Are Demand & Supply Driving Your Supply Chain Crazy?
Let’s face it, supply chain is a fascinating and pressure-filled field. Supply chains deliver the products that customers demand. The concept of a demand-driven supply chain was developed by Gartner (originally by Debra Hofman from AMR Research). It’s a great concept that the entire supply chain be driven by demand. Albeit, what it usually drives is the supply planners crazy. Don’t you wonder sometimes how and why you got into this field?
Through a series of articles and musings, I will share some thoughts through adages, quips, and comics that will look at supply chain with a tongue-in-cheek perspective. I look forward to comments and other perspectives.
This second article will look at the vagaries of demand and the vicissitudes of supply. Future story lines will include supplier management, inventory, supply chain risk, logistics, and managing numbers.
Demand planning is the art of integrating multiple, independent, and inaccurate signals into one accurate signal.
Demand is the baseline for all things supply. Customers’ desire for a product drives the demand and is the foundation for business volumes. Without demand there is absolutely no need for supply and even less need for supply chain folks.
But, where does the demand signal come from? It’s a question that remains mysterious for supply chain professionals.
Demand planners have a plethora of signals available to them – point-of-sale (POS) data, macro market or economic trends, historic demand accuracy, promotional effects, seasonality, business targets, prior product launches, actual orders, and more. While these are options aplenty, by themselves, none of them are sufficient or accurate.
Shouldn’t demand planners be able to get it right with so many variables available to them?
The reality is that most of these signals are rear-view mirror perspectives. As financial planners say, “past performance may not be indicative of future results.” We all know that if you drive your car by looking solely at the rear-view mirror you will eventually go off of the road. Not a good thing.
While many solutions providers have developed amazing tools and statistical techniques for demand planning, the fundamental problem of keeping demand stable and accurate remains unsolved, at least from the supply planner’s viewpoint.
Could it be that there’s more art to demand planning than anyone wants to acknowledge? So maybe the key is to channel our inner Picasso rather than our inner Newton. Regardless, each cycle, whether weekly, monthly, or otherwise, the demand signal is passed on, like the hot potato it is, to the supply team to work with.
And it’s usually different than the last one submitted.
Supply planning is the science of delivering that exact signal … regardless of how much or often it changes.
The supply planning team has the unenviable job of taking that ever-changing signal and converting it to a very specific plan for their factories to deliver. Reducing the uncertainty in the ability to deliver the products required is of utmost importance.
Supply planners are evaluated on finding the ever elusive perfect balance between the triangle that is forecast accuracy, on-time delivery, and stock levels. What’s your business targets for on-time delivery to your customers? Methinks it is well over 90%. 95%? 98%?
Is that even relevant in this day and age? We’re just being measured on our ability to serve the next link in the demand chain. Want a real headache? Start integrating notions of on-shelf availability one or two levels down the chain.
Factories do not deal with ever-changing requirements very well. Shooting at moving targets is not manufacturing’s core competency. They expect to have clarity and stability to be most productive. Building the same exact products at the same volume every single day keeps factory GMs young, vital, and stress-free.
That’s just not the real world of demand and supply. Enter the necessary evil: Stock.
While the demand may move around a lot, supply has a few tricks up its sleeves to mitigate the variance. Buffer stock of inventory and manufacturing postponement techniques are just two of many tools that the supply side can employ to reduce the effects of demand uncertainty.
Regardless, the never-ending conflict to balance the vagaries of demand with the specificity of supply contributes to the sleep deprivation of supply chain practitioners.
Balanced supply & demand is a rare event … they are actually two mutually exclusive, independent signals that occasionally intersect in time and space.
The assertion remains that demand accuracy is fleeting and changes in the signal are frequent and sometimes severe.
The monthly S&OP was our venue to manage the long-term balance of supply and demand. The cycle commenced with an updated demand signal and the supply team would evaluate inventory, capacity, incoming materials, and any constraints to match supply to the demand.
Imagine a giddy set of supply geeks preparing to tell the CFO, COO, CSO, and other execs that we can support the revenue and demand plan. Yeah, baby!
Then, the sucker punch appears. “Actually, we have changed the demand signal for you to evaluate.” Thud.
I lost count of how many executive S&OP meetings that we would be presenting that seemingly perfectly balanced supply plan with the demand signal from the business when the head of demand would utter that sentence. Are you kidding me?
And you thought that Nadia Comăneci performed miracles on top of that 4” wide padded suede beam!
At a macro level, supply and demand balance is quite achievable. But, we all know that attaining that balance at the micro or SKU level is the Holy Grail of supply planning. In those S&OP meetings, the total supply would easily match the total demand. That said, we’d have a list of angst-inducing shortages accompanied by a list of Little Orphan Annie excess products.
Chasing demand is the never-ending pursuit of supply chain. Sort of like that little puppy going ‘round and ‘round after its tail for minutes on end, only infrequently getting to it.
“Forecast accuracy” is the biggest oxymoron in supply chain lexicon.
I’ve often quipped that supply chain personnel typically do not utter the words “forecast” and “accuracy” in the same sentence without including a few other colorful adjectives.
For many, forecast accuracy is seen as the sole responsibility of the demand team. For an organization to truly mature, it needs to be a shared responsibility with marketing, sales and finance. The more the merrier. It may not be more precise, but it does increase the odds of a kumbaya session in the next S&OP meeting.
The numbers tell it all: world class demand planning accuracy is ~80% but you get fired if your supply delivery or manufacturing output accuracy hovers anywhere near 80%.
OK, maybe this stretches it a bit. However, the point is valid. Best-in-class demand planning is typically in the 70% range and supply chains get measured on their ability to reach the “Perfect Order”. I’ve been with companies that have settled for 65% as an “aspirational” target.
What is the cost of poor forecast accuracy? Heck, what’s the cost of 65% forecast accuracy? There are only a few levers available to accommodate a 35% degree of uncertainty – carrying more inventory or reducing service levels are two.
If we take a look at Gartner’s “Hierarchy of Supply Chain Metrics” and modify it ever so slightly, demand accuracy, inventory (instead of supply chain cost), and service level (instead of perfect order) are inextricably linked. If demand accuracy is low, something else has to be traded off. Either you carry more inventory or you risk lower service levels. We all know that both can be detrimental to a business.
No wonder so many of our top-talent supply chain planners moved to the demand side of the business.
Michael Massetti is a global high-tech supply chain executive who really does enjoy being a supply chain professional! Seriously.
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