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Demand-driven Supply Networks for Small and Medium Business

Written By: Sean Wheller
Published On: October 10 2005

Introduction

In the last year or two there has been much talk about demand-driven supply networks (DDSN). A simple search on Google for "DDSN model" will return pages of information about DDSN. Despite this and all the noise about small and medium business (SMB) in the enterprise applications arena, information about DDSN for SMBs is virtually nonexistent. The irony of this is that SMBs constitute the majority of the supply chain and yet case studies and reports make little or no mention of them.

What does this mean? Is DDSN an IT strategy for large enterprises only, or can SMBs also take advantage of the benefits DDSN brings? In this article, we explore the concepts of DDSN in simple terms and discuss how SMBs have the possibility to employ DDSN as a strategic competitive direction, from which to cultivate new growth as apposed to just striving for lowered costs.

This article has been sponsored by SYSPRO

DDSN Defined

Traditionally the supply chain has been driven from the back, by producers and manufacturers "driving products to market." The dominant action in a traditional supply chain was to push products downstream towards end customers. This model was linear in its approach. Businesses in the supply chain were merely acceptant of demand based on the orders received from businesses in front of them. They rarely had any visibility into the true market demand for a product. To maintain downstream momentum in order to reduce inventory investments, upstream businesses constantly had to exert pressure on the downstream businesses to place orders. In this environment, demand could often be erratic and therefore hard to predict. Items could go from a situation of under-stock to over-stock in very short spaces of time, and businesses across the supply chain did not have timely and accurate information in order to balance the turbulence.

In contrast, demand-driven supply networks are driven from the front by customer demand. Instead products being pushed to market, they are pulled to market by customers. Is the once dominant force of pushing, merely substituted for a dominant force of pulling? Not entirely. DDSN does not remove the ability of a company to push product to market. It merely defines that companies in a supply chain will work more closely to shape market demand by sharing and collaborating information. In doing so, they will have greater and more timely visibility into demand. The aim of this collaboration is to better position everyone with the ability to more closely follow market demand and produce, in tandem, with what the market wants. Rather than replace the force of pushing, product to market, the DDSN strategy is to match a pull from customers with an equal and opposite push from supply chain members. Instead of leading the market from a push and artificially inducing unsustainable market demand, the concept behind DDSN is to react in tandem with demand. The methodology behind DDSN is to bring the supply chain eco-system into balance.

The Advantage

There are three main advantages to DDSN as a supply chain strategy:

  • Participants in the supply chain are all able to take part in shaping demand as apposed to merely accepting it. Where businesses traditionally had little or latent visibility into market demand, the collaborative technologies employed in implementing DDSN have the overall effect of reducing and even eliminating the gap between upstream businesses and the end customer. This gives them a more accurate and timely insight into market trends to increase the accuracy of their forecasts and hence their ability to interpret and respond to demand fluctuation.

    This type of market intelligence impacts more than just a business' ability to plan operations; it translates directly into reduced inventory holdings across the supply chain, which, in turn, means an overall reduction in the amount of capital invested therein and the associated risks.

  • The customer centric approach, as apposed to the factory-centric approach of DDSN accepts that product design and ongoing product innovation are key requirements in creating competitive advantage and shaping demand. Early feedback from customers can help product designers better understand what customers like and don't like about their products. In addition, product designers can also interface more readily with manufacturing facilities to assist in solving production problems that may arise, especially in the early stages of production setup.

  • Deterministic optimization is replaced with probabilistic optimization that uses stochastic optimization methods to handle variability. Probabilistic models do a better job of accounting for the uncertainties that exist in the supply and demand equation. Probabilistic modeling also enables simulation of "what-if" scenarios so managers can randomly vary their initial conditions.

The combination of these three factors drives growth through the constant interaction between supply (push) and demand (pull). Research conducted by AMR Research, an American-based research organization, indicates that participation in DDSN directly translates into improved business performance. AMR shows that the main impact of DDSN participation is in the critical area of demand forecast accuracy, which directly impacts key metrics such as perfect-order fulfillment, supply chain cost and cash-to-cash cycle time.

AMR's Research shows that the improvements in demand forecast accuracy instill increased levels of responsiveness and cuts costs throughout those members of a supply chain who participate using the DDSN model.

"Companies that are best at demand forecasting average 15% less inventory, 17% stronger perfect-order fulfillment, and 35% shorter cash-to-cash cycle times, while having a tenth of the stockouts of their peers."

AMR Research

DDSN at the Edge

Most small and medium businesses do not have the budgets required to deploy all the IT systems needed to support a DDSN strategy. For this reason, especially in the early stages of a technological development, uptake is mostly led by enterprise-level early-adopters such as Wal-Mart. As with many technologies that are in the early stages of development, small and medium businesses have to wait for the time when adoption increases and costs come down. Being in this position often means that SMBS are rarely in a position to employ many technologies for their competitive advantage. In the case of DDSN this is not necessarily the case since it is possible for businesses to adopt a modular approach to building their DDSN infrastructures.

Eating the Elephant One Bite at a Time

For small and medium businesses, the best approach toward a DDSN strategy is to identify small targets that require small investments but have a much larger potential for return.

A recent article published in Harvard Business Review, "The 21st-Century Supply Chain," Hau L. Lee gives a hint on how large and small businesses can go about building a DDSN. Although Hau's article does not speak directly about DDSN, many of the tasks he recommends are directly inline with the process of building DDSN capabilities. Hau's article aligns the planning process into three objectives on which businesses should focus in their quest for DDSN capabilities:

  • Agility - The ability to respond quickly to short-term change in the demand and supply equation and manage external disruptions more effectively.

  • Adaptability - The ability to adjust the design of the supply chain to meet structural shifts in markets and modify supply network strategies, products, and technologies.

  • Alignment - The ability to create shared incentives that aligns the interests of businesses across the supply chain.

When focusing on these objectives, small and medium businesses must research methods that will enable them to attain the objectives. For each objective, there are a number of methods that may serve the purpose. We discuss these in the Methods of this article. However, in a small and medium business scenario, the trick is to identify those methods that require the least investment but deliver the greatest returns.

Not all methods need to be implemented at once. Planning around methods with a low investment to return ratio enables the business to "eat the elephant one bite at a time"—in other words, tackle large problems manageably. As the project develops, savings from the implementation of these initial methods can be used to finance methods that require greater investment and have lesser returns. In this way, it is possible for small and medium businesses to capitalize early on DDSN and its technologies, while in their early stages, and gain competitive advantage.

In many instances methods that present a low investment to return ratio are easily identified by examining the most important supplier and customer relationships of the business.

The Methods

In this section we discuss some of the methods small and medium businesses can investigate. It is important to note that there is no clear-cut formula to determine the best methods in every instance. Every business, being different, will need to investigate the pros and cons of each method. Businesses may discover scenarios particular to their special circumstances. These instances call for open and creative thinking between supply chain members and can often yield surprising results that are difficult to replicate by market competitors.

Agility

To foster agility, businesses must take a new look at their current supply chains. Where traditionally the main objective was to make life as streamlined as possible, they must now look to make the supply chain more agile. In doing so, management will often be faced with compromise situations. Introducing agility into a supply chain often requires some sacrifice.

However, agility is a most desirable attribute if one not only wants to smooth market fluctuations in demand and supply but, most importantly, eliminate many of the negative effects of certain external events. For example, a company making tubes for television sets, releases a new and much improved tube technology that provides better picture quality, has a longer lifespan, and guarantees fewer failures. It would be natural for all companies in the business of making television sets to want to incorporate the new tube in their products. In this case, the manufacturer with the shortest total time to market will stand a greater chance of winning market mindshare. The company with the most agile supply chain would be the first to release a product sporting the new tube technology. They would be able to make engineering and design changes faster and rapidly reduce their work-in-process inventory to ensure that they would not be left with dead-stock or have to release older models at distressed prices when the new model reaches the stores.

In reality, most businesses will have to discover a balance between speed and agility. The equation may be more or less balanced in either direction depending on the business and its supply chain.

Some of the methods businesses can use to promote agility include

  1. Promoting information flow between themselves and their suppliers and customers. The faster information flows from end-to-end the better each business' visibility into the nature of actual demand and supply becomes.

  2. Developing collaborative relationships with suppliers by defining tasks that each business does internally and then collaborating the resulting data with each other.

  3. Designing for postponement.

  4. Building inventory buffers by maintaining a minimal safety stock of inexpensive components and closely aligning safety stock quantities with customer service levels.

  5. Having a dependable logistics system or partner.

  6. Drawing up contingency plans and developing crisis management teams.

Adaptability

"Great companies don't stick to the same supply networks when markets or strategies change. Rather, such organizations keep adapting their supply chains so they can adjust to the changing needs."

"The 21st-Century Supply Chain"
- Hau L. Lee

All markets are susceptible to structural shifts that can impose dramatic long-term changes on customer needs. We do not have to look far back in history to see the impact such changes can have. An example is the recent trend toward outsourced manufacturing and then offshore manufacturing. Such shifts occur due to numerous reasons. The best defense businesses have is to constantly monitor economies to identify such shifts ahead of time and restructure their supply chains accordingly.

Some of the methods businesses can use to promote adaptability include

  1. Monitor economies all over the world to spot new supply bases and markets.

  2. Create flexible product designs.

  3. Use intermediaries to develop fresh suppliers and logistics infrastructure.

  4. Evaluate the needs of ultimate consumers—not just immediate customers.

  5. Determine where companies' products stand in terms of technology and product life cycles.

Alignment

One of the greatest challenges businesses face when embarking on the road to DDSN is that of alignment. After decades where each business took care only of its own affairs, maximizing its own interests, guarding its own data and sometimes spying to acquire the knowledge of competitors, collaborating and sharing is not something to which business owners take an immediate liking. Yet, by its very definition DDSN is not something one company can do in isolation.

A major motivator in getting individual businesses in a supply chain to collaborate is to get them to see a greater alignment. Most business owners are aware that aligning supply chain interests with their own is beneficial to their business. Business owners know first hand that a lack of alignment causes many problems. Here are some of the methods businesses can use to promote alignment:

  1. Exchange information and knowledge freely with vendors and customers.

  2. Lay down roles, tasks, and responsibilities clearly for suppliers and customers.

  3. Equitably share risks, costs, and gains of improvement initiatives.

Conclusion

It is possible for small and medium businesses to implement demand-driven supply networks, although it is unlikely they will initially need to implement all the "bells and whistles." Selective implementation of high return methods can promote agility, adaptability, and alignment and enable SMBs to successfully implement and participate in DDSNs.

This article has been sponsored by SYSPRO.

About the author

Sean Wheller is an author, management consultant, and the president of enbaya, a consulting firm that assists hi-tech businesses as they chart a course and get underway with new initiatives-products, markets, partnerships, and entire businesses. Wheller is the author of the book SYSPRO e.net solutions - The Definitive Guide which is available from SYSPRO. Over the past fifteen years, he has been a consultant to leading European, American, Middle Eastern, and African based information services and software firms. Prior to founding enbaya, Wheller held the position of CEO at MediaOneIT. Currently, his clients include Lucent, Avaya, Nortel, IBM, Comverse, SYSPRO, and numerous early stage technology firms.

He can be reached at sean@enbaya.co.za

 
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