Reinventing the supply chain so it is truly demand-driven isn’t easy but, if you get it right, it can transform your business.
Imagine you are standing at a bus stop. Your smartphone vibrates to tell you that big rain clouds are only 15 minutes away. You call a company to order an umbrella. Within 10 minutes, it is delivered by drone to your exact location. When the rain starts pouring a few minutes later, you are completely dry.
”For Erich Gampenrieder, Head of KPMG’s Global Operations Center of Excellence, this is the perfect illustration of the concept known as ‘demand- driven supply chains’. In essence, the idea is as simple as it sounds: developing a supply chain in which planning, procurement and replenishment are aligned to consumption and consumer demand.
For the extremely satisfied customer at the bus stop, this meant keeping dry. For the company that delivered the umbrella, the rewards would be significant too. Gampenrieder says: “Our research shows that companies with supply chains that are truly driven by demand can grow sales by 1-4%, cut operating costs by 5-10% and reduce inventory by 20-30%.” In a consumer market where margins are constantly under pressure achieving those kind of gains could be transformative, but how do you get there?
The traditional supply chain has served the industry well for a long time. A company could make a certain number of products for a certain cost in the confident expectation that, when they pushed them through the supply chain into stores, the margin on each item would be enough for them to make a profit. But the proposition at the heart of this model began to look obsolete as soon as globalization and the internet became commercial realities.
In today’s marketplace, consumers can shop anytime and anywhere, have unlimited information at their fingertips and are socially, ethically and environmentally aware. They are also empowered to express their opinion (and have the outlets to do so), are more exposed to risk and demand a personal experience. These major changes mean companies are discovering that the tried and tested models are no longer valid.
Too often, the old supply chain model left companies with the wrong product, at the wrong place, time and cost. That is why, 10 years ago, Gartner Consulting came up with the concept of a five-stage journey to a demand-driven supply chain. The journey to the kind of umbrella- delivering perfection Gampenrieder has outlined isn’t short or straightforward and, partly because of that, companies often make basic mistakes when they first start out.
You need to do the fundamental stuff before you take the next step. Because the concept of a demand-driven supply chain has only been with us for a decade, companies often misunderstand it. There’s always a supply chain initiative somewhere, which is said to be the best thing since sliced bread, so companies try that. And before they’ve had time to discover whether that worked, they read about another initiative that’s the best thing since sliced bread, so they try that too” says Gampenrieder.
Such haphazard approaches obscure the fact that, as he puts it, “There is no typical transformation journey. No two supply chains are alike, which makes it extremely hard for one company to just copy something another company has done and succeed.
”Cultural issues can compound the problem. Andrew Underwood, Supply Chain Partner at KPMG in the UK, says: “Many people who run supply chains are trained to just do what they’re told. Understanding consumer demand is usually driven by sales and marketing – and too often the supply chain just makes what they’re told to do work. This is especially true when it comes to new products. Essentially they are not able to sense-check what they are required to do, let alone do the analysis and explore whether it would be more profitable for the company to rationalize its SKUs when a new product is launched.”
The complexity of today’s supply chains doesn’t help matters. With more channels and partners, more countries to serve and, often, more outsourced manufacturers involved, this aspect of a company’s operations can be hard for other executives to fathom. “The increasing complexity of supply chains means that many companies who want to change don’t even know where to start,” says Underwood. Too many supply chain chiefs only get invited into the boardroom when something goes wrong and, as a consequence, the function is perceived as being only ever as good as the last bad event. This reinforces the view that supply chains are all about process, not policy, a mindset that makes it well-nigh impossible to design, create and execute a supply chain that does what it needs to do to satisfy consumers, drive growth and reduce costs.
Transformation starts with a thought, not a deed. “The supply chain strategy needs to be aligned to the company strategy,” says Gampenrieder. To do that, he says, you need to start with a mission statement – what are we trying to achieve? Then you have to understand the capabilities you need to fulfil your goal, agree to the key performance indicators so you can be sure you’re on track, and define the financial cost to achieve the perfect order – the umbrella that arrives in such convenient, timely fashion. The executives in charge of supply chains have a responsibility too: “It is extremely important that they can quantify and describe the impact on the profit and loss statement in a one-page document, with easy graphs.”
The discussion required to achieve all this draws out some of the conflicts inherent in any company in the consumer marketplace. As Underwood suggested, sales will invariably want to sell everything to everybody everywhere and won’t lose much sleep over the expense of that – whereas for production, cost and utilization rates could be crucial. Defining and aligning strategies should, Gampenrieder says, help companies answer one crucial question: “To know sooner and act faster, what do you need to be able to see? Do you have the visibility to know what your customers want and when and where they want it? Do you know where an order is at the moment, and can you quickly identify where demand and supply disconnect and understand any continuity issues before they occur?”
To deliver the strategy – and achieve this kind of visibility – companies need to collaborate so closely with suppliers and customers that they work as one virtual organization. Given that the relentless focus in supply chains for much of the past five years has been on ruthlessly eliminating cost, companies may need to build trust before they can truly collaborate with suppliers who may, at first, suspect a hidden, cost-driven agenda.
Yet if a virtual organization is created, companies can make informed, timely decisions across sales, marketing, finance and operations. This will make it much easier to understand what the customer values and needs, develop plans that emphasize the cost to serve the customer and profitability, and identify the trade-offs that deliver the financial targets.
If you don’t have this, it will be harder to create a flexible, agile supply chain that meets customer demands and performs efficiently: managing risk and bottlenecks, and understanding – via custom-made scenarios – what trade- offs need to be made so that, for example, the company has a realistic idea of how expensive it will be to resolve an issue.
“The question many companies struggle to answer is: what do we need to change?” says Gampenrieder. “You can segment your supply chain by customer, product, region, sales channels – or combinations of the above – so you need to develop a few custom-made supply chain archetypes – no more than three to five, because the complexity will kill you. In this way you could, for example, analyze SKU management, identify those that don’t deliver the margin you need and free up capacity for those that do. Retailers could determine the cost to serve for a particular product or channel. The data on cost and performance could help them adjust the pricing model for particular delivery options or reconfigure inefficient processes at distribution centers such as packing and scanning.”
Many companies don’t make the most of such analysis because they lack the in-house expertise, don’t do these exercises often enough, and don’t know how to present the findings when they do. Instead of compelling dashboard- style visualizations, too many companies produce comprehensive, yet weighty, 120-page reports that will never be read by time-poor executives and will not, therefore, improve the company’s performance.
The trouble with transforming supply chains is that you can change anything and everything – but that doesn’t mean you ought to. “The momentum behind change can flounder if companies have too many priorities, aren’t focused, and don’t take initiatives in the right sequence,” Underwood says. “Understanding what to tackle first can be difficult – companies trying to implement advanced capabilities too soon can fail.” So, for example, firms turning to predictive analytics often realize that it’s hard to make the most of such innovations without investing in the supporting technology or core processes or restructuring some units.
The danger is that if companies choose the wrong initiatives – or try to do too many at once without understanding how they interact – supply chain transformation turns into a corporate game of snakes and ladders, in which gains in one part of the organization are counterbalanced by losses elsewhere.
“What we learn from early adopters is that different companies need different strategies because they are at different levels of maturity and have different supply chains,” says Gampenrieder.
Different companies have succeeded in different ways. At Colgate, the focus of its transformation was return on assets and operating margin. At Procter & Gamble, it has been about saving money (in 2013, supply chain costs fell by US$1.6bn) while becoming more responsive. At Unilever, targeting the 3 Cs (customer service, carbon and costs) has led it to outsource less and in-source more. Creating a demand-driven supply chain may not be quick, easy or cheap, but the companies that are succeeding have turned an aspect of their business that has historically been regarded chiefly as a cost center into something that can give them an enduring competitive advantage. With competition for consumers becoming ever fiercer, having the right product in the right place at the right time for the right price could be the key to growth for brands and retailers.