About Demand Chain
The concepts of supply chain and demand chain are often used interchangeably. However, this site is about demand chain because it is about the demand driven "pull" model of operation. This model seeks to identify and react to market demand, giving price- and margin stability a high weight, while accepting the risk of under-utilized capacity in the short term. This model coexists and competes in the market with a supply driven "push" model, which gives unit cost reduction a high weight, while accepting the periodic need for discounting to clear stocks. The two have completely different implications for the factory, logistics- and sales operations.
The promises of an improved demand chain are formidable: Stocks down by 40-60%, slow movers down 40-50%, lead times down some 50%, forecast accuracy up 26%, sales up 5% .… are the kind of numbers commonly cited in this context, notably by vendors of demand chain systems and consultants. The good news is that such benchmarks really are achievable. The bad news is that expensive and complex systems play a supporting role only. What makes the topic of demand chain so difficult is the complexity of the process and the fact that traditional organizations are typically characterized by formidable obstacles to a smooth demand chain operation.
The impact on costs is sometimes referred to as an "iceberg" in that many types of costs are not immediately visible. Commonly recognized are the financial costs of operation and providing warehouses as logistics costs. In the balance sheets, the amount of capital employed in inventories can be detected, but the quality of that inventory is already more difficult to detect, as is the opportunity cost of binding valuable capital in inventories. However, when it comes to measuring the discounts required to move excess inventory and the loss of sales opportunities when hit rates are low, companies usually have no reliable measurement tools. It is no exaggeration that margins can be improved by 10-20% by getting the demand chain right in healthy companies. In fragile companies, it is a matter of survival with a much higher potential. To capture it, three core modules need to be tackled and integrated into one smooth process:
It many sound trivial to identify the forecasting quality as a key to the problem, but it is remarkable how many companies have their forecasting horizons out of sync with actual lead times for their products. Many companies do not monitor hit rates or the quality of their customer- and staff forecasts, let alone react in practice to those with a good track record. All customers are treated equal. Other companies have so many planning layers that market information is replaced by the wishful thinking of those who are merely supposed to be aggregating the numbers. In extreme cases, the suppliers or factories make up their own minds regarding what to produce, creating a disjointed chain where demand and supply just don't seem to match.
The more traditional logistics cost drivers typically offer plenty of improvement scope. Even when overall inventory reach looks reasonable, individual products may offer quite a few nasty surprises. More importantly, low hit rates may coexist with high inventories. The initial purpose here must be to reduce costs for warehousing space by reducing its main driver, physical inventory levels and returns of merchandise from the market.
However, in many companies much more can be done. The number and location of warehouses may be out of line with required service levels, offering scope for reduction and improvement. In addition, transport and handling costs can often be reduced by optimizing the product flows, minimizing handling points and keeping efficient logistical units in tact as long as possible in the process. The place where localization work is done may need reviewing, as may transport modes and pricing arrangements. There are many parameters to get right, if service levels and costs are to be optimized simultaneously.
The third module for improving the demand chain is the toughest and most time consuming to change. The more flexible the manufacturing unit and its suppliers, the better it can respond to market needs, of course. For best results, however, a more comprehensive approach must be taken, looking also at the product portfolio, commonality- and production-scheduling issues.
The problem is that it involves parties at opposite ends of the demand chain. At one end are those forces close to the market driving the complexity of the product portfolio. In many companies there is a deeply rooted desire to maintain or even increase complexity, even though empirical studies have shown that variants eventually cannibalize each other. The costs associated with such complexity are rarely understood and usually borne by others in the chain. Streamlining the product portfolio and the creation of model families takes some pretty tough management intervention, but is fundamental to the success of demand chain flexibility.
At the other end are the designers and engineers creating model families with common parts and introducing innovations where appropriate. They may be working at very different international locations with their own habits, systems and supplier preferences. Typically, they are concerned with optimizing the "bill of materials", not the whole demand chain. The results this leads to can be expensive further down in the line and can seriously compromise manufacturing flexibility.
Before elaborating on each of the modules in the following pages, two further points need to be emphasized: First, that it is not possible to be successful by working on each module individually. Ultimately, success requires teamwork, in that the "soloists" need to become an "orchestra". Second, the relevant information must be available to those involved, if the communication and orchestration of activities is to work. These issues are taken up in the last section of the demand chain module.