Demand driven & agile supply chains

The last couple of weeks I read it several times. ‘Supply chains must be demand driven’, or ‘you have to be agile to survive in today’s global competitive environment’, ‘you’re agile or you’re dead!’. Some S&OP models suggest that being demand driven is the highest form of maturity. This seems mostly advocated by AMR Research and Gartner.

Before you think otherwise, let me tell you that I think that agile, responsive and demand driven supply chains come closest to what supply chain management in its purest form is about. As consultant, I worked for a meat manufacturer that received four times a day POS information from 600 stores from the largest retailer in the Netherlands. This gave direct insight in consumer buying behaviour. If the weather was better than predicted (the forecasting model took temperature in account), hamburgers and sausages would fly off the shelves to find their way to a barbeque. Based on the last POS data transfer the production schedule for the afternoon shift could be changed. The extra hamburgers and sausages produced in the late shift would find their way the next morning to the DC and stores of the retailer. This is a beautiful example of an agile, responsive and demand driven supply chain.

But being agile and demand driven are strategic choices that need to give you competitive advantage and have a pay back. For some supply chains these choices will be very different as they don’t get competitive advantage from being demand driven. Market dominance, product characteristics and go to market models don’t have a need to be demand driven or agile. I suggest to read up on David Simchi-Levi (http://slevi1.mit.edu/). He published a lot of great work on agility versus efficiency and demand driven versus supply driven.

Demand driven and agility are wonderful supply chain concepts. They are not holy grails and the preferred end status for every supply chain. Furthermore, we have to realize that (unfortunately) we live in a world that in many ways is about supply control. A large part of the world’s GDP is controlled by industries that don’t really care about demand.

Mining; Australian mining companies are investing 130 billion AU$ in supply exploration. China’s and India’s growth and demand for resources will continue. Don’t get fancy about being demand driven; just make sure you can dig the stuff up!

Oil: the Organization of the Petrol Exporting countries (OPEC) meets regularly to decide…basically how to control the supply of oil.

Banking: European banks do stall up to 800 billion Euro at the Central European bank. They don’t want to borrow it to other banks, because a lack of trust. There is demand for cash, but the banks decide not to make money but instead control the supply of cash.

Food & crops: a large part of the world food chain (fruit, meat, sugar, soy beans etc) is in the hands of a few companies. These companies play geo-political games rather than demand driven supply chain games.

My point?

Advocate whatever supply chain concept you believe in, but provide some context in what industry and supply chain situation your preferred solution will work, especially if you have an influential position.

4 thoughts on “Demand driven & agile supply chains

  1. I am one of those advocates of agility and demand driven, but you are correct that these need to be see in context, and my context is very Western, even high-tech/electronics with short product life cycles and long, lean supply chains. I am accustomed to hearing from executives that they need greater supply chain efficiency such as lower inventories, shorter cash-to-cash, etc.

    I met recently with a VP of Supply Chain in China and when I asked him what was the biggest barrier to him meeting his goals, his reply was Western anti-dumping laws. That was one I had not heard before. But it is a very clear indicator of a supply-driven approach aimed at gaining market share.

    Just as an aside, I believed him when he told me that the company wasn’t trying to sell their products below cost, but that their cost is less than 30% of the equivalent prodcut manufactured in the West. Scary stuff.

  2. Wow Trevor, you’re faster then light! I just pressed ‘publish’ 🙂

    Thanks for you feedback. I’m an advocate as well, as I worked mostly in FMCG and short shelf life environments
    Challenging myself and others is what I try to do every now and then (I just wrote this blog in 40 minutes watching a bad movie)

    Scary stuff indeed. Will the balance ever come back? Will the Chinese housing bubble burst as well? Is the world going to produce in Africa next?
    There is a lot more scary stuff to come I guess

    cheers,
    Niels

  3. Hi Niels; a well thought out and very relevant article.

    It worries me that a certain approach is force fed to Supply Chain executives by ‘expert analysts’ and ‘consultants’ without consideration to industry or context (and I write this as one of these so called ‘consultants’). Even within an organisation, there will be different Supply Chain competitive drivers needed to satisfy the demands of the customer. Further, these drivers may change even within the lifecycle of a certain product.

    Previously everyone was told they need to practice TQM and JIT principles, then 6 Sigma, then Lean, then they needed to off-shore their key capabilities, then bring them back to ‘profitable proximity’ etc, etc. The problem lies when businesses are advised to adopt an approach as if it’s a panacea to all of its ills, regardless of whether it actually helps the company be more effective on the delivery of value to its customers.

    Your article is therefore needed and I hope a large number of senior executives working in the Supply Chain industry take the time to digest its points and realise that whilst each of these individual approaches, be they lean, demand driven or agile, has value, they may not be the best strategy to adopt in every example. Intelligence and courage is required to stop and take the time to truly understand how best to serve the customers in each supply chain; and then adopt the most appropriate strategy, structure and processes to enable this.

    Keep up the good work.

  4. Thanks for your positive feedback Sean.

    Well, I guess the title of your last article, ‘segmenting for success’, says it all
    As you say, we are able to define value chains by business area, product group, product and hey.. even product life cycle
    You HAVE to be agile or lean just doesn’t work and won’t be good enough

    Impressive references and amount of knowledge in your article. Well done!

    cheers,
    Niels

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