Demand Driven: Fixing clogged supply chains for a sustainable future
In our last blog - Why do small problems magnify in supply chain management? We discussed the importance of systems thinking and correcting operational metrics to drive inventory velocity through our supply chains. Previous to that, our blog Time to break out of the traditional mould highlighted the increasing difficulties in reducing forecast errors in the new normal.
Supply chain vulnerabilities, however, continue to pose difficulties for companies and suppliers in meeting increasing levels of demand, record-long lead times, rising commodities prices, and hiccups in transporting products. Businesses must respond on multiple fronts at once to safeguard their operational viability and be resilient in the face of unprecedented future crises, such as the COVID-19 pandemic. In this new blog, we will dive into four deep-seated ideas that we need to address immediately to clear clogged supply chains.
Variability is the enemy
Stable supply chains are easy to manage and cheaper to run. Volatile supply chains are stressful and regularly face cost blowouts. We, as an industry, must find ways to suppress this variability as far as possible. So, where must we start finding the biggest variability culprits? In the traditional and legacy planning systems.
Materials Requirements Planning (MRP) and Distribution Requirements Planning (DRP) were designed to net-to-zero and not intended to run in volatile environments such as today, hence the introduction of safety stock. Furthermore, MRP is completely coupled, which creates a major source of variability amplification - daily system runs and minimum order quantities send the well-known bull whip effect cascading through our bills of material and network structures. Therefore, MRP extrapolates errors in the forecast signal, creating tremendous noise and generating system nervousness.
Given the complexities, it’s about time we realise that our traditional push-based coupled system, fed with inaccurate forecasts, will never be able to stabilise our supply chains in this new normal. We need a planning approach that suppresses variability within its structural and mathematical makeup.
Traditional planning systems often prevent us from decoupling supply chains into smaller, independent planning positions. Decoupling offers the opportunity to improve agility, provide faster response times, and most importantly, suppress variability.
Much like the relationship of a harbour wall to the harbour, variability suppression is achieved when these walls are strategically positioned. This allows the boats (assets) to remain calm (productive & responsive) and protected from the crashing waves (variability). This multi-echelon, decoupled buffer system is our ultimate objective.
When implemented, this will suppress the destructive bullwhip effect, lower net stock holding across the supply chain, and improve our responsiveness. Inventory then makes a strong transition from liability to an asset, when correctly sized and positioned, whilst protecting critical resources.
Understanding true demand
Once inventory is strategically positioned in a decoupled system, we can pivot from the challenges of a push-based model to the well-documented benefits of a pull-based model. This requires a shift in focus to the most accurate demand signal - sales orders.
There is still valuable information to be extracted from the forecast, but its purpose is now straightforward and largely limited to high certainty trends, events, projects, and new product estimates. Shifting the focus away from a “finite number” prediction becomes highly liberating for teams participating in the planning process, as they now have time to focus on bottlenecks and core supply chain operations.
With a more accurate, customer-centric demand signal driving the supply chain, businesses can now provide clear prioritisation at each decoupling point. This signal clarity allows the team to manage manufacturing, stock transfer, and purchase orders easily and promptly. Execution capability makes a step-change improvement with supply chains becoming customer-centric overnight.
Rewarding flow and signal accuracy
Repositioning how we incentivise, and reward people is critical to driving organisational change. Carol Ptak and Chad Smith from Demand Driven Institute advise that our metrics and measures should encourage the flow of materials and relevant information up and down our supply chain. With the signal now increasingly focused on actual customer sales orders, businesses will have the key enabler to achieve this flow.
Getting orders into the system as soon as possible and running demand driven planning systems daily, focuses our attention on the exceptions only. When supply chains concentrate on the customer and teams are measured against flow-based metrics, organisations can swiftly improve the returns on capital employed. It is a logical progression, when we take 20-50%+ of the error out of the demand signal, companies can free up constrained resources and increase their net system output.
Supply chain planning must fundamentally implement systems thinking to manage the whole, and not individual functions: decouple the system into independent planning positions reducing variability amplification, while pulling from a single clear and true signal - the customer sales order. To remain sustainable and customer-centric, teams must be rewarded for working together to achieve the system’s success in the flow of materials and information.
Does such a methodology and system exist? The Demand Driven Adaptive Enterprise (DDAE) is a resource that provides an end-to-end methodology. This pull-based planning approach leverages the best thinking from established planning and operational advancements, such as the Theory of Constraints, Six Sigma, Lean, MRP and DRP, as well as innovation.
In the next blog, we will unpack how demand driven is helping countless companies suppress the destructive bullwhip to become truly customer-centric and rapidly stop conflict across supply chain functions. Companies are using this elegant approach and realising 20-50% inventory reductions, 2-12% point improvements in service levels, whilst reducing total operating costs.
This truly is a revolutionary approach designed by planners, for planners, which is rapidly being recognised by leading supply chains as the missing link required to survive and thrive in today's new normal.