Achieving profitability through a demand driven strategy

Tue, 01 Jul 2008 03:55:00 GMT

A subject with many aspects. Therefore Kineticsware starts a series of stories about demand-driven strategy. Many aspects, too many to catch everything at once. Today the first in a series of many, where we would like to paint the picture and give you first some background.

The Background

Trying to find a catchy intro to the story about 'demand driven strategy' I was digging into me personal history.

When I was a young boy I was helping in the holidays my uncle, who was one of last milkman serving his customers door-to-door. At the end the working day he made up his mind what to buy and what to change as result of the trend of the day. Some years later I tried to make some extra money while studying by doing the same but now with bread. After my first two weeks I knew exactly, what was selling better on a Thursday compared to a Friday. I knew what to sell but the company I was working for was throwing away a lot of precious products at the end of day, because they were not able to anticipate. At least they were not using the information that was brought back to them. A missed opportunity.

Shortly after, the profession of door-to-door delivery was fading away, we went to a special store and somewhat later to a general grocery store. And we were buying what the store had to offer; the buying pattern was more focused on to find out what to buy rather than buy what you need. Times have changed, consumers have grown up and know exactly where to buy what, retailers do their very best to attract people with reductions, actions and all known activities.

Many years later I was reading a story about the US-based company Frito Lay. An interesting story about a company with a special strategy. Direct delivery to stores after finding out, store-by-store, what the buying pattern was. Maybe one of the best examples of an early demand-driven supply network.

The ultimate starting point for moving towards a demand-driven strategy is 'knowing the behavior of your customer, today but preferably also tomorrow'. Building customer loyalty.

In some industries the trend of a demand-driven strategy has been around for quite some time and we have seen manufacturing processes change from make-to-stock to make-to-order. Especially in the area of manufacturing capital equipment this trend was just necessary to survive. The bad examples of companies reacting too late are too many; the car manufacturing industry in England maybe at the top.

In a governmental study, published in 2007! many of the real problems of continuous change and the ability to anticipate are addressed. A nail-on-the-head sentence is:

'Government agrees with the Committee that the challenges faced by the UK automotive

industry in maintaining global competitiveness are around skills, business processes, the

efficiency of the supply chain and constant investment in R&D.'

The full report can be found at:

http://www.publications.parliament.uk/pa/cm200607/cmselect/cmtrdind/598/598.pdf

Companies that were forced to change their business process and who did that in time, realized that a real change of the business process is something that works throughout all layers and levels in the company.

Technology vendors jumped on the bandwagon and made you believe that their tool could make the shift possible.

In one of the studies of AMR Research I found two major parts that I would like to share with you. One is the sentence: 'In 2003, AMR Research introduced the concept of the Demand-Driven Supply Network (DDSN).' The business examples mentioned earlier show that DDSN has been around as long as businesses exist, finding better of ways of working and innovation in order to survive. But at least it has a name now.

The other part is more realistic and talks about the challenges a company face when moving towards a true demand-driven strategy.

Five common misconceptions about being demand driven. While many companies believe that they are demand driven, nothing could be further from the truth.

• #1—I have a great forecast: I am demand driven.

• #2—I have implemented lean manufacturing: I am demand driven.

• #3—My marketing department has great data on all customers—this will allow

us to become demand driven.

• #4—The corporate forecast is a demand visibility signal.

• #5—Becoming demand driven is a technology project.

Implementing a demand-driven strategy is a way of living. It is the same story like we see with companies implementing lean theories. Lean came, went again and came back. This was basically because there were too few companies that understood the message. Lean is a principle, a way of corporate thinking and not a product you can buy. The ones who got this and were persistent in overcoming the pain of change are the ones you see on the list of the Top 25 Supply Chains; Toyota, Apple, IBM, Nokia.

While every company has a different approach to achieving a demand-driven supply chain, some common strategies exist. These five are crucial:

1. Achieve visibility throughout the supply chain,

2. Ensure accurate forecasting and demand planning,

3. Collaborate across the enterprise, and with partners and customers,

4. Link the supply chain across multiple departments and eliminate silo thinking,

5. Implement technology-enabled processes.

Now we understand that implementing a demand driven strategy needs corporate vision and support, time to adopt, and the right tools we can look at the industry segment Kineticsware is focusing on; Consumer Goods. In this industry segment the challenges are similar to what we saw in the example of capital equipment, additionally Consumer Goods companies face a higher complexity of the value chain. Where in the capital equipment manufacturing industry the number of customers are rather limited, the Consumer Goods industry has an extended value chain which includes the behavior of consumers; you and me.

Manufactures and distributors normally do not have visibility on the behavior of the customers of their customers, the retail chains. Or better said in the past they didn't have.

Retailers have to operate in a full market with choice for consumers. They need to create differentiation in an environment filled with competitors. Today’s successful retailers understand that they are only as good as their supply chain partners. Building customer loyalty for sustained growth and profitability means sharing business critical information to manage cross-enterprise processes. Managing cross-enterprise processes requires efficiently working with supply chain partners to ensure that customers’ needs are meet. Multiple examples are available and many companies follow leaders like Wal-Mart. Over 40,000 distributors and manufacturers delivering to Wal-Mart have access to the most detailed information about consumer behavior. The benefits of analyzing sales data cannot be overstated – there are case studies documenting sales increases by more than 40% per SKU. The vast majority of the 40,000 companies having access to the information are however not able to use it to their benefit.

It may be clear that being demand driven makes a difference: an increase in revenue by 10% and profitability by 5% to 7% as a recent study among supply chain leaders shows are no exception but average figures.

But how? Next time we will talk about how to implement and apply a demand-driven strategy.

Aad de Jonge

Achieving profitability through a demand driven strategy