The demand-driven supply chain: A holistic approach

The demand-driven supply chain: A holistic approach A report from the Economist Intelligence Unit Sponsored by Oracle The demand-driven supply chain: A holistic approach Contents Preface 3 Executive summary 4 Introduction 5 Basic forecasting: setting a solid foundation 6 Beyond forecasting: shaping demand 9 Short in supply 11 Overcoming obstacles 13 Conclusion 15 © Economist Intelligence Unit 2009  The demand-driven supply chain: A holistic approach Preface T he demand-driven supply chain: a holistic approach is an Economist Intelligence Unit white paper, sponsored by Oracle. The Economist Intelligence Unit bears sole responsibility for this report. The Economist Intelligence Unit’s editorial team wrote the report, and the findings and views expressed do not necessarily reflect the views of the sponsor. Rob Garretson was the author of the report and Debra D’Agostino was the editor. The report was based on desk research and in-depth interviews with executives from around the world about the challenges and opportunities they face in developing more demand-driven global supply chains. Our thanks are due to all interviewees for their time and insight. January 2009 © Economist Intelligence Unit 2009  The demand-driven supply chain: A holistic approach Executive summary N ow more than ever, businesses must improve the efficiency of their supply chains in order to maintain competitive advantage. But the principles of lean manufacturing and inventory control that famously helped companies like Toyota, Dell and Wal-Mart to rise to the top of their respective industries are no longer enough. Companies must apply new technologies and sophisticated analytics not only to make their supply chains more responsive to customer demand, but also actively to shape demand towards more profitable business. Today’s demand-driven networks must enable companies to be flexible in applying the full array of levers at their disposal—including pricing, sales incentives, promotions and other marketing tools—to stimulate demand for their highest margin products and to maximise business with their most profitable customers. This holistic approach to building demand-driven supply chain operations requires: l Improved demand forecasting tools that help to fine-tune base-level forecasts—based on historical sales data—to eliminate anomalies and other “noise”, before incorporating larger deviations and less predictable variables. l Integration of new forecasting and demand management tools with existing supply chain and logistics systems to allow visibility of supply and demand all along the network in real time. l A collaborative approach to sales and operations planning that brings sales and marketing together with supply chain operations to develop a comprehensive plan. l Profitability as the prime objective, above simple cost cutting or revenue enhancement, in measuring supply chain performance. Companies must target their most profitable customers and promote their most profitable products and services.  © Economist Intelligence Unit 2009 The demand-driven supply chain: A holistic approach Introduction F acing economic uncertainty, volatile energy prices and intensifying global competition, large multinational corporations are seeking strategic and operational advantages more than ever before. Among the key operational components most demonstrably tied to business success is the efficiency of global supply chains: the network of people, technology, activities, information and resources involved in supplying a product or service to a customer. The proof is apparent on Wall Street. At the end of 2007, and for the third year in a row, the 25 companies identified by Boston-based AMR Research as maintaining the top supply chains among the Fortune 500 enjoyed market-beating stock In today’s fiercely performance, with an average total return of 17.9% compared with 6.4% for the Dow Jones Industrial competitive Average. environment, it is For years, the world’s leading companies have been wringing inefficiencies from their global supply not enough simply chains, shrinking excess inventories and speeding order fulfilment, thus utilising cash more efficiently to streamline global and better matching the supply of components and end-products with customer needs. Over the supply chains and past several years, companies across a wide range of industries have adopted demand-driven supply eliminate excess networks, using the “pull” of actual customer demand rather than the “push” of available supply to costs. manage their network of suppliers, materials and components from manufacturing to distribution. The principles of lean manufacturing and just-in-time inventory management famously helped Toyota leapfrog General Motors as the world’s largest vehicle manufacturer, and vaulted Wal-Mart to the forefront of global retailers, with US$379bn in revenue in 2007. Yet in today’s fiercely competitive environment, it is not enough simply to streamline global supply chains and eliminate excess costs. Leading companies are applying new technologies and sophisticated analytics to make their supply chains more responsive to customer demand, rather than letting availability of supply drive the chain. They are also taking steps to shape demand based on product availability and profitability, linking storefront marketing efforts to back-end logistics to help keep inventories lean and boost profit margins. This paper explores the opportunities, challenges, risks and rewards of creating a holistic, end-to-end approach to supply chain management. © Economist Intelligence Unit 2009  The demand-driven supply chain: A holistic approach Key points n Fine-tuning base-level forecasts is a critical first step. n Some firms apply algorithms to determine changes in demand based on weather and current events. n Eliminating “noisy” data to focus on key indicators can greatly improve forecasting efforts. Basic forecasting: setting a solid foundation A t Tesco, a UK-based global grocery chain with revenue of roughly £52bn in fiscal 2007, product availability is naturally a key competitive driver for success. But with more than 50,000 products on its shelves, six different store formats and operations in 14 countries, determining appropriate inventories can be extremely difficult. Stocking too many perishables, such as fruit and dairy items, leads to waste and can cost the company hundreds of millions in lost revenue annually. “It’s not good enough to say how many chicken thighs we’re selling for the company,” says Bruno Monteyne, Tesco’s “If you’re trying supply chain development director. “We need to know exactly by store and by day how much we’re to measure and going to get and sell.” forecast the run According to Mr Monteyne, the projection of sales based on historic patterns—the “base-level” rate of sales for forecast—is more complicated than it seems. Although predicting sales based on historical data is a product day- nothing new, the complexity of global retail operations such as that of Tesco makes refining such by-day, you’d be models a continuing challenge. “If you’re trying to measure and forecast the run rate of sales for a surprised about product day-by-day, you’d be surprised about how noisy the data are,” Mr Monteyne says, referring to how noisy the data variations in the pattern of sales that are hard to correlate to specific variables, much like static that are.” interferes with a radio transmission. -Bruno Monteyne, supply chain Eric Winn, senior director of procurement operations at C&S Wholesale Grocers, a US-based grocery development director, Tesco wholesaler with revenue of around US$20bn, knows how difficult it can be to create accurate forecasts.