Today's supply chains aren't ready for the emerging demand economy
We are at the forefront of a profound shift in the ways of commerce: The economic engines of supply and demand are trading places. Demand-based economies are emerging in the United States and Europe. The business of buying is shifting from a centuries-old supply driven construct, moving rapidly to a customer-centric one.
The signs are abundant, once you begin observing. The change is being fueled by the increasingly knowledgeable consumer who has more ready access to an enormous amount of product, price, service and delivery information in combination with ever-lower cost products available from a highly diverse set of sources.
In a supply-based economy, production dictates what is available to purchase, and cost is the key economic driver. Conversely, in the demand economy, customers will dictate what they will purchase, and value is the key. Most businesses are not ready — not primed for managing to demand and availability, but only for optimizing cost and supply. And being the low-cost producer or having the highest market share — strategies which made companies win in the 1980s and 1990s — will no longer succeed. Time-advantaged strategies will win when well defined for a specific market space.
A demand economy looks vastly different from the vanishing supply economy. Customers will insist upon specialized products for unique situations and tastes. Product-line complexity will be broad. Demand variability per product will be higher by orders of magnitude. Seemingly excessive service levels and response times will be the norm. Free cash flow will be under extreme pressure, as customers stretch payments, specialized suppliers from the Pacific Rim ship only on cash, and slow-moving inventory expands.
In such an environment, the supply chains as designed and installed over the past decade in most companies are rapidly becoming obsolete. These supply chains were designed to optimize costs, not value. Long replenishment lead times were tolerated at the expense of the flexibility and responsiveness that soon will be prized. Suppliers are forced to react to a high velocity of manufacturing resource planning (MRP) change orders, rather than become collaborative partners. Supply chains are sequential, linear and resistant to complexity, the latter being the element the demand economy values most.
The supply chain is a delivery mechanism for the old, expiring economy. Continuing to rely on current practices will substantially erode service levels and will make total cost to serve prohibitively high. The problem is an outdated approach toward planning logic and a chain mentality, both of which inhibit collaboration and cripple flexibility. The result is a 10- to 15-percent premium on per-piece purchase price, as well as ballooning inventories, which in turn leads to truncated sales of high demand and seasonal items.
An entirely new operating approach is required to turn emerging problems into strategic advantage, taking a positive step toward sustainable profitability and increased wealth for all stakeholders: planning around networks, rather than chains. These networks will be characterized by orchestration of the actions necessary to meet customer demands. Adaptability, collaboration and networking will be the key design objectives and will become increasingly more valuable. Time advantage will replace market-share advantage as a competitive strategy. Likewise, customer value will replace cost advantage as the key performance metric. There are major implications for organization structure, systems, external relationships and the physical side of the supply operations.
Such networked planning can decrease purchase cost, which amounts to half the cost of goods sold. The alternative — staying cost oriented and supply driven plays right into the hands of the super-low-cost production engines in the Far East. The changes required are extensive and will touch many areas of your organization. Fortunately, implementation is more counter-intuitive than difficult to accomplish. A new, more customer-centric thinking process is essential, along with a fundamental change in culture.