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2016

In an outstanding whitepaper released by Tata Consultancy Services, Lakshmi Narasimhan and Ramesh Srinivasan discuss a topic—among other things—that certainly needs to be clarified.Myths v Facts.jpg

 

The term “demand driven” has been applied to supply chains with such a broad range of realities underlying them that it has been difficult for the real demand-driven supply chain to separate itself from the confusion.

 

In their whitepaper, Narasimhan and Srinivasan cover five common misconceptions. Drawing upon their writing, and adding what I hope will be helpful comments, I will try to cover these misconceptions here:

 

1. Demand-driven means make-to-order

While it seems like a fairly rational leap from “truly demand-driven” to “make-to-order,” the leap is too great. When we use the term “truly demand-driven,” we mean to express a supply chain where replenishment actions are always triggered by actual demand, and not from forecasts. In a truly demand-driven environment, strategically placed buffers function as decoupling point in the supply chain. The purpose of these buffers is to absorb variability in supply and demand. However, it is actual demand that brings any given buffer to the point where replenishment actions are triggered. (Note: Forecasts related to future events may influence the size and configuration of any given buffer, when necessary, but forecasts never directly result in replenishment actions in a truly demand-driven supply chain.)

 

The replenishment actions are not triggered by specific customer orders—as in make-to-order. Rather, they are triggered by and prioritized based on the status of the strategic buffer.

 

2. Decoupling points in a demand-driven supply chain mark the push-pull boundary

In a truly demand-driven supply chain, “push” generally does not come into play. The decoupling points in a truly demand-driven supply chain serve two purposes: 1) to decouple lead times and bring them within customer tolerances, and 2) to reduce or eliminate the transmission of variability across the supply-demand boundary (i.e., bullwhip effect). “Push” does not happen on either side of the boundary under demand-driven methodologies. (Note: As in many other things, purity is seldom the full reality. Even in environments that operate as truly demand-driven over 99+ percent of the SKU-locations involved, there may be a few that simply cannot be handled in this way. As a result, there may be a small number of items still handled in a “push” scenario.)

 

3. Demand-driven systems never employ forecasts

In fact, truly demand-driven environments may rely on forecasts in more than one way. Two crucial role of forecasts and forecasting in truly demand-driven supply chains: 1) long-term forecasting – which is used primarily for capacity planning into the future, driving capital investment and other longer-term decisions; and 2) short-term forecasting – used to calculate buffer adjustment factors which, when applied, scale buffers up and down to cover “events” such as short-term promotions, product introductions and end-of-life, or other events such as adding new stores or distribution channels.

 

4. Demand-driven is all about placing burdens on suppliers to stay “stocked up”

On the contrary, truly demand-driven environments are genuinely focused on being able to supply better, more accurate data about demand to suppliers while, at the same time, reducing variability in demand. The goal of truly demand-driven supply chain manager should be to increase end-to-end visibility and to aid suppliers in their own movement toward becoming demand-driven. It’s good for everyone in the supply chain.

 

5. Demand-driven is only good for raw materials and low-value goods

Narasimhan and Srinivasan say, “Many companies implement pull replenishment mechanisms only for C-class (less critical or low value) parts or parts that experience steady demand.” However, as a result of this approach, these companies miss the opportunities that demand-driven methodologies offer for improving the return-on-investment performance of their critical A and B-class items, as well. With few exceptions that are typically easily identified and handled, becoming truly demand-driven is good for the whole gamut of inventories across the whole span of the supply chain.

 

The damaging effects of these misconceptions

Companies and supply chain managers who felt that they could not become MTO (make-to-order) or could not give up forecasting may have turned aside from becoming truly demand-driven due to these or other common misconceptions. We think it is high time that demand-driven MRP and demand-driven S&OP be given a second look—even, a deep look.

 

We can help. Contact us with your questions or concerns. We would be happy to help you discover the ROI opportunities in building a demand-driven supply chain.

 

 

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In his highly-acclaimed book, Administrative Behavior: A Study of Decision-making Processes in Administrative Organization, Professor Herbert Simon, coined the term “satisficing” as a blend of satisfying and sufficing. The logic by which Simon came to the conclusion that managers (at all levels, including C-level executives) resort to satisficing may be summarized in the accompanying logic diagram (Current Reality Tree).CRT Satisficing - BoundedRationality.png

 

NOTE: You may read the diagram from the bottom to the top as if-then statements. The if’s is found at the beginning of arrows and the then’s are found at the tips of the arrows.

 

Don’t shrug your shoulders and walk away

Sure. You can shrug your shoulders and walk away, saying to yourself, “So, what? We don’t have any choice. That’s what we do, and everybody does it.”

 

Big Data doesn’t make you a better manager

Here’s the thing: What this logic really tells you is that big data, business intelligence, and so-called powerful analytics don’t inevitably lead to better management decisions.

 

More importantly, if you don’t recognize that fact, one of the “satisficing” decisions you are likely to make is to spend more money on big data, business intelligence and analytics efforts with zero, near-zero, or (equally as likely) negative return on investment.

 

Why?

 

Because at the same time that big data, business intelligence and analytics is putting more information at your managers’ fingertips, the increase in the volume of data will actually reduce the management attention that can be given to the truly relevant information. And, only relevant information is actually meaningful for decision-making.

 

What’s really needed

What’s really needed is not merely the flow of more information. There is a simple relationship between the flow of relevant information, the flow of relevant materials (in your supply chain), and the flow of cash and profits, leading to an increase in return on investment.

 

That relationship may be depicted like this:

DDMRP Flow-to-ROI Links.jpg
Increase the flow of relevant information (not just more information)—filter out the irrelevant informationand managers can immediately begin making better decisions about how to sustain the flow of relevant materials. This, in turn, leads to increasing cash flow. Increased cash flow leads to improving net profits, and while investments are held steady, and ROI is increased.

 

Traditional MRP (material requirements planning) systems that were conceived 50 to 60 years ago, and encoded as software 30 to 40 years ago, are simply not able to deliver truly relevant information for managing supply chains in today’s dramatically different business environment. The world has just changed way too much for these outdated methods to be effective. (The most effective witness to this fact is the fact that more than 90 percent of companies that have invested in costly MRP systems still supplement them to this day with spreadsheets and other workarounds.)

 

The answer is also not found in big spending on more and more expensive forecasting software. The forecasts are still wrong simply because there are too many variables and too much complexity in the supply chains. Things cannot be synchronized effectively.

 

The answer is to be found in finding simple, yet extremely effective methods for supply chain management.

 

Demand-driven MRP has proven to be such a simple, yet effective, method. You can read more about it here.

 

And, we can help you get started with it if you will contact us here.

 

Isn’t it about time to try something that makes sense in today’s world? What else are you still using that hasn’t changed since the 1950s or 60s?

 

 

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On 18 May 2016, the Demand Driven Institute (DDI) announced that High Impact Coaching and Strategies’ supply chain management solution, TheONE, had been certified as DDMRP (Demand Driven Material Requirements Planning) compliant.software_compliance_logo.png

 

A short time ago, I had an opportunity to interview Sandy Goodwin, one of the founders and principals at High Impact Coaching and Strategies. He was also a key figure in the design, and guided the development, of TheONE software.

 

Goodwin told me that his firm “has a long history of delivering demand-driven factory and supply chain transformations.” Working mostly with global enterprises, Goodwin confirmed that “our… clients [are] saving millions of dollars” as a result of the software and demand-driven coaching we provide.

 

The Overcoming the Common Failures

When asked to come to the aid of these globally-involved companies, Sandy said, we found that virtually all “our clients were continually fighting against their MRP systems and inaccurate forecasts.” No matter how much these firms has spent on their enterprise-level demand management and planning systems—even several millions of dollars—they still found they were dissatisfied with the results in terms of supply chain and inventory management.

 

“After years of developing techniques” intended to “trick” MRP into delivering somewhat improved results, Goodwin and his team discovered “DDMRP, and found that the methodology was a perfect fit” for what they were trying to accomplish with their clients. They also grasped—almost immediately—the huge potential gains their clients could reap from implementing the DDMRP approach.

 

This discovery of DDMRP, of course, led to the development of TheONE. TheONE, Goodwin declared, “allows us to provide our clients with demand-driven supply chain software” that fully supports both “the tactical and strategic solutions we have been implementing [in] operational supply chain environments for over a decade.”

 

Resistance to Change

Despite DDMRP’s proven track records for delivering results like these, getting executives and managers to even consider something other than traditional MRP is still an uphill battle according to Goodwin:

  • Inventory reductions of up to 65 percent (the average is around 40 percent)
  • On-time delivery rates up to 100 percent
  • Improvements in inventory turns up to 400 percent
  • Lead-time reductions up to 80 percent
  • Inventory obsolescence reduced up to 90 percent

Amazingly, “even though every company” with which Goodwin’s firm has an opportunity to speak “accepts the serious shortcomings of [traditional] MRP, most are reluctant… to make the leap of faith” required to “step into the 21st century, and embrace [the] demand-driven planning methodology.”

 

How DDMRP and TheONE Deliver Supply Chain Results

How can DDMRP principles—operating in TheONE solution—deliver such dramatic results with consistency and reliability?

 

Goodwin answers that question with confidence, saying that “TheONE [first] specifies and [then dynamically] manages optimal inventory levels.” The software can identify areas where inventory reductions may be safely made while, at the same time, also identifying those points in the supply chain where additional investments in inventory will better support the flow required for improvements in return on investment (ROI).

 

“The full integration with our clients’ ERP system[s],” Goodwin adds, “TheONE has full visibility of [both] demand and supply, and [thus is able to] dynamically adjust buffer levels to ensure inventory is aligned to the requirements of the customer.”

 

“The daily flex in buffer size,” has proven effective time after time, says Goodwin, in reducing or eliminating “demand distortion” and improves “the responsiveness of the supply network to support changing demand requirements.”

 

The key to success is “end-to-end visibility” and “a distinct transition away from reliance on the inaccurate forecast[s]” of the past. DDMRP, when properly supported by effective technologies such as TheONE, “senses and shapes strategic inventory positioning within the entire supply chain—from retail and distribution to manufacturing and multi-tiered suppliers,” according to Goodwin. That is what makes it so highly effective.

 

Still Struggling?

Are you and your supply chain still struggling to deliver the kinds of long-lasting results you really desire? Is sustainable ROI elusive? Are you, too, plagued by inaccurate forecasts and an MRP system that has driven your supply chain and planning managers to work-around found in spreadsheets, Access databases, and other ad hoc strategies and tactics?

 

Maybe it’s time you consider becoming truly demand-driven (which does not mean make-to-order). Maybe it’s time to start making more money—in as little as eight weeks.

 

We can help you move in the right direction—finally.

 

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