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Demand-driven supply chains

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					         Chapter 5



         Demand-driven
         supply chains

              ‘Matching supply with demand’ is the fundamental goal of the
              logistics process. Conventional business practice seeks to mediate
              demand and supply through forecasts – in other words, the
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              forecast is used as an attempt to predict demand and then finished
              goods inventory is created ahead of that anticipated demand.
              However, because today’s market place is considerably more
              volatile and, as a result, less predictable, it has become necessary
              to seek alternative approaches to demand management. The way
              forward is to substitute information for inventory and in the
              process become more responsive to real demand. Becoming
              demand-driven requires a supply chain that is ‘agile’ in its ability
              to meet changed customer requirements. New ways of working
              with supply chain partners are required if customer responsive-
              ness is to be enhanced.



         Today’s market place is characterised by a much higher level of
         turbulence than has previously been the case. Markets have frag-
         mented, and customers and consumers require customised solutions;
         the days of standard products made ahead of demand for mass
         markets have long gone. In a world such as this, traditional approaches
         to forecast-based management become increasingly untenable. The
         reason for this is that classic statistical forecasting is often based upon
         taking information on past demand and then trying to identify
         patterns from which projections into the future can be made. However,
         when previous sales show no patterns because of volatile shifts in
         demand, then clearly there is no basis for a forecast.
           Capturing information on the requirements of customers or con-
         sumers as close as possible to the point of sale or point of use should
         be a key goal of supply chain management. However, many




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         86   Marketing Logistics

           organisations are forced to anticipate those requirements through a
           forecast since they have no clear view of the final market place. Thus
           the supplier of packaging material to a chocolate manufacturer may
           not see anything other than the orders it receives from the chocolate
           company. Similarly, the chocolate company will probably not see the
           real consumer demand off the shelf at the retailer, if the retailer only
           sends sporadic orders. In most supply chains the majority of
           manufacturing and distribution activities are driven by a forecast
           rather than by demand.
              The point at which activities cease to be forecast-driven and become
           demand-driven has been termed the ‘order penetration point’,
           although the term ‘demand penetration point’ is more accurate. All the
           activities upstream of the demand penetration point are forecast-
           driven, with all the consequent problems that that can bring.
              The challenge to the supply chain is to find ways in which the
           demand penetration point can be pushed as far upstream as possible.
           Through sharing information on real demand it becomes possible for
           supply chain partners to synchronise their operations and become
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           more in line with the needs of the market place. At the same time as
           moving the demand penetration point upstream, the aim should be to
           move the ‘decoupling point’ as far as possible downstream. The
           decoupling point is, in effect, the point of commitment – the moment
           where inventory, held in a generic form, is committed to a particular
           finished form or to specific customers or markets.
              The decoupling point represents the transition from forecast-driven
           activities to demand-driven activities. Figure 5.1 shows different
           situations, ranging from a ‘make-to-order’ environment (where
           demand penetrates to the far end of the chain) to the more commonly
           encountered situation where only the last party in the chain interfacing
           with the consumer actually experiences real demand.




         Figure 5.1 The demand penetration point




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                                                     Demand-driven supply chains   87

            There was a time, of course, when make-to-order was the norm in
         almost every industry, but industrialisation brought mass production
         and with it greater uniformity and lower costs through economies of
         scale. Thereafter, make-to-order tended to occupy high-value, low-
         volume niches far removed from the everyday mass market. In
         consumer goods terms, these products would likely be luxury goods
         or the outputs of craft industries. In recent years, however, advances in
         manufacturing and information technology have made make-to-order
         an affordable option even for FMCG goods.
            In certain circumstances flexible manufacturing and logistics sys-
         tems can allow manufacturers to reduce work-in-progress, all but
         eliminate finished goods inventory, and create additional value for
         their customers by making each and every product to a bespoke
         customer order. This is ‘mass customisation’.

         Mass customisation
         According to Professor Paul Zipkin of Duke University in the USA,
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         mass customisation is ‘mass production with variety’. For the
         customer, the upside of this value proposition is that the products are
         tailored to meet his or her particular requirements. The downside is
         that the customer is likely to have to wait to get them.
            Mass-customisation systems must have three key capabilities:
         elicitation; process flexibility and responsive logistics (Zipkin, P. (2001)
         The limits of mass customisation, MIT Sloan Management Review,
         Spring, 81–86). All three must themselves be bound together by
         effective communication systems capable of tracking a discrete
         customer order from elicitation through to final delivery.
            Elicitation requires a mechanism for interacting with customers and
         obtaining specific information. An elicitation process must provide a
         simple and user-friendly means of leading customers through the
         process of identifying their exact requirements. It must capture
         identification details, such as name and address; customers’ selections
         from menus of alternatives; physical measurements/quantity; and
         reactions to prototypes. In some instances the customer’s requirements
         may be as simple to elicit as a name or a message to be featured on the
         finished goods, or perhaps a series of easy-to-obtain measurements to
         determine the dimensions of the finished item. The example of
         Reflect.com, presented here, is one of the more unusual examples in
         that the selection process seeks to elicit highly esoteric requirements.
            Process flexibility is the second essential requirement. Some indus-
         tries have progressed further than others; customisation may only be
         possible in one or two processing phases. In engineering and the
         apparel industry, mass-production systems have been made more
         flexible though CAD/CAM systems, modular design and the wider
         use of digitally controlled manufacturing equipment.




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