How to mitigate risk in demand-driven supply chains
You can read this article in 10 minutes
While the development of a wholly demand-driven supply chain (DDSC) might not be for every enterprise, there is no doubt that many can benefit from such a strategy. However, there are risks involved in the demand-driven approach and for many companies, their presence creates a reluctance to shift from conventional, but increasingly outmoded forecast-based planning.
This is strange in a way, because the risk is inherent in every supply chain strategy, yet if enterprises were not capable of overcoming, or at least mitigating them, there would be no enterprise.
“In a world that’s changing really quickly, the only strategy that is guaranteed to fail is not taking risks.” – Mark Zuckerberg
The risks attached to DDSC can be managed and minimized just like any other. In this article, we will discuss how your company might address three key risks that typically stop businesses from committing fully to demand-driven supply chain management.
The Risk of Becoming Too Reactive
Because DDSC is based largely on responding to demand signals rather than forecasts, some companies are concerned that by adopting a demand-driven strategy, they risk becoming fixated on reacting to short-term demand fluctuations, losing focus, and ultimately increasing costs.
Of the risks discussed in this article, this one is probably the toughest, and most complex to mitigate. Demand driven supply chains must indeed react to some extent, but not indiscriminately so.
To maintain control, it is critical that operational, product, and marketing strategies are very clearly set out, with defined priorities to guide decisions. Supply chain processes will probably need to be redesigned with agility at the top of the agenda, to enable an approach that is more reactive perhaps, than forecast-based management. However, it should not be forgotten that in traditional forecast-driven operations, inaccurate forecasts commonly create reactive situations that the supply chain is not prepared for.
“In today’s complex and volatile markets, attempts at significantly improving forecast accuracy are doomed to expensive failure. The demand-driven SCM concept therefore uses actual demand instead of error-prone forecasts to drive replenishment.” – Simon Eagle, Deman Driven Institute
The demand-driven supply chain is at least designed to respond quickly to change, but the strategy need not, and should not, be entirely reactive.
The companies enjoying success with demand-driven operations do not place their resources entirely at the mercy of market forces. Instead, they create a collaborative environment in which supply chain functions and partners shape demand to reduce variability. This means for example, that marketing-campaign planning involves manufacturing and procurement functions, to ensure preparedness for an uptick in product demand.
The Risks of Information-Sharing
Demand-driven supply chains can only work when all partners, including those in the extended supply chain, openly share information with one another. This necessity is concerning for some company leaders, who fear conflicts of interest, information leaks, and other data-security vulnerabilities.
“In the blockchain world, each user can and should own their data, and ‘central’ players are less vulnerable to data losses and breaches.” – William Mougayar, Author – The Business Blockchain: Promise, Practice and Application of the Next Internet Technology
The desire to avoid data falling into the wrong hands is, of course, understandable, but digital security measures are improving all the time. If care is taken to secure trustworthy data storage solutions, develop robust policies, confidentiality agreements, and contracts, and use authorization mechanisms to restrict data access, there is no reason to let security concerns put the brakes on your DDSC plans.
In the not-too-distant future, blockchain technology advances may further reduce the data-security risk for supply chain operators, while also offering opportunities to improve visibility significantly.
If many of the potential advantages of blockchains are realised, and your company has a plan in place to adopt the technology as it becomes more accessible, you may find that intensive data security measures are but a relatively short-term need. Of course, you could wait to move forward with DDSC plans until blockchain solutions prove their worth (or otherwise), but it may be prudent to assess what your company stands to lose through being overcautious.
The Risk of Being Too Lean
Another concern standing in the way of DDSC implementation relates to inventory, or rather, fears that there will not be enough of it to meet unexpected demand peaks or to cover supply shortages. In fact, though, this particular “risk” is completely within the control of your company and its supply chain partners.
“We do not use the forecast to drive our transactions. Instead, we set up a bugger, where we wait until we have actual demand, and then make a decision based on this demand.” – Nick Lynch, Global Planning Excellence Manager, Shell
It is important to understand that a modern demand-driven supply chain strategy does not pursue specific “lean” objectives. Instead, it is all about right-sizing inventory and placing it in strategically advantageous locations. Indeed, buffer inventory plays an important role in the demand-driven supply chain, ideally managed according to the following principles:
- Independent buffer inventories are established, serving as decoupling points. This helps to prevent natural process variability from being amplified through the supply chain;
- The inventory buffer-levels are maintained in accordance with typical demand and known variability;
- Each stock location is replenished according to an optimised cycle and sequence, corresponding with inventory consumption;
- Exceptional stock builds in the buffer-inventory locations cover seasonal peaks, marketing campaigns, periods of planned manufacturing downtime and other planned events.
If buffer inventory is managed correctly, you should rarely encounter situations in which your supply chain is too lean to cope with demand. However, inventory is not the only way to buffer the supply chain and reduce risk. Capacity and time buffers also play a vital role in demand-driven operations.
However desirable it may seem to run manufacturing, warehousing, or transport operations at 100% of their capacity, to do so is to invite severe problems in the event of supply shortages or sudden demand peaks. Therefore, demand-driven supply chains ideally require capacity, as well as inventory, to be buffered.
Capacity buffers can encompass labour, physical space, assets, processes, and technology. Here are a few examples of how you might buffer capacity as part of a demand-driven supply chain strategy:
1) You could consider developing the capability to run an extra daily shift in a warehouse, production, or transport operation. The extra shift would be utilised only when required to meet demand.
2) Warehouses might be run with a certain percentage of storage space unused, ready to handle spikes in storage and throughput requirements.
3) Arrangements could be made with external manufacturing and logistics companies to provide extra operational capacity when necessary.
4) Scalable business information systems could be deployed where possible. Software-as-a-service (SaaS) solutions for example, are ideal for coping with variable demands on digital systems. Cloud-based enterprise platforms are fast becoming as desirable, if not more so, than traditional on-premises systems, which are typically less flexible in terms of scalability.
Time buffering quite simply involves implementing process times slightly longer than those that your operations can comfortably accommodate. For instance, you might…
- a) Insist upon four-hour delivery windows for your customers even though you could typically deliver within a two-hour timeframe.
- b) Offer a 24-hour delivery lead-time while equipping your operation with the ability to deliver within 12 hours.
These and similar buffering tactics provide some padding to avoid service failures in the event of supply or order-fulfilment hiccups.
As the above examples show, there are numerous ways to insert buffers into your supply chain to deal with demand variability. Before moving on though, the following point is worth emphasising…
When it comes to inventory buffers, independence is critical. A buffer maintained at each supply chain node should be independent, autonomously replenished as it depletes, and should not generate acute demands on other nodes upstream.
The DDSC Network Effect
In the demand-driven supply chain, the “network effect” is your best friend. The network effect is generated when all your suppliers and partners are connected to the same supply and information chain, creating visibility into your needs and your suppliers’ ability to meet them. The network effect helps every entity in the supply chain to react faster. It also aids you in working with multiple suppliers to address potential or actual shortages in materials, components, and other forms of inventory.
Mitigate the Risks and Reap the Rewards
To return to the statement made in the opening of this article, a fully demand-driven supply chain is not necessarily the right strategy for every organisation, but if you see a business case for DDSC in your enterprise, it would be a shame to let risk aversion be a stumbling block to adoption.
After all, the list of opportunities created by a DDSC strategy is long, and includes access to the following benefits:
- Reduced inventory
- Lower transportation costs
- Improved warehouse cost performance
- Reductions in labour costs
- Increased sales and profitability
The above benefits are proven. According to statistics from leading industry sources, enterprises that successfully implement demand-driven operations are able to reduce inventory by as much as a third and improve delivery performance by 20%.
DDSC: A Transformation Worth Making
The transition to DDSC may not be a simple one to make and requires a new way of thinking about supply chain operations. The necessary changes impact not only your own organisation but also those of your suppliers and partners. However, with the right resources and perhaps some help from external specialists that understand supply chain transformation, the risks of becoming demand-driven are surely outweighed by the rewards.