By Karin Bursa
Becoming demand-driven enables companies to knock down organisational silos and create an integrated planning platform that ensures all teams involved are aligned and working toward the same goal – the ability to profitably satisfy demand. In this article, Karin Bursa discusses the impact of becoming a demand-driven organisation.
For many consumer goods (CG) companies, “becoming demand-driven” requires a significant break from the past. The organisation must leave behind its legacy processes and embrace a new way of approaching the supply chain. The first questions to be answered are: What does it mean to be demand-driven, and what are the benefits to your organisation?
Being demand-driven, in its most basic form, means thinking about your business from the outside in, understanding what the market wants and determining how you will satisfy that demand. As simple as this may sound, it can be a difficult concept to execute. Decades of manufacturing-as-usual and pushing products to market has engrained our attitude toward efficiency and output. The focus has become: how much product can we produce and how efficiently can we distribute that product to market?
Being demand-driven flips this around and asks companies to determine how they can accurately perceive and satisfy the demand that exists, using all available resources, products, production capacity, and distribution networks. Here the market pulls goods from you. The idea that if you “build it they will come” is no longer valid.
Impact on Products
The pace of new product introductions (NPIs) in consumer goods places pressure on supply chain organisations to collaborate with sales, marketing, finance, operations, etc. to develop an accurate plan that ensures the right product arrives at the right place for the right price at the right time.
The shift to a demand-driven philosophy impacts the CG product portfolio. For example, a traditional inside-out plan would look at a portfolio of 14 product families and develop a plan to push these out to the market. In a demand-driven organisation, we first take a look at how many product families the market can absorb, and which products will sell at quantities that are profitable. This approach could drive the 14 product families initially planned down to 12 or 11, based on what the market can absorb.
Impact on Customers
Consumer goods companies often look at customer-specific demand (for example a retailer) instead of demand in aggregate. To become demand-driven requires the ability to segment customers, know which 10 or 20 customers contribute the most to your bottom line, and ensure you can satisfy their needs. This information lets you develop a plan that meets the service level agreements in place.
Impact on Channels
Consumers today are buying product through multiple channels, from retail to wholesale to online and direct from the manufacturer. Both the mix of channels and the capabilities to serve the channels profitably are critical to success. As channel complexity grows it is important to look at the demand for each product through each channel, as opposed to determining demand for each independently. You must develop the demand-driven capability to slice and dice and evaluate based on more than just a volumetric or financial measure.
I Know My Demand, Now What?
When you understand demand for a period of time, there are two key steps:
1. Determine if the demand is being realised at the expected pace, or if demand needs to be stimulated. Demand sensing techniques can quickly determine how a product is performing against plan and indicate when sales and marketing efforts are required to influence consumer behaviour.
2. De-emphasise the outbound point-of-view. Historically, CG companies have thought about planning product from a ship-from point-of-view. Today, demand-driven companies plan based on a ship-to process. Where will customers need the product? For example, selling through a retail chain with seven distribution centres can lead you to look at the demand for each distribution centre and the most profitable path to deliver the product there. From this information, you can set smarter inventory policies as well as supply and replenishment strategies.
A Change in Philosophy
As our business philosophy changes and we start to look at demand from the outside-in, the strategy begins to change. Smaller, more frequent shipments are required for some customers while others may see better results from special pack sizes that facilitate the rapid movement of goods through the distribution centre. This shift can be seen most often in the apparel and footwear market where each retail location may receive a different assortment of styles, sizes, colours, etc. To help facilitate this demand, special packs and labeling can help facilitate the distribution.
In another example, retailers such as home improvement centres may require unique packaging or the inclusion of accessories that help differentiate a product in its store from the same product in another. For CG manufacturers this means holding two distinct inventories for very similar products. As a consumer goods company, you need to evaluate complex inventory investments based on the pull through of that particular customer. You need to compare multiple scenarios that will allow you to bring together your strategic goal of being demand-driven.
The Proof is in the Pudding
Demand-driven organisations receive significant benefits. While there may be greater inventory stratification, inventory significantly lowers across the network, including obsolete inventory. Lower inventory investment allows CG companies to turn around and reinvest the savings into NPIs and market expansion.
Demand-driven organisations also see an improvement in forecast accuracy. With a more focused approach to evaluating demand and the products required to satisfy that demand, accuracy increases. This has a waterfall effect across the supply chain. With a better predictor of demand you can better align inventory and supply, position inventory accurately, and utilise your production and distribution assets more effectively.
Another area where CG companies are achieving significant gains is in customer service. With clear visibility to specific customer level demand for a product, you are able to more profitably meet their needs when and where they want it.
New products create risk for CG companies and can disrupt the production and distribution of well-established products. Becoming demand-driven enables you to knock down organisational silos and create an integrated planning platform that ensures all teams involved are aligned and working toward the same goal – the company’s ability to profitably satisfy demand.
The road to become demand-driven is not an overnight excursion; this journey requires a change in mindset, a change in process and an excellent technology foundation to make it happen.
About the Author
Karin L. Bursa is an executive vice president at Logility, a provider of collaborative supply chain management and retail optimization solutions. Ms. Bursa has more than 25 years of experience in the development, support and marketing of software solutions to improve and automate enterprise-wide operations. You can follow her industry insights at www.logility.com/blog. For more information, please visit www.logility.com.