The discussions were all with very bright people trying to figure out the basics of becoming demand driven. The gaps were many. It resulted in deep reflection on how I communicate these concepts more effectively.
As I talked to clients, I drank a pot of coffee. I like it black. No sugar. No cream. Straight up. Hot and strong is my preference.
People that know me well will tell you I am a lot like that pot of BLACK COFFEE. I give advice straight. There is no sugar-coating, no sweeteners added, and you will not find me muddying the waters with cream. In writing this post, I would like to let you into the dialogue as a tacit listener. I write this in the hopes that my answers can help you and your teams.
The Questions Clients Asked
The discussions were intense. On the calls, I heard some central themes:
- “Can we back up? Can you tell me the basics of demand-driven? I am confused. Everyone talks the language of being demand-driven, but I am not sure what it really means? When do the concepts make the MOST sense?”
- “To become demand-driven, I need to work with new technologies. I am convinced that this is not what I get from the conventional ERP project. I also see that there is no one company (technology partner or consulting partner) that rolls it up for me. I am convinced that it is not one technology to help me get to my goal. Instead, it is about having them all working together in a different way. Do you have a picture of what this looks like?”
- “We are victims of our own success. We are working with black boxes behind a dark curtain in the dark room. Most people do not understand what we do, but they like the results. How do we now move from inside-out to outside-in?”
- “We have a mature supply chain planning group. How can we, as a team, influence the greater organization? We have made an impact on business results, but how can we influence the marketing and sales group to move from marketing-driven or sales-driven to demand-driven or market-driven?”
- “Supply chain for us is a function. We are put off to the side. We want to contribute more, but our hands are tied. How do we get permission and acceptance of the larger organization to work on a more holistic supply chain plan from the customer’s customer to the supplier’s supplier?”
- “What are the real benefits of becoming demand-driven? Market-driven?”
- “Good news on market acceptance of our products travels fast, and for the most part, we as a supply chain team can run fast with the good news and make up the differences in volume. However, this is not the case with bad news. When demand goes down, it takes a LONG time to translate what is happening in the market to action by the supply chain organization. I believe that this is a key value proposition for becoming demand-driven. Do you agree?”
- “I am good at forecasting. I hear companies talk about new technologies to improve demand-sensing and demand-translation, but I question why I should care? My forecast is already so good that I don’t think that I need to consider a new approach.”
Before, I give you my answers, I want to share some frustration. Tomorrow, I turn 59. I put the first words to paper on the concepts of becoming demand-driven on my 50th birthday at AMR Research. It was nine years ago. I have now written on the concepts of becoming demand-driven in over 700 articles and worked with over 350 companies. I see the concepts of becoming demand-driven as yesterday’s news and have advanced the concepts to become market-driven in my book Bricks Matter; but to my amazement, as I watch people parrot the words, I am constantly amazed by how FEW people REALLY understand the concepts.
Let me give you an example. A long-term client called me on vacation last week with a plea to help with some extensive work on becoming demand-driven. At first I was excited to help. He then followed with a Statement of Work (SOW) to four companies: two strategic consulting companies and a small boutique Lean consulting company and myself. I know of no strategic consulting firm that understands the concepts of becoming demand-driven. And, we cannot confuse Lean with demand-driven. The issuance of this statement of work to three companies that I would never have short-listed to help with a demand-driven journey told me how little my client really understands about being demand-driven. As a result, I politely called and declined his opportunity. I wished him well in his journey and declined to do a bake-off.
I am constantly amazed by how little the large strategic consulting firms know about supply chain; much less the concepts of becoming demand-driven. Demand-driven has grown in popularity and has become a buzzword. It is overhyped. The overuse of the term demand-driven by companies espousing Lean processes, and the bait-and-switch tactics of System Integrators, drives me nuts. In almost all of the cases that I see in the market, the client asks for a road map for “Demand-driven Value Networks” and they are given an implementation plan for ERP by the consulting firms, or a road map for Lean by a Lean group.
Please do not get me wrong, I believe that Lean practices and ERP have their places; but, as I see it, they are each are a small part of the demand-driven journey. A demand-driven journey needs to start with the building of outside-in processes and the use of channel data. It requires an understanding of WHY the current supply chain systems that are dependent on tightly integrated technologies based on orders and shipments are inadequate. It has the following characteristics:
- It is not a strategy for an integrated ERP project. Becoming demand-driven is about data synchronization and harmonization. While companies need a system of record, the advanced planning, SRM and CRM applications of most ERP vendors do not help in actualizing the demand-driven vision. They are too limiting. Stop the presses and cancel the buses of consulting partners that are on their way to help you.
- The most progress is coming from best-of-breed industry-specific solutions. It is about building processes to improve demand sensing, shaping, translation and orchestration. It often requires advanced analytics. These solutions are most likely to come from small best-of-breed providers. These solutions need to be implemented by these vendors as well. They are not well known by the larger consulting houses.
- It is not about the supply chain as a function. A Demand-driven Value Network strategy is about building a strategy that goes from the customer’s customer to the suppliers’ supplier and embraces the use of customer data with integrated test-and-learn strategies. The supply chain as a function is too limiting.
- Data latency must GO! Customers that are demand-driven understand that they need to wipe out data latency and improve role-based decision making based on channel and customer data. As a result, they are embracing programs that enable the visualization of daily channel sales data. They are aggressively embracing business strategies to bring this data into cloud-based in-memory analytics with advanced visualization technologies.
Today, companies are stuck. Progress on growth, operating margin and cycle management is grinding to a halt. As I work on the analysis of corporate balance sheet data, I am more and more convinced of this fact. Despite all of the pretty ads in airports and compelling PowerPoints by well-intended technology partners, by and large most of the projects implemented in the last decade failed to deliver against their promise.
Today, companies lack systems to manage supply chains as a complex system and drive progress on the Supply Chain Effective Frontier (the balance between growth, profitability, costs and working capital and inventory cycles). The processes that were designed over the course of the last decade are legacy. Instead, we need to embrace new forms of analytics, the use of structured and unstructured data to sense demand, and the building of end-to-end processes. The processes and technologies that got us here are not going to be what drives differentiation on the path for Supply Chain 2020.
So, with that said, here are my answers:
What are the basics?
Demand-driven is a value network that senses demand with minimal latency to drive a near real-time response for demand shaping and demand translation. When mature, the processes become outside-in with a focus on value-based outcomes.
This is in stark contrast to the traditional supply chain: a small function within the greater organization, that is inside-out focused on orders and shipments.
How do the pieces fit together?
It starts with the gathering and use of channel data. It requires a strong understanding that an order is not an accurate representation of demand and that a forecast needs additional analytics to be consumed to be useful. The traditional processes of forecasting and order management are not sufficient.
Channel data takes different forms. For a consumer products company, it is point-of-sales (POS) data. For a heavy equipment manufacturer, it is direct sensing from pumps and motors of machines as they are used in the field. For a chemical manufacturer of paints, it was the use of channel data on Lowe’s and Home Depot paint sales, and the use of weekly automotive sales data, in the channel on color and pigments. For a crop protection company, it is the sensing of crop progress in the growing season and the adoption of processes to sense regional needs. A medical device manufacturer is sensing the scheduling of cases in hospitals and the use of components in surgery. The data is different, but in all supply chains it is more available. This is especially true if relationships are designed to include data sharing.
The project needs to include a demand-signal repository that enables the cleansing, harmonization, and usage of channel data (both structured and unstructured data like social and rating and review data) to be used by advanced analytics. This data is then able to be consumed by sales for role-based reporting, category management, and by marketing for category management and market-share analysis, and by the supply chain team for replenishment and account planning.
The most advanced clients are working on the use of the channel data to build a test-and-learn environment. These companies are working on the combination of optimization and cognitive learning engines to sense market conditions and applying test-and-learn engines to improve growth and advance market positioning.
The key is that channel data is now more available. The use of the channel data enables a quicker and a more meaningful response than conventional order processes. For one consumer products client that I worked with it meant a four-week quicker signal for replenishment resulting in additional sales of over $500M a year. For a chemical company, it cut two months of latency in sensing true channel demand resulting in a 2% increase in sales and 32% reduction in inventory. For a heavy equipment manufacturer, it meant better service and the reduction of three months of spare parts inventory through direct machine sensing.
What are the real benefits?
Most of the benefits are cross-functional. They are about making decisions faster and improving the effectiveness of the organizations to make good decisions.
- Making decisions faster. If a company uses channel data and builds the capabilities to use daily data daily for decision making, the company can make market decisions in 4-6 weeks less time.
- Good news travels fast. Bad news travels slowly. In most organizations, strong sales travels quickly, but there is a resistance to accept market signals that trigger slowing sales. As a result, companies make too much product, write-off and mark-down items, and fight slow-moving inventory. The building of demand-driven processes aligns the value network to the market signal.
- Improves service. On a new product launch, it helps with the timing of the next production run. In the areas of trade promotions, it helps the decision to improve replenishment.
Is there a sector where it works best?
The greatest benefits happen when the latency of demand is the longest. The greater the latency in the order signal, the larger the opportunity. Some of the largest benefits that I have seen are in the heavy industrial and chemical industries. It is a mistake to think that the applicability is only for consumer products. I believe that it is necessary to reform health care and that it is an important element of Corporate Social Responsibility (CSR) programs.
In addition, the more demand shaping that occurs, the greater the opportunity. Demand shaping includes new product launch, marketing and sales programs, merchandising campaigns, price management shifts, trade promotional activities, and run-out strategies.
For more on being Demand Driven consider reading these articles:
Story of Kimberly-Clark, a Demand-driven Leader: http://www.supplychainshaman.com/page/2/?s=demand+driven
Overall on Demand: http://www.supplychainshaman.com/downstreamdata/bait-and-switch/