Synchronize Your Demand Chain
Synchronize Your Demand Chain
The implications of inaccurate demand forecasts are well known. Forecast too low, and you miss out on potential revenue and lose market share. Forecast too high, and you expose your company to inventory obsolescence and tie up precious capital. Because of the cost of erring in either direction, companies have been willing to invest considerable sums in complex tools designed to make forecasts more accurate.
Nonetheless, forecasting remains something of a black art—especially now, during this period of unprecedented uncertainty.
Even the best-run companies are not immune to the hazards of forecasting. Cisco, for instance, has been deser vedly lauded for having one of the best supply chains in the world. With 87 percent of its orders submitted over the Internet, it has real-time demand data. This information should enable Cisco to react to emerging trends and generate accurate forecasts. However, by early 2000 the company’s orders were regularly exceeding its forecasts. As a result, Cisco often ran out of the components it needed. Customers sometimes had to wait as long as 15 weeks for delivery.
In an attempt to rectify the situation, in mid-2000 Cisco entered into longer-term contracts with key sup- pliers. By making commitments to buy large quanti- ties of customized components months before they were actually needed, the company hoped to ensure that supply would be adequate to meet the antici- pated demand.
In December of that year, however, demand took an unexpected nosedive. Unfortunately, Cisco’s new contracts limited the company’s ability to respond
to the crisis. Its suppliers also were unable to adjust quickly and continued to deliver components long after demand had plummeted. Ultimately, Cisco was stuck with more than a year’s supply of some compo- nents. In April 2001 it announced an inventory write- off of $2.5 billion—almost two-thirds of its total in- ventory.
Clearly, Cisco was not alone in suffering from the business downturn in 2000. Cisco’s experience is just one among many possible examples illustrating the adverse effects of inaccurate demand forecasts—and of the longer-term fixed-volume supply contracts that often result. The fact is that inaccurate forecasts can unhinge even supply-chain leaders. Sophisticated forecasting tools and contractual arrangements can mitigate—but not eliminate—this risk. The only way companies can avoid such problems is by greatly reducing or doing away with their dependence on forecasts.
A number of companies are now moving in that direction by revamping their supply chains to syn- chronize supply directly with actual—not forecast—
demand. By letting true demand dictate actions up and down the chain, these companies are transform- ing their supply chains into what we call “demand chains”—chains that focus on fulfilling real orders rather than on building inventory to a level that may or may not be “just right.” The following four actions can help you transform your supply chain into a demand chain.
Shine a Bright Light on True Demand and Supply
Most companies, although they may receive and transmit orders electronically, have only limited
visibility into their supply chains. In general, they can “see” downstream only as far as their customers’
production. As a consequence, they base their orders and their production decisions solely on orders from the next downstream player. This policy leads to exaggerated order swings, with each participant in the supply chain trying to outguess the others, thereby exacerbating the disparity between true de- mand and supply. The result is the well-documented
“bullwhip effect.”
In contrast, the best supply-chain managers ensure excellent visibility along the entire chain, all the way to the current demand expressed by end users. For example, a leading clothing manufacturer actively monitors sales of its products to consumers and feeds that information back into the production process.
Plant managers immediately use the data to modify the company’s production mix. By doing away with forecasts, the company can almost eliminate unsold and obsolete products in a notoriously fickle sector—
a feat that none of its competitors have even begun to emulate.
But maintaining true visibility is not enough. Supply chain leaders also have tools in place to identify and manage the exceptions. When issues such as perfor- mance problems arise, preestablished triggers auto- matically notify all relevant participants. For example, a supplier’s unreliability—another major driver of supply chain problems—would trigger such a re- sponse. The ability to identify a batch of out-of-spec materials immediately and notify all affected parties automatically is much more powerful than the ability merely to detect that the materials are substandard.
Mechanisms that combine real-time data with intelli- gent communication allow companies to manage by the supply-and-demand information they collect, rather than be overwhelmed by it.
Keep Your Supply Chain Flexible
In addition to sharing real-time data about what’s happening along your supply chain, it’s essential to configure the chain so that it can react swiftly and strategically to the data it receives. The different ex- periences of Nokia and Ericsson when faced with the same issue vividly illustrate the importance of both supply visibility and flexibility. The two companies had been buying certain crucial components from the same supplier. When the supplier’s plant was struck by lightning and damaged by fire, executives assured both Nokia and Ericsson that the damage was minor and that the plant would resume full produc- tion in about a week.
However, the Nokia Global Supply Web—a proprie- tary collaborative-planning tool that was tied electron- ically into the production systems of the supplier’s plants—quickly saw that the damaged facility was not scaling up as expected. Recognizing the magnitude of the problem, Nokia moved aggressively both to re- design its affected products and to mobilize a network of alternative suppliers and production facilities.
Ericsson, in contrast, relied on the supplier’s assur- ances. By the time it realized the actual extent of the damage, the external supply of crucial components was drying up. Ultimately, Ericsson was unable to produce enough handsets to meet demand. The company lost significant market share and some
$400 million in potential revenue.
Offer Only the Products You Actually Want to Sell
Many companies provide tailored solutions to their customers’ needs, using standard processes that allow
buyers to make choices on multiple dimensions.
Leading companies synchronize the array of options they offer with their production systems. They make their products modular and then reflect that modu- larity in flexible production systems that let them respond to market conditions while still offering their customers real choice.
Dell is one company that has mastered this art. A prominent feature of Dell’s build-to-order system is its ability to shape customers’ choices to help ensure that the company’s supply chain functions smoothly.
Since Dell builds each of its computers to order, the company’s greatest challenge is to synchronize its supply chain so that it can deliver a complex array of components to tight assembly schedules. Toward that end, Dell has rolled out a standardized resource- planning and execution system across all its global manufacturing sites. The company now reschedules virtually every line in every factory around the world every two hours in response to customer demand.
This system monitors practically every part every day.
If demand for a particular component is outstripping supply, Dell can respond by dynamically balancing demand and supply in a number of ways. It can make the usual move of increasing supply, both by increas- ing shipments from existing suppliers and by sourcing from alternative suppliers. Or it can (and does) take a less common approach: decreasing the demand driving any temporary shortage by increasing the pub- lished lead times or by offering discounts on other configurations.
The ability to shape end users’ demand allows Dell to continue to offer both variety and responsiveness.
The company effectively eliminates supply chain dis- ruptions before they occur.
Manage Your Customers’ Supply-Chain Processes
True supply-chain visibility is hard to achieve. Cus- tomers often guard their downstream information jealously. Companies that succeed in persuading cus- tomers to share that information may find that with a small additional effort, they can get their customers to relinquish direct managerial control of their internal processes. Companies that gain that control can create significant value by optimizing the supply chain across multiple production points and inventory buffers.
Amcor, a major packaging manufacturer, has success- fully taken over inventory management for many of its key customers. Amcor’s close integration with its cus- tomers’ production systems—-including electronic transfer of customers’ master production schedules and access to their downstream demand data—has improved supply chain efficiencies for all parties in- volved. System inventories have typically shrunk by 30 percent, while write-downs for obsolescence have decreased by some 40 percent and availability (orders delivered on time and in full) has increased to more than 95 percent. Amcor has steadily gained customers, grown market share, and increased profitability since embarking on a strategy to manage its customers’
processes.
Alcoa, the world’s leading aluminum company, has developed the Alcoa Business System, which extends Alcoa’s processes deep into those of its main custom- ers. This allows the company to base production deci- sions on accurate, live information. As a consequence, in many businesses, Alcoa can increasingly produce to actual demand rather than to forecast or budget.
With these measures in place, the company slashed inventories by more than $250 million in a single
year, while at the same time boosting sales by almost
$1 billion.
* * *
You have two choices. You can continue to leap through the flaming hoops of multiple forecasting exercises—with all the uncertainty, risk, and cost that they entail—knowing all along that the results will be inaccurate and misleading. Or you can convert your supply chain into a demand chain.
The latter approach will mean investing in ways to achieve visibility, flexibility, and collaboration along your supply chain by gathering real-time supply infor- mation from your suppliers’ suppliers and true de- mand information from your customers’ customers.
Ultimately, it will mean taking over key processes for your customers. It will be a major undertaking. But now—when inventories in most industries are ex- tremely low and cost pressures are at an all-time high—
is precisely the moment to move aggressively ahead.
Your reward, in the end, will be to transform demand from a mystery to be guessed at (with costly conse- quences when you guess wrong) into a known quantity that drives a lean, highly responsive demand chain.
James P. Andrew Andrew McDonald
James P. Andrew is a vice president in the Chicago office of The Boston Consulting Group. Andrew McDonald is a manager in the firm’s Melbourne office.
You may contact the authors by e-mail at:
[email protected] [email protected]
© The Boston Consulting Group, Inc. 2001. All rights reserved.
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