An underlying, pervasive requirement for many manufacturing organizations is the need for greater supply chain agility. In this context, agility is the ability to profitably respond to demand across the internal, customer, and supplier networks with a blend of speed, ease, quality, and predictability -- i.e., operational excellence on demand. This agility will enable savvy manufacturers to better compete in an increasingly complex --and dispersed -- manufacturing environment. This environment calls for accommodating a growing mixture of products with shorter lifecycles, more demanding quality, regulatory compliance, and inventory management requirements, and reducing costs while updating old infrastructure.
A framework for evaluating operating strategies in this environment is the demand-driven supply network (DDSN). The goal of a DDSN is to enable a profitable response to demand across the full network of suppliers, employees, and customers. AMR Research Inc. has identified three interdependent areas that can benefit from the DDSN model, and several challenges that small to mid-size (SMB) manufacturers face in adopting such a strategy.
1. Sensing, Consolidating, and Shaping Demand: Organizations must develop the ability to sense actual changes in demand, and then combine these signals into a single, unified version of demand intelligence.
- Sensing Demand: Collecting real-time demand data through point-of-sale (POS) systems or vendor-managed inventory (VMI) transactions remains a key challenge. There is a great deal of latency in most manufacturing organizations' ability to sense change in demand -- a lag of two weeks is typical. Latency is even more commonplace among SMB manufacturers, since they have significantly fewer tools in place to measure and sense changes in demand (Chart 1). Surprisingly, these organizations appear to be slightly better equipped to react and respond to critical customer events like stock outs. Many of these organizations have less complex channel relationships, and more face-to-face customer relationships. Failure in identifying changes in true demand often lead to inaccurate forecasts and inefficiencies in downstream manufacturing and supply operations.
- Consolidating Demand: The typical manufacturing organization uses between five and six different systems to accept customer orders. Consolidating demand information into a single repository is an uphill battle. The result? While much money has been spent on analytical tools to leverage companies' demand intelligence (72% of companies reported that they have analytical and reporting tools in place), this investment has not led to improved capabilities. Only 40% of organizations indicate that they have effective, predictive analytical capabilities.
One result of this inadequate intelligence is that organizations are unable to define with precision the impact of demand-shaping activities like pricing. In fact, only half of manufacturing companies agree that they have integrated and consistent pricing information across product categories and geographies, and even fewer are able to accurately predict the true impact of pricing actions. These issues are particularly prevalent among SMB manufacturers. IT investments in SMBs have historically been focused at the plant floor to maximize asset utilization. Very little emphasis has yet been placed on establishing an information architecture to support predictive analytics, or even a unified view of product, customer, or demand intelligence.
2. Translate Demand: Implementing the organizational structure, processes, and systems to manage sales and operations planning (S&OP) or product launch and translate demand into actions and plans is a second key success factor in building demand-driven agility.
- Leaders actively shape demand: We have observed that demand-driven leaders actively manage demand: they promote, change prices, and introduce new products to take advantage of market opportunities. They use the baseline, unified view of demand to leverage market opportunities and balance supply and demand. Most frequently, these demand-shaping efforts include introducing new products (new categories, upgrades, or revisions) to capture emerging opportunities or initiate pricing actions. Within smaller manufacturing organizations, pricing emerges as the top demand-shaping activity, used by 74% of SMB manufacturers covered by this study. With fewer levers at their disposal to shape demand, SMBs often resort to pricing actions -- the easiest solution -- even if they cannot precisely predict the outcome.
- S&OP experience matters: Even among smaller organizations, S&OP teams are commonplace -- 63% of smaller manufacturers indicated that they have a formal S&OP team in place today. However, S&OP processes tend to be far less mature within smaller organizations. Among SMB manufacturers, 49% of companies with S&OP teams in place have had those teams operating for three-plus years. Compare this with larger organizations, where 70% of S&OP teams have been in place for at least three years. Why does this matter? SMB manufacturers with over two years of experience with S&OP can more effectively sense changes in demand and respond more quickly.
3. Profitably Respond to Demand: The third leg of the DDSN framework is a profitable response to the demand signal. The ability to predictably produce compliant manufacturing output to meet demand, including suppliers, contract manufacturing, and new product developments, is an essential ingredient to DDSN leadership. Still, only 30% of SMB manufacturers use the actual demand signal to calibrate supply chain and manufacturing activities. The remainder either build inventories or react to demand on an ad-hoc basis.
Simple ways to start: AMR Research has observed, and proven through analysis of operational benchmarks, that DDSN leadership can yield substantial benefits: from improved inventory performance, to reduced cash-to-cash cycle times, to higher revenues and margins. But most organizations, particularly SMB manufacturers, are still a long way from reaping these benefits. Becoming an agile, demand-driven manufacturer is not about simply buying more technology. It may be about leveraging IT systems, but more likely, it's about changing internal/external processes to better sense, shape, and respond to demand. Here are two ideas to improve your performance:
- Achieve cross-functional representation on your supply chain teams. Companies that have sales and marketing groups with direct reporting to the supply chain organization are closer to their customer, with greater capabilities to sense true channel demand. Companies that are better at demand sensing also have higher success rates in S&OP as well as in new product development and introduction (NPDI) efforts.
- Consider using customer scorecards to measure performance. The research supports that the most mature teams use customer scorecards, and that the more outward facing the effectiveness measurement is, the higher the company performs in sensing demand and new product introductions. While 80% of SMB manufacturers have a customer scorecard/measurement system in place, only 18% indicate that this data gets widely shared throughout the organization (Chart 2).
David O'Brien was until recently vice president, Quantitative Research, at AMR Research Inc. in Boston.