Demand-driven supply chain: and how it works

There is a saying that goes, “if the consumer has not bought it, nobody has sold it”. This known saying is a mirror reflection on the entire supply chain process which must be orchestrated by demand-driven sales. But as the creators of this concept and the Demand Driven Institute propose, driving sales by demand requires a fundamental change in managing these company procedures. With this change in place it is imperative to still remain focused on operational methods what will be based on resources and costs, which in turn will be driven by actual demand (sell-out) and flow-based methods.

Every business has a choice: to either continue operating under an antiquated method with supply chain tools, metrics and rules developed in the 1960s. Or to recognize the complex and volatile supply chains of the current scenario and make a fundamental change in the way business is conducted.

In the article “The Biology of Corporate Survival”, Harvard Business Review magazine presents a study of more than 30,000 publicly traded companies in the United States over 50 years. The results are unnerving: companies are disappearing faster than ever and the increase in mortality applies regardless of size, age and sector. No scale nor experience protects against early death. One of the key factors highlighted by the study is the lack of adaptability to the growing complexity of the new environment where they operate.

Demand driven as an antidote to the bullwhip effect

In traditional supply chain methods, the impact of delay and the excessive problems that accumulate as information is propagated by agents in the supply chain causes the bullwhip effect. Meaning, in view of a delivery time considered standard (historical average), the manufacturer generally produces enough to meet the demand forecast but is far from accurate. Thus, as soon as it is noticed that actual demand is different from forecast, supply levels must be adjusted at each stage of the supply chain. However due to the delay between the moment of demand changing and when it is detected at different points along the supply chain, its effect is often amplified, leading to out-of-stock (product shortage) or excess inventory.

This bullwhip effect is costly and inefficient for all participants, as manufacturers tend to compensate for it by decreasing or accelerating production, which can cause inventory levels to be below demand, resulting in lost sales, or above demand, meaning idle cash. It was to mitigate the bullwhip effect that demand-driven supply chain emerged.

A different approach

As seen, companies must adapt and change, or their very existence is threatened. But how you ask? Gartner developed the concept and approach of demand-driven value networks (DDVNs) that integrate processes and data to translate information from actual demand (sell-out) into an agile supply response that creates value and mitigate risks.

According to Gartner, manufacturers, technology companies and retailers that have demand-driven capabilities and sales work better in the long run compared to their peers with more traditional supply chains. These companies increase revenue faster, achieve 15% higher OTIF rates, and reduce inventory levels by up to a third. Thus, they promote an external vision based on information about the customer’s value. And they apply it to their product portfolios, supply networks and service processes to deliver customer value and profitable growth.

Value orchestration networks include selective collaboration with customers, suppliers, and partners, as well as managing information exchanges through multifunctional processes that synchronize product, demand, and supply decisions to maximize value. Critical capabilities for orchestration include supply chain visibility, agile decision-making in response to volatility and demand modeling to optimize profitable balance.

A technological platform at the pace of consumers

There is an effective way to transform a company from an operational strategy developed in the 60s to an agile and demand-driven sales organization, capable of keeping up with the extremely competitive market in a highly volatile environment. The answer is using the right technology, driving the process by sell-out – that is, by the end consumer.

Counting on demand-driven technology means that, in the face of market changes and fluctuations, the manufacturer is always prepared to withstand demand variations. Not getting caught by inventory shortage or excess depends on daily discovery about consumer behavior. A robust technology platform, integrated into the retail network, is what every company needs to keep up with changes in real time.

With a demand-driven technology platform, the manufacturer’s reaction power to synchronize the entire supply chain is massive. Hence, the manufacturer can have access to a wealth of sell-out information, automate the submission of orders for replenishment, balance inventory levels and organize production to meet demand.

Check out Neogrid’s solutions for automatic supply chain management and position your company at the pace of consumers.