Moving from push to pull: demand-driven supply chain management

Date : 23 January 2018

In this blog we talk to Simon Eagle and Ankur Bhandari, Partners at CAMELOT Management Consultants about the latest developments in Demand-Driven Supply Chain Management (DDSCM)

IGD: How do you see the food and grocery industry developing in the future?

Camelot: We’re seeing an increasing number of players and an increasingly competitive environment, with all involved looking to grow market share and drive down costs while at the same time dealing with the complexity and implications of distribution channel disaggregation. The market is also becoming increasingly globalised and we are seeing growing demand volatility driven by high promotion intensity, social media, price-sensitive consumers and fast-changing consumer loyalties.

Market volatility is being reflected in shorter life cycles and more volatile demand patterns, both of which are complicated by the longer lead times associated with increasing global trade. On the retailer side, the emergence of low-cost retailers with, ironically, smaller ranges of product have had an impact in recent years, establishing a significant and growing market share across Europe.

IGD: How would you define demand-driven supply chain management and how does it differ from traditional methods?

Camelot: One of the easiest ways to understand demand–driven is to contrast it with methods used by industry right now. Traditionally, manufacturers start by taking a forecast of what they think will sell, compare that with what’s in stock and future planned production, then plan to make the difference to achieve a so-called ‘safety stock’. Whenever the future inventory balance is predicted to miss the ’safety stock’ level, the planner is messaged to change the supply schedule.

Because demand forecasts are always incorrect, and getting worse in today’s volatile markets, companies are inevitably making the wrong product at the wrong time in the wrong quantities. This explains why supply chains are characterized by substantial amounts of expediting and schedule interruptions, as attempts are made to prevent service failures. These forecast-driven supply chains are always in a position of excessive or not enough stock. The continuous disruption of the schedules makes things worse by using unplanned capacity that increases costs and contributes further to excessive, unbalanced stock levels, and longer lead times.

Instead, supply chains should be about flow, allowing materials and products to move continuously to the customer without interruption. Supply chains should therefore be demand driven, predominantly making what has been sold rather than making what is estimated might sell. To do this, you set up strategic decoupled stock positions for all your items across the supply chain. These would be as finished goods, raw materials and maybe also at a disaggregation point in the factory, this could include a KANBAN style replenishment process in a factory for example.

The target stock levels are calculated using the daily forecast average over, say, the next three to six months. Then, the average demand over the replenishment cycle and lead time, plus a calculation for error, is aggregated to work out the target stock level for on-hand and on-order inventory.

Actual supply execution across a range of items then follows a pre-determined cycle and sequence and only what has been sold of each product is replenished. This allows for a stable, uninterrupted and efficient supply cycle. If the stock targets have been set correctly, such a process will successfully service base demand volumes and variability without need for any expediting and interventions. It means that planners can focus on real value-adding activities such as maintaining accurate stock targets and actively managing the exceptional and extreme demand events that are outside of base demand.

IGD: What are the benefits?

Camelot: The decoupled and demand-driven supply chain can deliver planned service levels with significantly better capacity utilisation, no fire-fighting, much shorter lead times, and the correct, lower level of stock. Companies that adopt the demand-driven approach have been able to reduce their stock levels by up to 50%.

Some businesses may think that their demand patterns are just too volatile for this approach to work. However, if you have consistently high volatility, then the average and standard error is still valid, so this approach will still be effective. You’ll obviously be holding more stock than if demand was less volatile, but the key benefit is that you won’t be disrupting supply operations with expediting and fire-fighting as you would if you were trying to be forecast driven.

IGD: What are the barriers that exist?

Traditional manufacturing resource planning (MRP) systems have not been compatible with this methodology. With demand-driven, each inventory point is decoupled from the rest of the supply chain, whereas MRP has always been based upon fully dependent demand. Therefore, it has proved exceptionally difficult to embed into legacy systems.

In recent years, many businesses have attempted to use spread-sheet-based demand-driven supply chain management which has worked on a small scale but is not a sustainable and scalable way of working across large and complex supply chains.

The emergence of ‘Software as a Service’ (SaaS) has allowed Camelot to enhance MRP systems to implement a robust enterprise-wide demand-driven process. So now this technical barrier has disappeared, companies can take their current systems, ‘add in’ the enhancement and begin making changes immediately.

A more significant barrier to adoption of demand-driven is perhaps conservatism amongst manufacturing companies. Despite the fact that demand-driven is really just a software-enabled lean pull approach with event management, the change is almost too large for some companies to comprehend. Paradigm shifts need a concerted change management effort to roll out, and some businesses are afraid to be innovators. But we are rapidly moving through this early adopter phase as some major FMCG companies are now trialling this approach, so we envisage a considerable acceleration in uptake over the next few years.

One of the advantages of using Software as a Service is that it allows for demand-driven simulations to be run, using a manufacturer’s demand data and parameters to quantify the benefits. So no leap of faith is necessary and subsequent small-scale pilots are feasible allowing for an incremental roll out.

IGD: Thanks for your time, to summarise, what does the future of demand-driven supply chains look like to you?

Camelot: Going into 2018/19 we are already seeing many companies, particularly in the FMCG industry, beginning to trial demand-driven. SAP’s announcement, with Camelot, that they are also supporting adoption of DDMRP through their new software releases has also helped in raising awareness and brought it into the mainstream.

This can be a genuinely transformational way of working, requiring a degree of ambition and appetite for change, along with senior level sponsorship. Those companies that adopt this approach early will undoubtedly be able to secure a competitive advantage.