The demand-driven supply chain

Indian businesses are under pressure, and their linear model of pushing products into the market has gaps. They are therefore looking at a demand-driven supply chain that helps them collaborate with suppliers to solve their supply chain blues, says Akhtar Pasha.

Factors such as globalisation, leaner supply networks, customer expectations that grow with each passing day, the need for selling mass-products that are also customised, and the increased variations in demand are all affecting the market for supply chain management (SCM) solutions. New business foci and pressures are driving pockets of innovation and renewed corporate spending in supply chain initiatives. That said, this spending is tempered by the fact that corporate supply chain maturity is still relatively low, limiting adoption. Supply chains are becoming increasingly global, complex and inter-dependent, forcing companies to extend planning beyond their four walls.

For example, the prices of passenger cars in India have risen four times in 2006 on account of rising costs of steel and other inputs. Despite this, the market has seen a flood of new passenger car models. The complex product life-cycle of an automobile with thousands of suppliers and sub-contractors necessitates that an OEM must have complete visibility into its supply chain to reduce costs and stay innovative.

Today’s IT-driven businesses face a strong disconnect between the concept of SCM and the daily business reality which most manufacturers experience. The first challenge in this regard is the lack of enterprise-wide visibility. Unfortunately, many manufacturers are unable to see beyond the four walls of their factories and therefore cannot fully understand their enterprise-wide supply and demand needs.

Broadly, the Indian SCM story can be divided into two trends that are prompting businesses to invest in structuring their supply chain—Demand-Driven Supply Network (DDSN) and collaboration between subcontractors / tier II / tier III suppliers with OEMs.

Towards a DDSN

"Traditional SCM tools with a supply orientation must be supplemented by a demand-oriented set of products" - Ravi Kathuria Vice-President Global Marketing Birlasoft

The complexity of supply chains has gone up substantially as processes are outsourced. As a result, the requirements for SCM are expanding as demand data and processes are being incorporated into a new method of managing supply and demand. Ravi Kathuria, Vice-president, Global Marketing, Birlasoft, says that DDSN integrates demand data and processes across the supply networks of customers, suppliers and employees to balance revenues against costs.

The shift is occurring for three reasons.

• SCM is no longer confined to the four walls. Adds Kathuria, “SCM must encompass not only managing the planning and execution of daily operations, but also encompass the same activities at an OEM’s suppliers and customers. Traditional SCM tools with a supply orientation must be supplemented by a demand-oriented set of products. Moreover, companies are trying to address the unified management of their global supply chains.”
• Traditional SCM deals poorly with rapid change. Many implementations of SCM work best during the steady-state demand periods of a product life-cycle, but poorly during ramp-up and ramp-down. With product life-cycles shortening and configurations or segmentations on the rise, traditional SCM systems make a poor fit in a world of dynamic product portfolios. Supply chain variations are one of the principal threats to profit margins, and in some industries this can be as high as 100 percent. A new set of products and integration capabilities is needed to address this issue.
• Traditional SCM doesn’t incorporate essential demand signals. The traditional demand signals of stove-piped forecasts are finally being recognised as distorted and outdated vis-à-vis the actual demand that they claim to represent. This distortion, coupled with unpredictability, can cost manufacturers more than 10 percent of the cost of goods sold. These views must be supplemented and supplanted by new interpretations, controls and feedback for demand data.

Opines Lawrence Chan, Senior Vice-president for Asia Pacific Operations, Infor Global Solutions, “Delivering the right product to the right location at the right time and at the right price is everything. The traditional approach of attempting to forecast (or guesstimate) the demand for a product does not support this requirement. Organisations are moving towards a model where production is demand- or pull-driven.” There has therefore been a move away from production based on forecasts to production based on demand. Chan adds that in order to achieve this a tight integration of a customer’s and suppliers’ systems is required. This integration also necessitates that organisations have a short response time; as a result, there is increased pressure on an organisation to support agile production and scheduling.

"There is a strong desire to accurately forecast, target and monitor supply chain links in real-time across the production line" - Chetan Pathak VP, Enterprise Solutions Ramco Systems

According to Chetan Pathak, Vice-president, Enterprise Solutions, India, Ramco Systems, “There is a strong desire to accurately forecast, target and monitor supply chain links real-time across the production line. Small businesses with Rs 25 crore are also looking at being able to make accurate forecasts.”

Comments Nagaraj Bhargava, Director, Marketing & Strategic Initiatives, SAP India, “New technologies like radio frequency identification will enable supply chain networks to detect and communicate real-time demand and supply signals across the network. Service management is of increasing importance, and SAP’s approach is to provide a complete service solution footprint including service parts management, enterprise asset management, and field service management.”

Transforming into a demand-driven business: a step-by-step guide

• Order accuracy. Capturing and executing the perfect customer order requires you to focus on more than your supply chain. You must examine the entire order life-cycle. With DDSN, every customer order seamlessly becomes a purchase order for raw materials, a work order for the manufacturing line, a transport order for transportation, and a pick order for the warehouse. It shortens lead-times, results in timely invoicing and collection, helps calculate freight with greater accuracy, improves customer service, and ensures delivery of the perfect order anywhere in the world. Take the case of MTR Foods which has seven diverse businesses—ready-to-eat foods, instant foods, ice-cream, meal accompaniments, frozen foods, spices & masalas, and vermicelli; the company has 200 products in all. For its instant foods it sources about 600 raw materials. Since it is in the business of processed foods, it cannot buy the raw materials that are required in bulk. Earlier, MTR used to buy 65 percent of its annual raw material requirement in the agricultural season to get the best of the yield, but this would lead to the company’s working capital being locked up. What’s more, some percentage of this raw material used to spoil, and had to be discounted, leading to a clear input cost loss.
  Similarly, for its vermicelli production, MTR used to source 12,000 tonnes of chiroti suji from 40 different suppliers, some of whom were as far away as Uttar Pradesh, Madhya Pradesh and Haryana. The first challenge was to ensure a steady and transparent supply chain since inefficiencies and delays in supplies are common and natural in agricultural commodity markets, leading to increased costs. While using manual systems, MTR used to take 30 percent stock cover (valued at Rs 70 lakh) for 20 days.
• Forecast accuracy. Forecasts are only 65 percent there. Forecasting is flawed. Most organisations have trouble aggregating multiple forecasts from different units or departments. They base production forecasts on historic sales without taking into account variations in demand and unpredictability, or they leverage demand-related information from marketing and sales. They also treat forecasting the same for products that are distributed through different channels (retail, wholesale, online, etc). When you can make a forecast by looking across products, channels, departments and regions, you can assemble all the critical information you need to achieve dramatic improvements in forecast accuracy—and respond to demand faster and more profitably.
• Inventory management. Give priority to reducing inventory-carrying costs and improving cash conversion. When inventory is used to buffer demand variability and uncertainty, the result is too much of it in the wrong place at the wrong time. By using advanced DDSN capabilities across planning, supplying, fulfilling, shipping and servicing, you can reduce total lead-times, turn over inventory faster and more often, reduce inventory-carrying costs, and improve cash conversion.
• New product development and introduction. As per market data, 75 percent of new products fail to meet sales forecasts. The priority should therefore be to make your new product processes react better to a customer’s needs. Too often, the wrong products are introduced and the right ones arrive too late to do much good. Demand-driven enterprises link all the processes related to new products—design, engineering, marketing, sales, manufacturing, fulfilment, shipment and servicing—to customer demand. Doing so allows you to introduce products in a more timely manner, phase in warehousing and inventory successfully, capture the right customer requirements, and fulfil them faster, cheaper and better than the competition.

Collaborative demand planning

"Changing customer needs and preferences for newer models have resulted in shorter product life-cycle" - C Gowri Shankar Executive Director Take Solutions

Comments C Gowri Shankar, Executive Director, Take Solutions, “Organisations are measuring demand forecast accuracy as a KRA (key result area) for the functions of planning and head of marketing. They expect forecasts to be very accurate…some organisations expect over 94 percent accuracy when it comes to demand forecasts, which is a dramatic shift.” He says that a collaborative forecast is a pre-requisite before the target for a specific period is arrived at in such an organisation.

Collaborative forecast models typically involve a forecast starting from the bottom of the sales hierarchy, say area manager, and moving up to the sales head at the apex level. Typically, such forecasts done at the lower end of the hierarchy are for shorter time horizons, but with greater granularity; for example, at the SKU (stock keeping unit) or pack level. There is an increase in time horizon with lesser granularity as the forecast moves up the sales hierarchy. Collaborative forecast models typically support a dialogue and multiple iterations between the immediate stakeholders in the sales hierarchy before arriving at the forecast, which then translates into the targets for the national or regional and area heads for various brand categories. “While actual demand is captured in traditional ERP systems, collaborative forecasts are not part of such systems. The actual demand figures need to be integrated from an ERP system into a collaborative forecast and planning system. These typically result in classic ‘white spaces’ in ERP,” states Shankar.

He cites the example of a company for whom Take is providing a solution which looks at optimising the production planning schedules across sub-contractor plants, with transport costs and cost of production being factors which need to be considered for optimisation.

He also cites ITC’s greeting cards and stationery business. Its printing and production is done across 12 to 15 locations. Capacities for production depend on the product mix. For instance, an A4 notebook has to be printed at a specific plant with the capacity to do it; this is different from the requirements of producing an A4 spiral notebook. The production at each plant is a function of the product mix, and is not easy to define in terms of tonnages of paper to be processed. The company needs to optimise performance by deciding the production to be undertaken at each plant for each of the SKUs based on proximity to markets, and production and transportation costs; it also has to ensure that there are no stock-outs.

Informs Atul Aggarwal, Director, Sterling Tools, “We had to cope with the task of supplying 2,000 different types of fasteners to 80 customers on a monthly basis, ensuring scheduled completion of different manufacturing processes, maintaining an inventory list of 20,000 raw materials, and then meeting the delivery deadline.” All these factors led to a demand planning system being deployed across the enterprise, which has helped its teams collaborate in product development and manufacturing.

For a shorter product life-cycle

“Electrical and automotive companies have a need to manage complex and shorter product life-cycles. The fusion of mechanical components and electronics in the automotive sector has dramatically changed product development life-cycle management. Changing customer needs and preferences for newer models have resulted in shorter product life-cycles,” observes Shankar. For example, Tyco Electronics (which provides automotive wiring) has set up shop close to where Tata Motors manufactures the Indica.

Tier-I vendors have to participate in the product development process actively to consolidate their position as preferred vendors with their principals. Neither the principal nor the OEM nor the Tier-I vendor is aware of the likely scale of production of the new products that are likely to emerge. For this reason, a Tier-I player’s product development is based on the flankers of existing production facilities, and is invariably based on incremental processes or operations which are adjuncts to existing plant and machinery. Shankar suggests that to start with a company is content to live with non-balanced production lines, but it soon realises that its cost of production is higher owing to such inefficiencies. This realisation dawns as volumes pick up, hence the need to have a flexible manufacturing system and agile production facility. Companies are becoming more innovative and are working towards collaboration in R&D and manufacturing.

Shankar makes another interesting point: “SCM can be used to maintain product margins.” He observes that businesses are emphasising transportation, warehousing and logistics where the value of the finished product is low and the conversion ratio from raw material to finished product is also low. Sometimes the emphasis is on inventory, when the ratio from raw material to finished product is high, as in the case of a Bangalore-based diamond company. This company starts manufacturing after an order is received, and delivers the product in four days; this model reduces the inventory of finished products and its associated costs. “The challenge is not to manufacture, but to start manufacturing when the order is received so that inventory costs are low,” says Shankar.

According to Chan of Infor, “As organisations move from production efficiency to product innovation and time-to-market efficiency, the emphasis of competitiveness has moved from having the best production facilities to having the best product life-cycle management capability. Thus, production is outsourced as it is now considered a non-core activity. Conversely, as product life-cycle management becomes a core capability, organisations are innovating at a faster pace all the time, thus reducing product life-cycles dramatically. This creates a vicious cycle whereby customers demand new innovations and products at a faster pace, and the high margin usually derived from the introduction of each new product gets squeezed and reduced (shorter product life-span).”

As competitive pressures rise and demand drives production, organisations look to their SCM solutions to increase efficiency and drive new revenue opportunities. Key areas of SCM growth will be warehousing, transportation and demand management, but with integrated analytics, event management and collaboration as highly sought-after additions. All of this leads to the full integration of an end-to-end SCM solution that improves profitability, competitiveness and growth.