Good ideas to improve supply chains do not always work

Roger OakdenSupply Chains & Supply NetworksLeave a Comment

A new supply chain idea of ten years ago.

Demand driven supply network (DDSN) was a new concept in 2004, but no mention is made ten years later. Why is that? Surely a DDSN is what all right minded businesses should aim for.

The design of DDSN was developed from the supply chain challenges of the early 2000s:

  • distortions downstream ripple back through a chain, causing demand uncertainty
  • unable to identify and account for variability in demand and supply across the nodes of a supply network
  • problems with new and revised product introductions – poor forecasting and inventory planning, supplier and manufacturing delays and poor co-ordination of promotions
  • effectively managing relationships through a supply network

The challenges appear to be very similar to the challenges ten years further on and that could be part of the problem.

The key capabilities to overcome these challenges were defined as demand management, supply management and product life management. For these capabilities to be effective, planning must be able to respond to changes as they occur. Therefore, the design of DDSN required the planning of demand, supply and products to have visibility of markets and the supply chains, continuous interaction between the three plans and freedom of planners to act, based on the latest data.

This approach reads as being quite reasonable, but you will note that the outcome within a business will be a complete re-organisation, with new responsibilities. One of the hurdles to introducing DDSN was identified at the time that “organisational barriers derail supply chain projects”. How many CEOs will accept the risk of failure?

Has the situation with supply chain ideas changed?

The latest newsletter from Lora Cecere notes the situation over the past six years in the American Consumer Packaged Goods (CPG) industry. Line items (SKUs) have increased by 30 percent, but shipments by 2 percent; therefore sales per item fell by 22 percent. 50 percent of SKUs provide 1 percent of sales.

With figures like this, who needs competitors to ruin your business?  Low national demand (or sales) for an item typically means an erratic pattern – a promotion in one area can make an item appear ‘successful’, clearing inventory and demanding more product; production plans are disrupted and rush orders for materials are placed. Multiply this over many low selling products and you have a problem of added complexity in your supply chains; which is not fully understood or costed.

Lora’s number one suggestion to improve the situation is item (or product line) rationalisation. A very good place to start and where you will earn your stripes as a logistician! Earlier in my career I was responsible for materials and operations at a division of a a global CPG company and we had the problem of proliferating product lines.

I showed senior management the effects of erratic sales against forecast in the levels of safety stock carried, the disruptions to production schedules, the inconvenience and cost of small materials orders. All to no effect. The situation only changed after I had ‘deep and meaningful’ exchanges with a senior marketing executive who supported my proposals.

The ‘long tail’ of low selling items was substantially reduced, but eighteen months later (when I had moved on) there was a new CEO and the old situation was back again.

Could it be that DDSN did not have a chance of successful implementation because, as with my employer, managements at many business do not understand their supply network?

As an example, there is not a problem with a company’s business model being to sell many, continuously released, low selling products (which has been called ‘mass customisation’). The problem is that to be successful, management must design the required supply network, negotiate specific contracts with suppliers that reflect the business needs and implement an organisation structure to match the business model. Copying the systems and processes of another company in the same industry, but with a different business model, is not the solution!

So DDSN disappeared for two reasons. The first is that too many senior management of consumer focussed businesses do not fully understand the underlying principles and challenges of their supply network. The second is that to implement DDSN requires a different organisation structure and CEOs are not willing to make radical changes, such as managing flows rather than departments, when their tenure in the job will most likely be less than the time for successful implementation.

To be adopted by a reasonable percentage of an industry, a good idea require the support of computer applications and training programs; this is now occurring in forecasting and planning for a demand driven supply network – ten years after the initial promotion of DDSN!

Change will happen, but slowly; the hope is that universities will recognise that supply networks are a core course (or subject) in their business and engineering programs. Subsequently, as graduates gain promotion they will hopefully remember the principles taught and think about the consequences of their decisions to the supply chains of their business.

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About the Author

Roger Oakden

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With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More...

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