contrast with a demand-driven strategy - where forecasts are only taken into consideration when designing the capacity needed.
The traditional networks work in silos with every link of the supply chain dimensioning its own capacity and forecasting demand without visibility or collaboration with the other stakeholders. In pull demand-driven supply chains, collaboration is key and all stakeholders work closely and share information to align the supply strategy as a whole. This helps to avoid the bullwhip effect - increasing inventory in response to shifts in consumer demand with larger effects at each upper level of the chain.
Other strategies are also more rigid as planning and execution follow a medium-term vision that was created based on the forecasts. This leaves little room to adapt to unpredicted scenarios.
Advantages of adopting a demand-driven strategy
The pull demand-driven approach to supply chain planning increases the efficiency of the available inventory as it guarantees that what one has available is exactly what the customer wants, rather than producing in batches hopping to be sold, only to end up with dead stock. Thus, the businesses with pull operations also benefit from a leaner cost structure with less capital tied up in inventory.
As previously mentioned, a demand-driven operation is focused on the customer and is optimised to deliver a fast and effective service. By running operations based on real customer orders, the supply chain is agile and is constantly adapting to changing customer expectations.
The increased need for speed is a trend across all sectors. So, building an operation that is able to deliver products quickly is a powerful competitive advantage. By working with semi-finished, demand-replenished stocks, pull supply chains are able to deliver with speed without the high investment in finished product stock.
Roadmap to adopting demand-driven supply chain planning
To transition to a demand-driven approach, leaders need to start the closest to the customer and move upstream through all the levels of the link until the suppliers are reached.
The first step is to set-up the S&OP capacity planning process which will define the number of production sites, distribution centres, transportation links, resources and suppliers that the business will need to meet its yearly goals. This is based on forecasting data, gathered in collaboration with all the stakeholders. A routine should be put in place to review this data monthly.
Following S&OP, S&OE is set-up to work based on real demand. Production is pulled by real customer orders. For this to happen without efficiency loss, productive and distributive operations should be optimised and leaned out so as to be able to work efficiently in small batches and high frequencies.
Lastly, the stock strategy will guarantee that all materials and semi-finished products are available for agile, fast plan-produce-delivery sequences. These stocks need to be dimensioned based on forecasts but replenished based on consumption to guarantee minimal cost with maximum reliability.
How to mitigate risk in demand-driven supply chains
Due to the multiple recent disruptions and insecurities, leaders look for comfortable solutions that will ease the risk of business value loss and increase the resilience of the operations when the unpredictable occurs. Some typical initiatives that can be done to improve resilience and mitigate risk are:
- Improving collaboration on forecasting
- Developing digital twin simulation models for scenario building
- Categorising suppliers by risk and setting up different agreement models
- Dual or multi-sourcing of raw materials
- Nearshoring of production and supply
- Expand backup production sites
- Increase capacity buffers
- Increase the manufacturing network diversification
- Increasing the inventory buffers of critical products
- Harmonising or standardising new products
- Reducing the SKUs in the product portfolio
These initiatives can be carried out in any supply chain, however, the cost and effort to implement them will be larger in a traditional one than in a Lean one.
In terms of planning, demand-driven planning is based on real data and shopfloor analysis, so boosting this accuracy is an achievable task.
When it comes to sourcing, a Lean demand-driven supply chain is built on collaboration and thus working with the different links in the process to reduce risk starts with an advantage already in place.
When defining the ‘just-in-case' stock buffers as stocks are Lean and based on real customer demand, setting up the safety levels that do not compromise profitability is simpler than in a system where regular stock already has a high level of safety bundled together. In production and distribution, all efficiency and productivity gains are explored before moving into capacity investments. As the operations are lean, the output is predictable and thus capacity planning is accurate.
The mixed strategy of applying ‘just-in-case' measures to a ‘just-in-time' system, brings the safety and resilience leaders need, while still guaranteeing business profitability in the long- term. The transition to a Lean demand-driven supply chain is a mandatory move for all businesses wanting to succeed in a volatile, unpredictable economy.
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