Let your customers be at the forefront of your supply chain transformation

Recent events – not least the Covid-19 pandemic and ongoing global trade disputes – have been a stark reminder that we live in an uncertain world. Supply chain managers know this all too well. The modern business environment is often described as volatile, uncertain, complex, and ambiguous, or “VUCA” in short. However, supply chains are expected to provide stability and deliver goods, in full and on time.

Legacy systems for managing this challenge are heavily reliant on inaccurate demand forecasts to drive daily “make, buy, and distribute” recommendations. This approach to supply chain management (SCM) has come to underpin many organisations’ replenishments approach. This is influenced by the software they use (APS/MRP/DRP), their processes, performance metrics, and the way departments interact with one another.

There is a solution. Popular already in Europe, growing in the USA, and now starting to catch attention in Australia, the Demand Driven approach to SCM and to MRP/DRP shifts the focus from the forecast’s influence at an operational level, to actual customer demand. The forecast is now liberated from operational pressures and used to drive insights across a tactical and strategic time frame.

In this article, we introduce the five key elements of the Demand Driven Institute’s approach to implementing this operating model in supply chains, and how that could solve your planning and end-to-end supply chain problems.

Strategic Buffer Positioning

Demand Driven Operating Model uses the concept of inventory, time, and capacity buffers, positioned strategically at defined points throughout the supply chain.

The purpose of these buffers is to decouple the different nodes across the supply chain while forming the primary planning mechanism. With these buffers in place, demand is only passed up through the supply chain when it reaches its replenishment point. This approach stops the destructive bull whip effect.

The location of each buffer will be crucial and follows a formal positioning methodology, ensuring that each dollar of inventory deployed generates a tangible Return on Investment (ROI).

Buffer Sizing

Being strategically located, each inventory buffer is dynamic. Its size can be seamlessly adjusted daily to reflect changes in the market. The size of the buffer is determined by the average daily usage (ADU) over the (decoupled) lead time, as well as protection against both demand and supply variability, which we know will come our way, much like a shock absorber. 
This is practically and conceptually different than the conventional practice of “safety stock,” which is often a fixed amount of supplementary inventory. Once safety stock is penetrated, exception messages prompt planners to expedite, creating substantial signal noise, distortion, and additional inventory.

Dynamic Adjustments

Where there is a high certainty of known or planned events occurring, buffers are adjusted to accommodate volumes that are likely to overwhelm operations. These tangible and precise actions are limited in volume and specific to strategic buffer positions within defined windows of time to mitigate risks and constraints.

Demand Driven Planning

With a network of strategically positioned buffers, the business is now able to plan based on a pull approach. The demand signal for replenishment is based on sales orders, not forecasts or master production schedule. This means replenishment orders are triggered and prioritised upwards through the supply chain, in response to actual customer demand, rather than using a mix of forecast and actual sales.

The “net flow position” is calculated as:

[Stock on Hand] + [Stock on Order] – [Qualified Sales Order Demand]

When this net flow position falls below the relevant threshold, it triggers a prioritised replenishment order based on buffer criticality. This clear signal against true demand creates significant confidence in the order and its importance. No more false signals.

Visible and Collaborative Execution

Management of open orders ensures that buffers with highest risk is protected. Furthermore, orders created during planning are “walked in” using a lead time management approach.

This refreshing solution reduces the noise across multiple open orders and shifts away from the traditional due date management (oldest order first) approach. Given this, both our internal teams and external vendors are aligned to the customer overnight.  

How do we measure success?

Performance indicators in Demand Driven Operating Model are focused on the flow of information and materials, and emphasise the importance of reliability, stability, and velocity (more than, for example, traditional cost reduction or efficiency metrics). This change in core operational metrics helps to get inventory moving through the end-to-end supply chain, without the need for fragile optimisation of individual functions.

Making the change

For many organisations, the forecasting approach is deeply ingrained at an operational planning and execution level. Making a change towards Demand Driven Operating Model starts simply with an exploration of gaps in conventional tactics against the merits and practical implementation a flow-based planning and execution method in this VUCA world.