demand driven

Stasis

by Lora Cecere on April 27, 2014 · 1 comment

sta•sis (ˈsteɪ sɪs, ˈstæs ɪs)
n., pl. sta•ses (ˈsteɪ siz, ˈstæs iz)
the state of equilibrium or inactivity caused by opposing equal force

It was 1988. I was involved in early Vendor Managed Inventory (VMI) pilots. In my work at Clorox we were starting to ship to Walmart using Retail Link. We were excited. It seemed like the start of a great thing. In the pilot, we were able to see retailer flows. We talked furiously about the design of the End-to-End Supply Chain (E2E).
At that time, the conference circuit was buzzing. The words collaboration, Efficient Consumer Response (ECR), Vendor Managed Inventory (VMI), and Collaborative Planning, Forecasting and Replenishment (CPFR) filled the air. The promises were thick. The concepts were right, but the execution was flawed. The processes were overhyped and companies rushed head-over-heels to join the throng.
Today, the average Consumer Packaged Goods (CPG) company has eleven VMI relationships and six VMI planners. Based on the research that we are doing, we can see that the programs are not growing. They are not contracting. Instead, they are caught between sales-driven and supply-driven processes. We have stasis.
While our initial energies were focused on large accounts, today’s VMI programs are getting the best traction in the drug and dollar channels. There are few VMI programs left with Publix, Safeway, Target and Walmart conspicuously absent. Kroger’s movement to Market6 added to the stasis. Companies are shipping fewer and fewer cases using VMI processes.
The programs operate as on an island. Only one company interviewed is actively working on the building of E2E processes, outside-in, connecting the flows of VMI. Ironically, while it is connected to the outside world, it is not well-connected to the manufacturer’s enterprise systems. Most companies’ demand-planning systems do not allow easy integration of retail data; and the connection to the planning systems requires an unwanted redesign that most companies try to avoid.

Figure 1.

Reflections

We are now entering our third decade of managing VMI processes. Most of the programs have been inherited.  The teams running them were not part of the overhyped exuberance.
The teams running them are heads-down and in management mode. Most of the VMI processes report through customer service. The technologies are fixed and the processes are tried-and-true. These teams are not actively trying to design End-t0-End flows or synchronize the VMI programs with other demand signals. It just is. VMI has become a reliable part of the order flow.
At Supply Chain Insights, we are in the process of completing a study on VMI that will publish in our May Newsletter. (The study is still open. If you would like to participate and compare your results to those of the industry, just access the VMI Study through this link.) We currently have 35 responses and are trying to drive the response rate to at least 50.

A Head-Scratcher

In the study, the average company reduced the costs of transportation by 3% and reduced the order cycle time by at least a day. And, as shown in Figure 1, the orders are cleaner and more reliable. Customer service levels improve. So, why if the process reduces costs, improves order cycle times, and order reliability, are we not driving greater adoption? These preliminary results make me scratch my head. Why are we at a stasis? Why are we not taking advantage of VMI more actively? I think the answer lies in the fact that the program is juxtaposed between the opposing forces of sales and supply. When companies become market-driven and understand the differences between a sales-driven approach and a market-driven value chain, the processes take on greater value. The mapping of flows outside-in and horizontally across the company enables greater value.
The more research that I do, the more I scratch my head. The CPG organizations talk more about collaboration than other industries, but they have made less progress than high-tech and electronics or A&D’s work on Performance-based Logistics (PBL). We have had a lot of talk and flurry over initiatives, but we are at a stasis.
What do you think? I would love your thoughts. Why is VMI at a stasis?

One of the favorite parts of my job is teaching classes on how to take supply chain concepts to the next level to improve corporate performance.

I love helping people to see supply chain concepts differently. One of the ideas that I am researching and sharing is the concept of building Market-Driven Value Networks. The concepts of being market-driven build on the research that I have done for the last ten years on building Demand-Driven Value Networks (DDVN).

The vision is aspirational and takes the concepts of being demand driven to a next level. To ensure clarity in this post, let’s start with definitions. I define DDVN as:

Demand-Driven Value Networks: A network that senses demand with minimal latency to drive a near real-time response to improve  demand shaping and demand translation.

And, a Market-Driven Value Network as:

Market-Driven Value Networks: An adaptive network focused on the delivery of value-based outcomes. It  senses, translates, and orchestrates market changes (buy- and sell-side markets) bidirectionally with near real-time  latency to align sell, deliver, make and sourcing functions. It builds on the concepts of becoming demand driven.

These are a step change in thinking. Both move the supply chain design from inside-out to outside-in. Traditional supply chains respond, but they do not sense. The processes and architectures that we built over the last thirty years delivered inflexible processes that take too long to respond. These legacy processes amplify and distort market signals putting the supply chain on the “back foot.”  As demand and supply volatility increases, the sensing and translation of network shifts is importance to corporate performance. Nine out of ten companies are stuck. They are unable to drive growth, maximize profitability and minimize cycles. More and more, companies are realizing that effective value networks drive GROWTH. No longer should the supply chain be thought of as just a cost center to manage.

As I teach the class, I learn too. Here I share these insights and recommendations to the readers of this blog on how to get started.

My Lessons Learned:

Supply chain practices are steeped in belief statements that there are “best practices” and that the “order is the best representation of demand.”  As we build supply chain strategies in the class, I work with attendees to first answer the questions in the green box to design the strategy:

  • What are the right ways to support the business strategy?
  • What are the right trade-offs between the value drivers for each value network?

Time after time, I find that companies are left with lofty business strategies that are not translated into actionable plans for the organization. I also find that there are too few business strategy consultants that understand the need for this translation. Most companies struggle with this activity. I find most are in a quite a mess.

The next step is to answer the questions on how to define demand and supply relationships to deliver on the promise of supply chain value networks.  The activity starts at the end of the supply chain in the definition of demand and supply relationships. It cannot be effective from the inside-out.

Companies are not good at demand. The gulf between commercial and supply chain teams needs to be closed. For most, the building of demand relationships is a new concept.  It is often the first time that attendees to the class have thought about the frequency, availability and cleanliness of demand data. We then work together through activities to gain an understanding of demand synchronization, harmonization and translation. The goal is to make channel data useful by the corporation.

In parallel, the design of supplier relationships to maximize value is a ripe area for discussion. Only 22% of companies are actively managing the end-to-end value chain to deliver on corporate sustainability goals. We discuss the principles of supplier development and how companies shift from punitive practices, where costs and waste are pushed backwards in the value chain, to owning the extended supply chain to deliver on the brand promise.

Most supply chain professionals have spent their time at the center of the supply chain and have not thought about the options and the design of the ends of the supply chain enough. The center is strong and inflexible and the ends are weak.

After answering the questions in the white boxes, companies can then define the process. It should be then, and only then that the business processes can be defined. Process needs to follow strategy. When this happens, there is greater balance between metric trade-offs and resiliency in year-over-year improvements in corporate performance.

Recommendations:

Many companies do not know where to start. And, we try to be clear in the course that the starting point is in improving reliability. The Market-Driven Value Network visions need to have both “big wings” and “big feet.” The feet are grounded in reliability. When given the choice between reliability and shorter cycles, the supply chain leader needs to choose consistency and reliability. This includes consistency in manufacturing operations, order-to-cash processes, and customer service. The wings are defined in a clear year-over-year strategy to enable evolution towards a vision.  Here is how you start:

  • Stabilize ERP Investments. I believe that ERP is important to improve transactional accuracy and cycle efficiency. You simply cannot have an effective supply chain without it, but I recommend that companies do it ONCE and do it WELL Avoid ERP bells and whistles. It is important that companies do not become hostages to long, multiyear ERP rollouts.  It is too big of an opportunity cost for the organization. In addition, the promise of extended ERP is not worth the trip. The gap in capabilities between best-of-breed supply chain planning applications and those from ERP providers is growing. When given a choice, implement the base modules for ERP and do it well. Sidestep the planning and analytic offerings.
  • Actively Invest in Cloud-Based Analytics for Self-service by the Line of Business User. Today, companies cannot get to data. The multiple ERP instances, and the tieing of analytics only to ERP projects, leaves the company unable to get data from a heterogeneous IT landscape. There are advancements of in-memory, cloud-based analytics like Qlikview in combination with visualization technologies like Spotfire and Tableau.
  • Redefine Demand.  Start by recognizing that the order is a poor representation of “true demand.” Start by asking for demand data by channel partners and then build systems to synchronize and harmonize channel demand data with new forms of analytics to recognize patterns. (Technologies to synchronize and harmonize demand data are sold by vendors like Orchestro, RSI, Retail Solutions, Retail Velocity, and Teradata.) Redefine demand planning to model what the company is “going to sell” and take advantage of the new attribute-based modeling capabilities from vendors like Logility and SAS, and demand translation capabilities (e.g., replace rules-based consumption logic) with solutions from Terra Technology. After taking these steps, invest in building cognitive learning engines and implement test and learn capabilities with technologies from Applied Predictive Technologies (APT), IBM and Enterra Solutions. These learning engines allow companies to sense, learn and then act.
  • Build Strong Horizontal Processes with a Focus on Orchestration. I describe orchestration in the blog posts  Just You and Me Dude and in the second post Bait and Switch. The important horizontal processes are Revenue Management, Sales and Operations Planning, Corporate Social Responsibility and Supplier Development. Build strong what-if capabilities through systems like Kinaxis and Steelwedge.
  • Invest in Business Networks and Inter-Enterprise Systems of Record. We are on the cusp of building effective business networks. There is a strong need for inter-enterprise systems of record. I do not think that this will happen through the repurposing of indirect procurement networks (e.g., SAP’s redefinition of Ariba). Instead, I think that this will happen through the evolution of industry-specific business networks.  I am busy researching the business network evolution of GHX for Healthcare, E2Open for high-tech, Elemica for the Chemical Industry, Exostar for Aerospace and Defense, the redefinition of Covisint for the Automotive Industry, and GT Nexus for Apparel and Distribution Intensive industries. What is old is new again. I describe this in the post Emperor’s New Clothes.

What do you think? I would love to hear your voice.

We know that companies are busy, and that it is hard to go to conferences and keep track of all the changes in the technologies. In our training, we try to build it down and combine the research with experiential exercises. If you are interested in having your teams participate in the training, and learn the concepts, check out our training options.