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2014

New shoes feel awkward. Blisters appear. Feet hurt. The shoes are worn for short periods. Often we shelve them to allow our feet to recover. However, over time, they slowly feel comfortable. They become a part of our wardrobe.

 

Learning to speak a new language is similar. Conversations are strained. Mistakes are made. Pauses are awkward. Confusion reigns. Communication is stilted. It takes time. Slowly the words take definition in everyday speech.

 

Nine out of ten supply chains are stuck. Growth has slowed. Complexity has increased. Companies are stuck at the intersection of inventory turns and operating margin. They are unable to drive improvements in both. The secret to unsticking the supply chain is to redesign processes to be outside-in. The supply chain processes need to be designed from the market back.

 

This a step change, not an evolution. Why? Most companies have designed supply-centric processes from the inside-out. The first step to making the shift is learning a new language.

Step Up and Learn the Language of Demand

In companies, there is no standard model for demand processes. It is evolving. New forms of analytics make new capabilities possible. In the traditional organization, some demand processes are sales-driven. Others are marketing-driven. However, sales-driven and marketing-driven processes are quite different from market-driven processes. <In fact, so much so that I wrote a book about it.>

 

Unfortunately, companies have invested money in traditional forecasting processes believing that if they make the forecast better that corporate performance will improve. Improving forecasting is not sufficient. It is about much more than conventional forecasting. While we need forecasting and we need to improve the processes, we also need to teach teams how to use new forms of demand data and adopt demand processes.

 

Why is this important? Supply chain leaders are fluent in the language of supply. They don’t know the language of demand. To become demand driven (or market driven), they need to learn how to speak a new language. In this process, they slowly learn that the customer order is a poor representation of demand.

Tonight, I am stuck at a New York airport in a snow storm. I have been at client’s for the last two days helping them to make this transition. So tonight, instead of making snow angels, I thought I would help readers to get started in speaking the language of demand.

New Terms to Know

The concepts of demand driven are now vogue. Many supply chain consultants will quickly rattle off case studies and proof points, but the smart supply chain leader will ground the discussion with clear definitions. Let’s start with these:

  • Demand Sensing: The reduction of time to sense purchase and channel takeaway. Demand sensing is a process, automated by technology, that reduces demand latency.
  • Demand Latency: The latency of demand signal due to demand translation of a customer purchase through the supply chain to an order for a trading partner. The time is different in each supply chain based on product sales velocity and the technologies used. For example, in a hospital, it is the translation of usage in a procedure to hospital order to a distributor and the translation of that usage to an order for a manufacturer. This time lapse varies by product and by channel. For the purchase of Tide at Walmart to translate to an order at P&G, the time is 5-7 days. For the translation of a purchase of Aleve at a retail outlet store to Bayer, the manufacturer is 60 days. As the long tail (small orders shipped with low-frequency) of the supply chain grows, demand latency increases and there is a greater need for demand sensing technologies.
  • Independent Demand. The purchase of a product by a customer in the channel.
  • Dependent Demand. The translation of this demand signal from a channel demand signal to a manufacturer or a distributor through a bill of material or a transportation or manufacturing routing.
  • Demand Translation. The translation of demand by role within the organization. Each role–customer service, sales, procurement, manufacturing–have a different need/definition for the demand signal.
  • Demand Shaping. The use of demand tactics –price, sales incentives, marketing programs, new product launch, promotions, and assortment– to increase baseline forecasting.
  • Demand Shifting. The shifting of demand from one period to another (examples include pre-shipments at the end of the quarter, stuffing the channel to get rid of stock, or shipping early) increases supply chain costs and distorts the demand signal. Try to minimize demand shifting and maximize the value of demand shaping. Get clear on the difference.
  • Forecastability. The mathematical determination of ease of forecasting (the determination of the probability of demand).  Many technologies include this in the base software package.
  • Forecast Value-Add (FVA): A methodology for continuous improvement of the demand plan where steps of the process are evaluated and the question is asked, “Did this change improve the forecast (bias and error) as compared to the naive forecast?” (For more on this topic check out the book, The Business Forecasting Deal.)
  • Naive Forecast. The historic forecast using prior month shipments.
  • Downstream Data: Use of channel data (Point of Sale (POS) and Warehouse Withdrawal) to sense channel demand.
  • Demand Synchronization. The demand signal must be connected from node to node in the supply chain and then synchronized and mapped. The most frequently mapped data elements are product hierarchies, time/calendars, and locations. In this mapping, the data granularity and frequency must be harmonized.
  • Demand Visibility. The translation of demand by role across the organization and across tiers and nodes of the supply chain.
  • Demand Consumption. The translation of the demand signal across planning horizons. In early planning products this was accomplished through rules-based consumption. New and more advanced technologies are using optimization and cognitive learning techniques to consume the forecast across planning horizons.
  • Integration. Close coupling of the data elements to use the data into software. Integration without synchronization and harmonization does little for the demand signal.
  • Harmonization. Data harmonization enables data of differing granularity and data structures to be harmonized into a common database.

Conclusion

Did I miss any? Just let me know.

 

And, please let me know if you have any great tips to share for the application of these concepts.

 

Also, if you want to practice speaking the language of demand face-to-face, it looks like I may be at the Marriott Airport Hotel in LaGuardia for a loooong time.  Flights are canceled for at least 48 hours. Look for me at the bar….

  Irony: the use of words to convey a meaning that is the opposite of its literal meaning.

Source: Dictionary.com

 

 

Do you remember Horton, the good-natured African elephant, in Horton Hatches the Egg? Mayzie, an irresponsible bird, asked Horton to sit on her egg while she took a short "break." To make a long story short: Mayzie permanently relocates to Palm Beach leaving Horton, the elephant, sitting in a tree attempting to hatch an egg.

 

Naturally, the absurd sight of an elephant sitting atop a tree makes quite a stir in the community. As Horton braves the elements, he is laughed at by his jungle friends, captured by hunters, forced to endure a terrible sea voyage, and is finally placed in a traveling circus. However, despite his hardships and Mayzie's clear intent not to return, Horton perseveres. He refuses to leave the nest insisting that he keep his word. He often repeats, "I meant what I said, and I said what I meant. An elephant's faithful, one hundred per cent!"

 

As luck would have it, the traveling circus ends up visiting near Mayzie's new Palm Beach home. Mayzie visits the circus just as the egg is hatching and demands that Horton return it, without offering him a reward. However, when the egg hatches, the creature that emerges is an "elephant-bird," a cross between Horton and Mayzie, and Horton and the baby are returned happily to the jungle, rewarding Horton for his persistence, while Mayzie is punished for her laziness by ending up with nothing.

 

Ironies

 

So, a reader might ask, "Why a treatise from Lora on Horton on this week?" I like stories. To me this one is a metaphor for what I see today. For many companies the supply chain is a function; but the supply chain leader is also asked to be the owner of value chains. They attempt to nurture and design the value chain to deliver the greatest value. However, due to the many functional organizational agendas, the supply chain leader is often left sitting alone on the branch attempting to drive value for the greatest good. The point of my story? We have to persevere.

 

As I sit at my kitchen table as an entrepreneur, working with many of my clients' supply chains at the end of the year, I am struck by a number of supply chain ironies. These are the ones that I see today:

  • Cash Can Travel Faster Today, but Payment Is Slower. I can now transfer funds in hours, but the average Days of Payables for a manufacturer has increased 30 days over the last decade. (It varies by company, but has increased by 28 for Procter & Gamble, 53 days for Nestle, and 64 days for Bristol Myers Squibb.) Only a few companies have partnered with their suppliers to move money more quickly. This includes BASF that has reduced the number of days by 20 and Coca-Cola that has reduced the number of days by ten. Most companies are pushing costs and waste backwards in their supply chain. Unfortunately, the transactional nature of companies to focus on short-term transactional benefits, blinds their ability to see the impact on their suppliers. Many companies will have to start seeing suppliers fail before they wake up.
  • Large Companies Can Scale, but Not Start Up. Small Companies can Start Up, but Not Scale. Large Companies Could Lend a Hand, but They Don't. Large companies are power brokers in the supply chain. They usually have a lower cost of capital. Many could fund their supply chains more cheaply than their suppliers going to the bank to get commercial terms. Yet, the buyer and seller arrangement for a small software company trying to do co-development with a large company is very one-sided. I watch large company after large company KILL the promise of innovation. In my opinion, co-development partnerships need to be defined as much more than a buyer and seller transaction.
  • Customer Service Is Everywhere, but NOWHERE. During this holiday season, as I sit on the phone waiting for a "customer service agent," I think that supply chain leaders everywhere should rethink customer service.  As seen by the growth of Zappos and Audi,  it matters. As I wrangle my way through the maze of auto-response systems and Indian-based Business Process Outsourced Services, I wonder who ever leaves these calls thinking that they are designed to give the customer service.
  • Companies Say Customer First, But Can They Listen? As I work with clients on their 2014 agendas, many espouse a customer-centric supply chain, but they are hesitant to build listening capabilities. While marketing and sales are traditionally about yelling the message, a customer-centric supply chain starts with the customer and judges the supply chain by its ability to serve. And, how can we serve the customer if we cannot listen? I am amazed how slowly supply chain teams are adopting sentiment analysis for unstructured text mining to listen to the true voice of the customer.  When companies can listen directly through the mining of unstructured data, they can hear quality issues... and five times faster.
  • Technologies Should Improve the Experience.  What About a Real Person? Last week, I paid my mortgage. The check was a manual check written for $2500.00, but it was read as $25.00 through the automated reader. If I was not watching my online banking, I would have ended up with  late charge and a ding against my credit. Sometimes, I think that we get so caught up in the mechanics of technology automation that we forget we are real people doing real business with real people.

 

Dealing with Mayzie

 

So, if the Supply Chain Leader is Horton in this story, who is Mayzie?  In my opinion, Mayzie is the group that is focused on short-term benefit. It is the team or function that wants to work opportunistically to drive short-term gain for the firm while negating the longer-term value that can be driven through a value chain. Like Horton in the book, many supply chain leaders are left defending the original promise of improving value. So, as you sit on that branch questioning what is happening, remember Horton when he said,  "I meant what I said, and I said what I meant. An elephant's faithful, one hundred per cent!" The supply chain leader must buck current trends and stay true to the original mission of driving value.

 

These are the ironies that I see.  Did I miss any? Let me know.  And, hopefully, you are not caught in a snafu of your own where your check is misread, the call is placed on hold and the automated "customer service" technology cannot understand your accent.