Within the the span of a few short years the Supply Chain competitive battlefield has moved from inbound supply side to the outbound side or customer facing part of the business. It is clear to me now that retailers are simply not able to accurately forecast demand anymore with so many factors now affecting consumer buying behavior (see NT Times, Reluctance to Spend). Consumer demand is impacted by the health of the economy, the real estate market, the unemployment rate, credit markets, as well as the ever increasing blizzard of competitive product offerings. The result is that maintaining customer service levels now comes at a high price for both businesses and the environment forcing companies to often oversupply the market in order to respond to volatile demand.
Companies that once excelled at managing lean inventories and building-to-demand now find themselves struggling to maintain customer service levels by placing more and more product, closer and closer to customers manufacturing, distribution and retail stocking locations. The Days of Inventory Outstanding (DIO) for some industries are actually heading the wrong way. The figure below, from CFO Magazine, shows that multi-line retail, durable goods, communications and networking companies have actually lost ground adding several days of inventory to their footprint of global warehouses (negative numbers are bad meaning increasing DIO). Even though this data includes the fourth quarter of 2008 representing the beginning of the financial crises I was surprised that the numbers weren’t worse. Then I began looking into E2open’s order push out and cancellation rate and realized that inventory was being flushed back to contract manufacturers and throughout the supply chain.
Days Inventory Outstanding change from 2006-2008
Demand Planning organizations have come under an unbelievable amount of stress as of late trying vainly to align volatile demand to inflexible supply mostly because customer order lead times are a fraction of the actual manufacturing cycle time of parts that make up their products. OEM and retail customers think in terms of days or weeks, not months or quarters that is actually required of long lead-time components (semiconductors, LCD panels, or hard drives). Predicting demand has become more like gambling than forecasting where suppliers are forced to wager on whose order will actually come true. This is compounded by the fact that many companies have outsourced much of their operations to contract manufacturers and do not even place orders anymore with their key component suppliers further lengthening the supply commit process making it more opaque. Add more ship-to locations, new products and customers requiring greater delivery flexibility with less inventory risk to the mix and it is easy to understand why fulfillment organizations feel overwhelmed.
Common Demand Management Challenges:
No one seems at all happy with Order Promise cycle times, especially customers who seek new sources of supply because their suppliers have simply not paid enough attention to their demand management processes. During 2004 – 2008 inbound supply chains were aggressively being re-tooled with the latest supply planning software to lower inventory and improve visibility (see E2open resources: Celestica Reduces Inventory) while demand management processes were only half heartedly re-engineered. This was a terrible error delaying many of collaboration and process transparency that had been brought to the supply side. Now companies find themselves with manual planning processes built around excel and silo software applications unable to scale their business. Here is a partial list of common demand challenges I see over and over again.
- Proliferation of Portals: Every customer wants their portal updated adding more manual overhead and cycle time.
- Low percentage of customers are B2B due to the time and cost to on-board them.
- The B2B data that is available must be manually merged with demand still coming from phone, fax, email and excel orders.
- Long sequential planning processes; too many specialized functions touching too many orders.
- Gaming the forecast is still all too common (either by the customer or by field sales force).
- More and more customer specific products are adding configuration complexity.
- Pressure to just say “yes” to get the order, then chase the supply, is increasing the number of “hot lot” exceptions. “If every order is an exception then no order is…”
- Excessive time is spent collecting data, validating it and checking order acceptance rules.
- Even employing “standard B2B protocols” too many customer process maps are unique requiring continual maintenance every time a back-end system changes.
While suppliers struggle to get a handle on these challenges their customers are not waiting for things to get better and are beginning to push their processes onto their suppliers. Many are implementing Vendor Managed Inventory programs, requiring discrete orders to become blanket orders, self invoicing and generally pushing more process administration down the supply chain adding cost, complexity and ironically reducing flexibility.
From an environmental point of view this means more energy used and more carbon emitted only to oversupply the market with products that eventually need to be discounted, reconfigured and/or cross shipped to another region with more demand. The progress of environmental initiatives that many companies are so proud of (packaging reduction, internal energy reduction and carbon footprints…) pale by comparison the real waste and pollution caused by building products without real consumer demand behind it. Furthermore, putting products on sale to stimulate demand is the most expensive way create demand. It creates a permanent source of margin pressure and conditions the buyer to delay an order waiting for a price reduction that then causes companies around the world scrambling to expedite everything during the last few weeks of every quarter. The waste this causes is mind boggling…
But if You Try Sometimes, You Can Get What You Need…
Getting better at being more demand driven requires radical process transparency, near-real time information on how your supply chain is performing and the ability to manage-by-exception. The days of simple arms length business transactions are over. Supply Chains are now networks requiring a new way to manage and respond to demand when and where it happens. Here is a list of things to consider:
- Look into SaaS platforms to connect your trading partners and provide you with only one “pipe” to manage.
- Connect 100% of your trading partners. The only way to have “one version of the Truth” is to have one version of it for everyone.
- Make sure the platform has full process breadth. Wide is better than deep. Have all participants see their part of the end-to-end process from customer to supplier.
- Make sure it can operate in a mixed model environment, discrete orders, blanket orders, OEM channel, Distribution Channels etc… Remember process breadth is better than feature depth.
Put all of this in place and you will be able to “execute your plan” and not have to “re-plan your plan” over and over again. Think of re-planning as rework and a symptom of the larger problem of lacking process transparency and control. Focus on implementing an execution platform to run your beyond the fire-wall processes on one set of numbers. While your ERP will remain your system-of-record to run your financials, your SaaS execution platform becomes your “system of process” common to all trading partners allowing you to quickly respond to customers so what they “want” can become a lot closer to what they really “need”.
