Cloud technology unleashes the demand-driven Holy Grail
A true demand driven supply chain (DDSC) has always been the holy grail of operations managers around the world.
Even when forecasts are finely tuned, an unexpected spike, or drop, in demand can wreak havoc on production schedules, leading to problems such as stock-outs and lost sales; inventory pileups, markdowns, and write-offs; poor capacity utilisation; and declining service.
Today, these margin-sappers are increasingly avoidable thanks to recent advances in technology, like cloud computing, which can finally make the DDSC a reality.
In fact, recent research by The Boston Consulting Group, has shown that some companies with advanced DDSCs carry 33 percent less inventory, improve their delivery performance by 20 percent, and reduce supply chain costs dramatically.
So what is DDSC? In essence, it is a system of coordinated technologies, processes and behaviours that sense and react to real-time demand signals across the network of customers, channels, employees, suppliers and supplier's suppliers that make up a supply chain.
In the past, matching supply and demand across the supply chain has been extremely difficult given the lengthy reaction times and the inherent challenges that arise from communicating across the various IT platforms in a company’s chain. Even more difficult given that those supply chains are increasingly extended and are supported by a complex web of interdependent partnerships.
But all this is now changing: advances in cloud-based technology are able to support more mission-critical activities like supply chain operations, through increased levels of security, better communication standards and solid 24x7x365 availability.
This means that, in addition to reducing IT infrastructure requirements, there is increasing confidence to allow cloud technology to be used to share real-time data across complex and extended supply chains. In effect, this allows the vertical integration of organisations, without the costly and inflexible physical or structural requirement to be part of the same company.
The advantage is that all participants in the supply chain can react early to changes in demand, and based on the same view of demand, which reduces risk of the dreaded ‘bull-whip’ effect. It is analogous to a car driver being able to slow down steadily based on seeing brake lights several cars ahead, rather than having to react to the car just in front.
The supply chain impact can be startling. By sharing real-time point-of-sale demand information with suppliers, so that they can optimise their scheduling in good time, a leading provider of cloud-based technology for SCM has seen retail on-shelf availability increase from 90 to 99 percent, with stock levels plummeting by 40 percent.
Given this good news and the fact that the supply chain software press is alive with the work that is happening at DDSC pioneers Cisco Systems, General Mills, Pfizer, PepsiCo, Procter & Gamble, and Kimberly Clark, it is surprising the overall pace remains slow.
This is because although developments in cloud technology are key, implementing advanced DDSC still remains hard work for many organisations. Through its work in this area Boston Consulting Group has identified a number of key success factors:
Focus DDSC where it delivers most benefit: Segmenting products according to specific characteristics can help companies determine the categories in which the benefits of a DDSC offset added costs.
Categories typically include high-margin products, high-tech or other products with a high cost of obsolescence, food or other perishables for which freshness is critical, products with highly variable demand (such as consumer durables), and products with rapid inventory turnover (such as fast-moving consumer goods).
Revisit data collection, quality and analysis: Most companies trying to implement a DDSC will need to collect and share data on inventory levels more frequently and increase the degree of data granularity they analyse. Data quality, including the quality of master data, is paramount as the granularity of decision-making increases and the data is used outside the organisation.
Align metrics and incentives: The ultimate goal of a DDSC is to ensure the best service at the lowest cost. To this end, the performance targets and incentives of all supply-chain players must be aligned so that everyone is marching in the same direction.
Change the organisation and employees' behaviour: To work, DDSCs require major organisational and behavioural changes. Most companies are reactive order takers: when a retailer orders five cases of soda, that’s what the supplier sends. With a DDSC, the supplier’s employees can take a more proactive role, suggesting a larger or smaller order if consumption data show the need—or even contacting the retailer before an order has been placed if POS data show that inventory is getting low.
And all this is made much easier if flexibility is built into the supply chain in procurement, manufacturing and logistics. This includes a responsive supply base, short changeover times, access to temporary labour and external capacity, the ability to produce small batches cost-effectively and access to multi-modal transport.
With the ability to access end-to-end data and analytics capabilities across the supply chain, cloud-based technology is poised to unleash the potential of the DDSC. This could revolutionise supply chain management in a wide variety of industries, including retail, consumer products, automotive, and aerospace and defence.
But only companies that truly understand the profound changes they must make to their organisations will reap the full benefits - and achieve a sustainable advantage in today’s fiercely competitive global economy.
NTT DATA Services, Remodelling Supply Chains for Resilience
Joey Dean, the man with the coolest name ever and Managing Director in the healthcare consulting practice for NTT DATA and is focused on delivering workplace transformation and enabling the future workforce for healthcare providers. Dean also leads client innovation programs to enhance service delivery and business outcomes for clients.
The pandemic has shifted priorities and created opportunities to do things differently, and companies are now looking to build more resilient supply chains, none needed more urgently than those within the healthcare system. Dean shares with us how he feels they can get there.
A Multi-Vendor Sourcing Approach
“Healthcare systems cannot afford delays in the supply chain when there are lives at stake. Healthcare procurement teams are looking at multi-vendor sourcing strategies, stockpiling more inventory, and ways to use data and AI to have a predictive view into the future and drive greater efficiency.
“The priority should be to shore up procurement channels and re-evaluate inventory management norms, i.e. stockpiling for assurance. Health systems should take the opportunity to renegotiate with their current vendors and broaden the supplier channel. Through those efforts, work with suppliers that have greater geographic diversity and transparency around manufacturing data, process, and continuity plans,” says Dean.
But here ensues the never-ending battle of domestic vs global supply chains. As I see it, domestic sourcing limits the high-risk exposure related to offshore sourcing— Canada’s issue with importing the vaccine is a good example of that. So, of course, I had to ask, for lifesaving products, is building domestic capabilities an option that is being considered?
“Domestic supply chains are sparse or have a high dependence on overseas centres for parts and raw materials. There are measures being discussed from a legislative perspective to drive more domestic sourcing, and there will need to be a concerted effort by Western countries through a mix of investments and financial incentives,” Dean explains.
Wielding Big Tech for Better Outcomes
So, that’s a long way off. In the meantime, leveraging technology is another way to mitigate the risks that lie within global supply chains while decreasing costs and improving quality. Dean expands on the potential of blockchain and AI in the industry.
“Blockchain is particularly interesting in creating more transparency and visibility across all supply chain activities. Organisations can create a decentralised record of all transactions to track assets from production to delivery or use by end-user. This increased supply chain transparency provides more visibility to both buyers and suppliers to resolve disputes and build more trusting relationships. Another benefit is that the validation of data is more efficient to prioritise time on the delivery of goods and services to reduce cost and improve quality.
“Artificial Intelligence and Machine Learning (AI/ML) is another area where there’s incredible value in processing massive amounts of data to aggregate and normalise the data to produce proactive recommendations on actions to improve the speed and cost-efficiency of the supply chain.”
Evolving Procurement Models
From asking more of suppliers to beefing up stocks, Dean believes procurement models should be remodelled to favour resilience, mitigate risk and ensure the needs of the customer are kept in view.
“The bottom line is that healthcare systems are expecting more from their suppliers. While transactional approaches focused solely on price and transactions have been the norm, collaborative relationships, where the buyer and supplier establish mutual objectives and outcomes, drives a trusting and transparent relationship. Healthcare systems are also looking to multi-vendor strategies to mitigate risk, so it is imperative for suppliers to stand out and embrace evolving procurement models.
“Healthcare systems are looking at partners that can establish domestic centres for supplies to mitigate the risks of having ‘all of their eggs’ in overseas locations. Suppliers should look to perform a strategic evaluation review that includes a distribution network analysis and distribution footprint review to understand cost, service, flexibility, and risks. Included in that strategy should be a “voice of the customer” assessment to understand current pain points and needs of customers.”
“Healthcare supply chain leaders are re-evaluating the Just In Time (JIT) model with supplies delivered on a regular basis. The approach does not require an investment in infrastructure but leaves organisations open to risk of disruption. Having domestic centres and warehousing from suppliers gives healthcare systems the ability to have inventory on hand without having to invest in their own infrastructure. Also, in the spirit of transparency, having predictive views into inventory levels can help enable better decision making from both sides.”
But, again, I had to ask, what about the risks and associated costs that come with higher inventory levels, such as expired product if there isn’t fast enough turnover, tying up cash flow, warehousing and inventory management costs?
“In the current supply chain environment, it is advisable for buyers to carry an in-house inventory on a just-in-time basis, while suppliers take a just-in-case approach, preserving capacity for surges, retaining safety stock, and building rapid replenishment channels for restock. But the risk of expired product is very real. This could be curbed with better data intelligence and improved technology that could forecast surges and predictively automate future supply needs. In this way, ordering would be more data-driven and rationalised to align with anticipated surges. Further adoption of data and intelligence and will be crucial for modernised buying in the new normal.
These are tough tasks, so I asked Dean to speak to some of the challenges. Luckily, he’s a patient guy with a lot to say.
On managing stakeholders and ensuring alignment on priorities and objectives, Dean says, “In order for managing stakeholders to stay aligned on priorities, they’ll need more transparency and collaborative win-win business relationships in which both healthcare systems and medical device manufacturers are equally committed to each other’s success. On the healthcare side, they need to understand where parts and products are manufactured to perform more predictive data and analytics for forecasting and planning efforts. And the manufacturers should offer more data transparency which will result in better planning and forecasting to navigate the ebbs and flows and enable better decision-making by healthcare systems.
Due to the sensitive nature of the information being requested, the effort to increase visibility is typically met with a lot of reluctance and push back. Dean essentially puts the onus back on suppliers to get with the times. “Traditionally, the relationships between buyers and suppliers are transactional, based only on the transaction between the two parties: what is the supplier providing, at what cost, and for what length of time. The relationship begins and ends there. The tide is shifting, and buyers expect more from their suppliers, especially given what the pandemic exposed around the fragility of the supply chain. The suppliers that get ahead of this will not only reap the benefits of improved relationships, but they will be able to take action on insights derived from greater visibility to manage risks more effectively.”
He offers a final tip. “A first step in enabling a supply chain data exchange is to make sure partners and buyers are aware of the conditions throughout the supply chain based on real-time data to enable predictive views into delays and disruptions. With well understand data sets, both parties can respond more effectively and work together when disruptions occur.”
As for where supply chain is heading, Dean says, “Moving forward, we’ll continue to see a shift toward Robotic Process Automation (RPA), Artificial Intelligence (AI), and advanced analytics to optimise the supply chain. The pandemic, as it has done in many other industries, will accelerate the move to digital, with the benefits of improving efficiency, visibility, and error rate. AI can consume enormous amounts of data to drive real-time pattern detection and mitigate risk from global disruptive events.”