Demand and Supply Integration: A Key to Improved Supply Chain Performance
The series is titled “Supply Chain Management: Beyond the Basics” and a new installment will appear each week on our website. It picks up where our original series of articles from Tennessee—the “Basics of Supply Chain Management” — left off. Among the topics we’ll be covering in this latest series are successful collaboration, supply chain risk management, strategic sourcing, supply chain finance, and more.
April 14, 2011
Companies have historically separated the processes used to plan for, and manage, demand from those used to supply the resources and labor to meet it. The problem with this business model is that the companies using it are often unable to consistently ensure that supply meets demand.
Too often, the demand and supply functions are not synchronized, resulting in a shortage of the products that customers actually want and/or a surplus of products that are not wanted. Companies are trapped in a pattern of reacting to the whims of the marketplace without developing a proactively designed supply capacity
Curiously enough, such companies often are the victims of their own success – marketing programs that are not integrated with supply capacity end up creating more demand than the company can fulfill.
To create a more efficient and effective business model, companies must acknowledge that they need to integrate demand and supply systems. At the University of Tennessee, we call this business model Demand and Supply Integration, or DSI.
In 1999, the author ordered a computer three weeks before Christmas. It was a gift for his sons, and, as such, he had a very specific time frame in which to receive it. So when he received a confirmation email stating the computer would be ready on February 16, 2000, he replied that he needed the computer much earlier.
A service representative researched the delay and explained that the backlog was due to the fact that the 400 megahertz Pentium chip he had ordered was particularly popular. Rather than leaving a customer dissatisfied, the service rep suggested a way around the supply chain bottleneck. For an additional $50, Dell could upgrade the Pentium chip and ship the computer within a week. The author readily agreed, and the computer was received well before December 25. The customer’s needs had been met and at a price that was reasonable to him.
What did Dell do right? First they had a system in place enabling customer service representatives to readily access sales, marketing, and supply chain information. This system allowed the service representative to do far more than just “empathize” with the problem. The service rep was able to work with the customer within the company’s current supply chain limitations and ensure satisfaction.
How often have you gone to a store for a specific item only to be told that it will not be available for a week or more? Frequently that is the only assistance you receive. You either purchase the product somewhere else or become frustrated with the delay. Either way, you are less than satisfied with the store’s service.
Through close relationships that facilitate information sharing at the system level, DSI allows companies to serve end-users better. It empowers each member of the supply chain to develop immediate and appropriate solutions to problems as they arise. It requires that managers not only focus on their own goals, but also learn to look to the larger organization (including external supply chain members such as retailers and end-users) as a whole. Goals must be agreed upon corporately and worked toward in unity.
One key element of DSI is development of an integrated sales and operations planning (S&OP) process to facilitate systemic information sharing. This provides a formalized procedure to begin synthesizing a company’s operational plan with its demand plan. The operational plan consists of manufacturing, procurement, distribution, finance, and related human resource plans
Operational plans include such items as monthly production schedules, extended contracts for raw materials with supply chain partners, and any plans to expand manufacturing capacity internally and/or with partners. In the demand plan, sales and marketing determine what should be sold and marketed… and when (given the supply capabilities of the firm). Demand plans may involve suppressing demand for products or services that are capacity constrained, or shifting demand from low- to high-margin items.
Once more, Dell serves as a model for effective creation and implementation of a sales and operations planning process to facilitate DSI. In the fall of 2003, California dock workers organized a strike that brought imports into the largest West coast ports to a standstill.
While most companies weather such supply chain disruptions by holding weeks (or even months) of domestic safety stock, Dell’s business model only provides for a few day’s supply of product on hand. Regardless, Dell needed to keep end-users happy. To continue providing product to its customers, Dell was left with only one option; it had to use expensive air freight to transport supplies from Asian vendors to the U.S. Company executives realized that one major constraint to this plan was the cost of transporting bulky cathode ray tube (CRT) computer monitors by air
Dell’s demand and supply managers created an alternative plan; they determined that they could “shape demand” by offering end-users the opportunity to buy flat screen monitors for the same price as the older ones. It would still be costly to transport monitors by air, but the cost of moving the flat screens was much lower than that for the bulkier and heavier CRT monitors
Dell might not make as much money on the deal, but their end-users were significantly more satisfied with their “free” upgrades. Essentially, they changed the monitor market overnight, a development for which competitors’ supply chains were not prepared. This sort of dynamic solution is only possible when organizations embrace a business model that integrates demand and supply processes.
Lest we think Dell is the only practitioner of DSI, consider the relationship between Whirlpool and Lowe’s. Every week, this retailer and vendor have a DSI conference call to discuss what appliances are selling in the stores and Whirlpool’s capacity to make product. Often, the discussion revolves around a particular model that is selling at a higher-than-expected rate in Lowe’s.
As executives from both companies related in a speech to the University of Tennessee Supply Chain Management Forum, this often results in Whirlpool quickly flexing its supply chain to make more of the high-selling product and deliver it to Lowe’s customers (perhaps, in the process, shifting capacity away from products for which Lowe’s is experiencing lower-than-anticipated demand). However, sometimes the answer is that Whirlpool and/or its suppliers do not have the capacity to make more of the product in question. It then becomes a question of demand shaping for Lowe’s.
What promotions, in-store displays, and sales incentives can Lowe’s implement to shift demand from the capacity-constrained model to one that the supply chain has more capacity to deliver?
While the stories shared here have been successes, incorporating DSI is not simple. There are many potential obstacles. The most common pitfall is misunderstanding the role of DSI within the organization. It should not be subject to company politics or artificial financial targets or quotas. Rather DSI should be used to establish organizational financial targets without preconceived ideas of the end result
Often this requires a reframing of corporate (and even the entire supply chain) culture, a shift that only occurs with a significant investment of time and labor on the front end.
In addition, DSI necessitates another company change: strong, effective customer integration. For that to occur, information must already flow easily between departments. A company must shift its focus from product and supply to customer, market, and supply chain. The transition is challenging, yet the ultimate value of DSI is undeniable.
This series is titled “Supply Chain Management: Beyond the Basics” and a new installment will appear each week on our website. It picks up where our original series of articles from Tennessee—the “Basics of Supply Chain Management” — left off. Among the topics we’ll be covering in this latest series are successful collaboration, supply chain risk management, strategic sourcing, supply chain finance, and more.
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