Demand-driven value networks grow from, and are a more refined state, of supply chains. Orchestrating demand at the mature stage of the demand-driven transformation, allows companies to better balance growth and efficiency, cost and customer service, and demand fluctuations. When demand-driven maturity is achieved, not only is there better balance, but greater agility. Based on research in the recession of 2010, demand-driven companies sense market changes 5X faster and align their value networks 3X quicker to changes in demand. This quicker alignment enables better customer service with substantially less inventory, waste and working capital. So, you might say, “Why are more companies not demand driven?” I was asked this question last week, and in this blog, I share my reply.
Background: What does Demand Driven mean?
I have written and studied the concepts of demand-driven value networks for the past 6 years. While software vendors espouse it, and consultants tout it, I find that very few companies –even now six years after the initial research – understand the concepts. Despite interest, only 2% of companies in the Fortune 500 operate demand-driven value networks today. The rest have supply chains focused on delivery of the right product at the right place at the right time. In their scramble to meet demand, they are blind to profitability, and focus on supply. The most mature companies –Cisco, Intel, Samsung, and Wal-Mart, have invested in supply chain excellence as a core competency, and understand the value of demand-driven concepts (e.g. demand latency, demand translation, and demand sensing). The economics of each of the company's markets have made it necessary for the companies to orchestrate demand. Demand-driven companies have by definition, five characteristics:
- Demand sensing: The early definition of demand-driven value networks was a network of trading partners that can sense and respond to demand fluctuations with near zero latency. The concept of demand sensing with near zero demand latency is the first step in becoming demand driven. A good example of this is Wal-Mart Retail Link.
- Active demand shaping: However, as companies mature and learn demand-driven concepts, they quickly learn that it is not sufficient to just sense demand, but that it is critical to also actively shape demand through demand orchestration. The process of demand orchestration is horizontal. It spans functional silo’s of sell, deliver, make and source to and enable market-to-market corrections (from the outside in) to stimulate, or deaccelerate demand. There are multiple demand shaping levers – new product launch, marketing programs, sales/channel incentives, price management, trade promotion management, service programs/after- market support, and the sale of Slow and Obsolete products (commonly referred to as SLOB) at the highest margin-- that can be leveraged to speed-up or slow down demand. The key of being demand-driven is to actively shape demand to maximize profitability ensuring alignment of all functions to deliver against the opportunity. All too often, in supply-driven organizations, demand is shaped in isolation. (E.g. a promoted product that is not in stock or a price decrease for a product when a commodity market is tightening.) Samsung does this well.
- Design of value networks for demand. A characteristic of demand-driven value networks is that they are designed, not inherited. The company also recognizes that they have multiple value networks with each having unique characteristics for response time, cycle times, and flows. The design of these value networks for demand-driven leaders recognizes the characteristics of demand flows and incorporates demand variability into the overall design. The goal of the supply chain shifts with demand variability. Networks with low demand variability (e.g. low MAPE) can be push-based supply chains based on efficiency goals of lowest cost per unit. Networks with high variability and high volumes (seasonal products) need to be designed to be responsive. These value networks sacrifice the lowest cost to have the most responsive value network. Networks with high variability and low volumes need to be designed for agility. In these networks, companies design for the same quality, cost and customer service given the level of demand fluctuations. They know what is possible and become active modelers to understand the trade-offs. Intel's supply chain mastery program allowed the company to redesign the value network quickly to launch the Atom chip.
- Agility through demand translation. In the management of demand networks, demand is orchestrated—sensed and actively shaped to maximize margin—through the use of an agile supply network. In this agile network, manufacturing and distribution flexs to maximize value. (E.g. Manufacturing load is shifted from plant to plant, and shipping modes are changed to maximize value in the value network.) This orchestration of demand—sensed, shaped and translated to maximize profitability – is usually coordinated through a series of horizontal processes designed from the outside-in (from market facing processes to supplier processes) of revenue management, Sales and Operations Planning (S&OP), and New Product Launch Commercialization.
- Focus on Outcomes. As companies implement demand-driven value networks, the focus shifts from selling in to the channel to selling through the channel. It can also shift from a product-based focus to a value-based outcome focus that combines product and service (E.g. An example of value-based outcomes is the shift that is happening in healthcare. It is no longer sufficient to just sell insulin to diabetes' patients, they want devices for monitoring and direct linkage to their physicians.) This may seem like a subtle shift; but the change management issues loom large for an organization implementing the strategy.
Why have demand-driven processes not become more ubiquitous?
The answer is simple. Implementation challenges loom large: change management issues are enormous. Companies that attempt to navigate a demand-driven transformation program, must tackle them head-on. These top the list:
- Incentives: The Role of the Commercial Teams. As long as sales is incented for volume sold into the channel and marketing for market share, companies will never become demand-driven. To make the move on demand-driven initiatives, companies must focus on profitable sales through the channel.
- Traditional View of Supply Chain Excellence: For demand-driven initiatives to have success, they must extend from the customer's customer to the supplier's supplier. In 92% of companies surveyed in the fall of 2010, supply chain concepts only encompass deliver and make. Customer and supplier initiatives are usually managed in separate initiatives largely driven by cost.
- Leadership: The concepts of demand latency, demand sensing, demand translation and demand orchestration are not widely understood. As a result, are not included in the definition of strategy.
- Focus: Inside out not outside in. Process focus is from the inside of the organization out, as opposed from the outside (market-driven) back. In demand-driven processes, the design of the processes is from the market-back based on sensing and shaping demand.
- Vertical rewards versus horizontal processes. In supply-based organization, the supply chain is incented based on cost reduction, procurement is incented based on the lowest purchased cost, distribution/logistics is rewarded for on-time shipments with the lowest costs, sales is rewarded for sell-in of volume into the channel, and marketing is rewarded for market share. These incentives cannot be aligned to maximize value.
- Focus on transactions not relationships. Today, the connecting processes of the enterprise --selling and purchasing-- are focused on transactional efficiency. As a result, the greater value that can happen through relationships--acceleration of time-to-market through innovation, break through thinking in sustainability, and sharing of demand data--never materializes.
The Role of Enterprise Applications:
The demand-driven value network implementation is not your traditional approach of: add ERP + APS/CRM +SRM and shake until well-blended. In fact, some of the most demand-driven companies have legacy systems. Instead, the focus is on:
- Process: The implementation instead, requires a focus in processes: revenue management, new product launch, channel data management and use of demand insights.
- Network design: The design of the network is an essential element to actualizing this strategy. Demand-driven companies have deep investments in supply chain modeling software—optimization and simulation – and actively model scenarios for the network reflecting changes in both demand and supply.
- Sensing: They also have a control tower to actively sense network changes and adapt the network for changes in market demand, constraints, and opportunities. This over-arching group that crosses source, make, deliver and sell works hand in hand with customer service to maximize the use of resources while minimizing costs, and maximizing profitability.
So, does this mean that we give up on demand-driven concepts? I feel that the answer is emphatically NO. It is the right concept, but it will take more time.
What do you think? Did I miss any of the major change management issues? Got any comments to share with readers? I look forward to getting your thoughts.
This week, I was at National Retail Federation 100th conference. Great show. Look for my thoughts later this week.