What Happened to the Concept of Demand-Driven?

By January 12, 2011 Demand driven 7 Comments

Demand-driven value networks grow from, and are a more refined state, of supply chains. Orchestrating demand at the mature stage of the demand-driven transformation, allows companies to better balance growth and efficiency, cost and customer service, and demand fluctuations.  When demand-driven maturity is achieved, not only is there better balance, but greater agility. Based on research in the recession of 2010, demand-driven companies sense market changes 5X faster and align their value networks 3X quicker to changes in demand.  This quicker alignment enables better customer service with substantially less inventory, waste and working capital.  So, you might say, “Why are more companies not demand driven?”  I was asked this question last week, and in this blog, I share my reply.

Background:  What does Demand-Driven mean?

I have written and studied the concepts of demand-driven value networks for the past 6 years.  While software vendors espouse it, and consultants tout it, I find that very few companies –even now six years after the initial research – understand the concepts.  Despite interest, only 2% of companies in the Fortune 500 operate demand-driven value networks today.  The rest have supply chains focused on delivery of the right product at the right place at the right time.  In their scramble to meet demand, they are blind to profitability, and focus on supply.   The most mature companies –Cisco, Intel, Samsung, and Wal-Mart, have invested in supply chain excellence as a core competency, and understand the value of demand-driven concepts (e.g. demand latency, demand translation, and demand sensing).   The economics of each of the company’s markets have made it necessary for the companies to orchestrate demand.  Demand-driven companies have by definition, five characteristics:

  • Demand sensing:  The early definition of demand-driven value networks was a network of trading partners that can sense and respond to demand fluctuations with near zero latency.  The concept of demand sensing with near zero demand latency is the first step in becoming demand driven.  A good example of this is how supply chains can be transformed by moving from a push to a pull-based signal using Wal-Mart Retail Link.
  • Active demand shaping:  However, as companies mature and learn demand-driven concepts, they quickly learn that it is not sufficient to just sense demand, but that it is critical to also actively shape demand through demand orchestration.  The process of demand orchestration is horizontal. It spans functional silo’s of sell, deliver, make and source to and enable market-to-market corrections (from the outside in) to stimulate, or deaccelerate demand.  There are multiple demand shaping levers – new product launch, marketing programs, sales/channel incentives, price management, trade promotion management, service programs/after- market support, and the sale of Slow and Obsolete products (commonly referred to as SLOB) at the highest margin– that can be leveraged to speed-up or slow down demand.  The key of being demand-driven is to actively shape demand to maximize profitability ensuring alignment of all functions to deliver against the opportunity.  All too often, in supply-driven organizations, demand is shaped in isolation.  (E.g. a promoted product that is not in stock or a price decrease for a product when a commodity market is tightening.) Samsung does this well.
  • Design of value networks for demand.  A characteristic of demand-driven value networks is that they are designed, not inherited.  The company also recognizes that they have multiple value networks with each having unique characteristics for response time, cycle times, and flows.  The design of these value networks for demand-driven leaders recognizes the characteristics of demand flows and incorporates demand variability into the overall design.  The goal of the supply chain shifts with demand variability.  Networks with low demand variability (e.g. low MAPE) can be push-based supply chains based on efficiency goals of lowest cost per unit.  Networks with high variability and high volumes (seasonal products) need to be designed to be responsive.  These value networks sacrifice the lowest cost to have the most responsive value network.  Networks with high variability and low volumes need to be designed for agility.  In these networks, companies design for the same quality, cost and customer service given the level of demand fluctuations.  They know what is possible and become active modelers to understand the trade-offs.  Intel’s supply chain mastery program allowed the company to redesign the value network quickly to launch the Atom chip.
  • Agility through demand translation.  In the management of demand networks, demand is orchestrated—sensed and actively shaped to maximize margin—through the use of an agile supply network.  In this agile network, manufacturing and distribution flexs to maximize value.  (E.g. Manufacturing load is shifted from plant to plant, and shipping modes are changed to maximize value in the value network.)  This orchestration of demand—sensed, shaped and translated to maximize profitability – is usually coordinated through a series of horizontal processes designed from the outside-in (from market facing processes to supplier processes) of revenue management, Sales and Operations Planning (S&OP), and New Product Launch Commercialization.
  • Focus on outcomes.  As companies implement demand-driven value networks, the focus shifts from selling in to the channel to selling through the channel. It can also shift from a product-based focus to a value-based outcome focus that combines product and service (E.g. An example of value-based outcomes is the shift that is happening in healthcare.  It is no longer sufficient to just sell insulin to diabetes’ patients, they want devices for monitoring and direct linkage to their physicians.) This may seem like a subtle shift; but the change management issues loom large for an organization implementing the strategy.

 Why have demand-driven processes not become more ubiquitous?

The answer is simple.  Implementation challenges loom large: change management issues are enormous. Companies that attempt to navigate a demand-driven transformation program, must tackle them head-on.  These top the list:

  • Incentives:  The role of the commercial teams.   As long as sales is incented only for volume sold into the channel and marketing only for market share, companies will never become demand-driven.  To make the move on demand-driven initiatives, companies must focus on profitable sales through the channel.
  • Traditional view of supply chain excellence:  For demand-driven initiatives to have success, they must extend from the customer’s customer to the supplier’s supplier.  In 92% of companies surveyed in the fall of 2010, supply chain concepts only encompass deliver and make.  Customer and supplier initiatives are usually managed in separate initiatives largely driven by cost.
  • Leadership: The concepts of demand latency, demand sensing, demand translation and demand orchestration are not widely understood.  As a result, are  not included in the definition of strategy.
  • Focus:  Inside out not outside in.  Process focus is from the inside of the organization out, as opposed from the outside (market-driven) back.  In demand-driven processes, the design of the processes is from the market-back based on sensing and shaping demand.
  • Vertical rewards versus horizontal processes.  In supply-based organization, the supply chain is incented based on cost reduction, procurement is incented based on the lowest purchased cost, distribution/logistics is rewarded for on-time shipments with the lowest costs, sales is rewarded for sell-in of volume into the channel, and marketing is rewarded for market share.  These incentives cannot be aligned to maximize value.
  • Focus on transactions not relationships.  Today, the connecting processes of the enterprise –selling and purchasing– are focused on transactional efficiency.  As a result, the greater value that can happen through relationships–acceleration of time-to-market through innovation, break through thinking in sustainability, and sharing of demand data–never materializes.

The Role of Enterprise Applications:

The demand-driven value network implementation is not your traditional approach of:  add ERP + APS/CRM +SRM and shake until well-blended. In fact, some of the most demand-driven companies have legacy systems.    Instead, the focus is on:

  • Process: The implementation instead, requires a focus in processes:  revenue management, new product launch, channel data management and use of demand insights.
  • Network design: The design of the network is an essential element to actualizing this strategy.  Demand-driven companies have deep investments in supply chain modeling software—optimization and simulation – and actively model scenarios for the network reflecting changes in both demand and supply.
  • Sensing:  They also have a control tower to actively sense network changes and adapt the network for changes in market demand, constraints, and opportunities.  This over-arching group that crosses source, make, deliver and sell works hand in hand with customer service to maximize the use of resources while minimizing costs,  and maximizing profitability.

So, does this mean that we give up on demand-driven concepts?  I feel that the answer is emphatically NO.  It is the right concept, but it will take more time.

What do you think?  Did I miss any of the major change management issues? Got any comments to share with readers? I look forward to getting your thoughts.

This week, I was at National Retail Federation (NRF) 100th conference. Great show.  Congrats to NRF for 100 years of great service to the industry.  Look for my thoughts later this week.

Lora Cecere

Author Lora Cecere

Lora Cecere is the Supply Chain Shaman. A shaman interprets and connects the evolving world to a group of followers. Lora does this for supply chain. As the founder of Supply Chain Insights and the author of Supply Chain Shaman, Lora travels the world to chart the course of supply chain practices and disruptive technologies. Her blog focuses on the use of enterprise applications to drive supply chain excellence.

More posts by Lora Cecere

Join the discussion 7 Comments

  • Steven Daugherty says:

    As always, very insightful analysis on a topic near and dear to me.

    I agree on the role of incentives, but I think it might be too much to ask for Sales to not target revenue or Marketing to not target share. I would contend rather that it is the application of specific incentives across functions that is crucial. Balance sales with forecasting accuracy, market share with inventory turn or obsolescence. Just as important, the operations functions need an outside-in focused metric – on-time performance as measured by key accounts rather than simply shipments from the factory.

    The role of Leadership cannot be emphasized enough, but primarily as an impact on corporate culture – both Samsung and Cisco had crushing run-in’s with inventory obsolescence that indoctrinated a generation of leaders to embrace SCM and they have deeply incorporated into their culture and reinforced with the above KPI. Inventory is more a thing to be respected (or feared) rather than simply another lever to pull in a Core Working Capital calculation. With that kind of experience, Demand Driven is more of a logical imperative than some huge change management exercise.

    The question is how to align companies on the Demand Driven concepts without such crucible events. Retailers can help with well thought through supplier scorecards, but SCM performance has to be put on equal footing with GMROI. Business schools could certainly improve how they train the next generation of consultants, leaders and Wall St analysts on these concepts. But how to move the needle within a company and a career?

    • Lora Cecere Lora Cecere says:

      Steve
      You are right. Based on your response, I changed the blog text on sales metrics from “focus on volume” and marketing focused on “market share” to focused ONLY on volume and market share.
      As always, thanks for your response.

      Lora

  • Charles Chase says:

    Lora, I agree completely with your assessment of the few companies that have truly embraced demand-driven networks and demand-driven S&OP. In fact, most companies are still developing constrained supply based forecasts of shipments/orders. Actually, I’m not surprised that only 2% of companies in the Fortune 500 operate demand-driven value networks. The only company that I was aware of being demand-driven is Cisco. It appears that most companies are still operating from a traditional S&OP process design that is supply-driven and focused only on process with little if any focus on demand-side analytics. Although many are moving to demand sensing none have the capability from an analytical (skillset) or technology perspective to do true demand shaping. They continue to match demand to supply, rather than supply to demand with focus on supply-driven metrics missing market and revenue opportunities. Polarization between the commercial and operations sides of the business continue to exist across most companies with little if any integration (balancing) between demand and supply. Those few companies (mainly CPG) who are attempting to do demand shaping are not benefiting due to the lack of integration between demand and supply data and processes. It is still judgment based with no data integration between POS and shipments/orders with separate processes that are miss aligned due to opposing KPI’s and performance metrics.

    Not only are there corporate culture challenges that require strong change management skills lead by an internal “champion”, but data integration and technology challenges. Furthermore, most companies are reluctant to invest in statistical/analytical skills within their own organizations. They still rely on third party syndicated services providers and consultants to do the analytic work. Meanwhile, the process has gotten too difficult to manage due to the escalation of SKU’s orchestrated by all the corporate consolidation (acquisitions) that has taken place of the past decade. The task has grown too big to manage using Excel spreadsheets. However, most companies continue to manage the process using Excel and literally touch every product in every market every month, rather than managing the process on an exception basis. They have layers of technology supported by multiple software vendors who are unable to communicate with one another. The large ERP/SCM solutions have provided some integration from an order transaction and reporting standpoint, but have been weak when it comes to integrating demand data with supply data, and almost non-existent when it comes to analytics.

    Companies who want to become demand-driven need to recognize that aligning the supply chain, marketing and sales (demand generation) functions to support the business is crucial. Subsequently, they must become more fact-based ( relying on data and analytics) using common key performance indicators (KPI’s) to manage the process with emphasis on demand-shaping to influence market conditions, the product life cycle, and the planning horizon. Finally, they need to deploy enabling technology that is scalable across the corporate enterprise with strong data integration characteristics supported by advanced analytics with user friendly persona based interfaces.

  • Ben says:

    Hi Lora,

    Great post. I’m interested in finding out more, specifically around the subjects of:
    demand latency, demand sensing, demand translation and demand orchestration

    Currently writting an essay on the internationalisation process and would like to include academic study on demand concepts. I’m discovering there’s not much written on the subject of demand-driven, which is both good and bad – good because it’s new, bad because there’s not a great deal to reference.

    Any help appreciated.

    – Ben

  • Alejandro Ramirez says:

    I know the article is more tan five years old but I wanted to ask if the numbers for example of the percentage of Fortune 500 companies working under DDVN has increased and what are currently the companies working properly based on DDVN. Txs

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