[From iSource Business, December 2002/January 2003] As organizations continue to take competitive control over consumer and business demand, successful companies will run their businesses according to a demand driven philosophy. In fact, they'd rather you referred to their business management strategy in this area as a demand chain, not a supply chain.
Organizations have nearly done all they can to maximize cost cutting efforts, and now the rallying cry in business is "build revenues." This newfound competitive nature that typifies the "demand-driven" company is indicative of the fact that they've changed the way they plan, forecast, expend capital, market and service customers, and manage their inventory.
In fact, Kent Allen, research director for analyst firm Aberdeen's sell-side and demand chain management practice, says simply, "The demand chain is really looking at the completed product, preparing and transacting the sell of it in the most efficient manner to make a profit." Key to this is the widespread use of Internet technologies combined with the challenging sales environment, stemming from the lingering global recession, he suggests.
"Traditional supply chain automation focuses on the coordination of materials," adds Kosin Huang, senior analyst for the Yankee Group, in her recent report "The Strategic Opportunity for Demand Chain Management: Key Processes Defined." "What's needed at the end of the value chain is an integrated set of demand chain solutions that manage the flow of finished goods for trading partners from manufacturers to wholesalers, distributors and retailers to end consumers. They have a need to tackle business processes such as pricing and promotions optimization, configuration, order capture, demand planning and replenishment, and order fulfillment. These processes roll up into four major categories: demand stimulation, demand capture, demand interpretation and demand fulfillment."
Jennifer Chew, research analyst for Forrester, describes a need to radically revamp how demand management software is even structured. "Today corporations follow the fallacy of completely re-planning every time there is a change in the demand or supply chain when, in fact, what they need to be able to do is to respond in small ways to small changes. They can't do that in the current environment."
In what Forrester labels Adaptive Supply Networks, Chew explains that the types of software programs that companies rely on, like vendor-managed inventory (VMI), are still not being driven by end-consumer consumption. "The current programs are based on consumption in the middle of the demand chain, such as the distribution centers, as opposed to actual point-of-sale data at, for example, Wal-Mart."
So, what's it going to take to get us to a demand chain model driven by true B2B or end-consumer demand? While the road to demand management nirvana may be paved with potholes, at least there is a road and there's even a map included for directions.
The Journey Begins
Since it's more time consuming today to build forecast consensus around true customer demand, the challenge to build it right is greater than the business world realizes.
Forrester's Chew uses the checkout aisle at the grocery story to bring home the point. In basic terms, if you watch the checkout clerk at the grocery store scan six cans of cat food, odds are you'll see her scan one can six times, rather than pick up each can individually, look for the bar code and then scan it. As the customer, you might have purchased two chicken cans, two fish cans and two beef cans. However, if the store records what was purchased according to the one can that was scanned, it will show its inventory is down by six cans of fish-flavored cat food.
"So even though you might have point-of-sale data being fed back into a demand management application it's very likely the system contains inaccurate data," says Chew.
Although the inventory dilemma is definitely a problem for retail, they might take a hint from what's been happening in the distribution and manufacturing sector. A relatively new technology called radio frequency identification (RFID), which can provide robust data that cannot be incorrectly identified, is being used by companies like Ford Motor Co. to track its vehicles through the supply chain from the time they are ordered to the time they're delivered. Some retailers have already decided to test the benefits to the technology, like Gillette for example, which has started attaching RFID tages to is razor packages to be scanned at the checkout. Yankee's analysts are quick to remind, however, we are still several years from seeing this become a mainstream practice. (For more on RFID technology, see the article "Needle in a Supply Chain Haystack on page 25 of the January 2002 issue of iSource Business magazine).
Directions for Adaptation
Forrester Research advocates that firms take three sequential steps to integrate solid demand management processes into their businesses to achieve quick response time to customer demand. In other words, so they can quickly adapt to demand changes.
First, build consensus-based forecasts. Says Forrester's October 2002 TechStrategy Report, "Demand Forecasting Done Right." "Firms must streamline and expedite consensus-building processes for forecasts to accommodate consumption patterns," the company said. If an organization cannot forecast consensus within hours, not days or weeks, then the forecasting can become useless. Bausch & Lomb, using Manugistics, updated its processes to do just that; it can now obtain forecast consensus in hours by combining baseline data sources into one model.
After speeding internal forecasting processes, Forrester advises firms to drive demand signal accuracy, focusing on improving signal accuracy for baseline demand. They point out that an organization will not be able to migrate from a forecast-based to a consumption-driven supply network until it can rely on accurate demand signals. And since point-of-sale data is often inaccurate, firms will be required to gain demand visibility at upstream distribution points in the supply chain, as well.
Finally, corporations should adjust supply and distribution levels against the more accurate demand forecasting and signal accuracy. Says the Forrester report: "Once baseline forecasts embrace real-time demand, firms must use those consumption-driven forecasts to shape inventory and production decisions. With this alignment of consensus forecasting and demand signal accuracy, global consumer products company Kimberly-Clark can make simple, quick adjustments to inventory placement on its product, for example, to take advantage of a successful weekend promotion."
And because companies have the ability to make simple adjustments in demand through the right systems, Forrester predicts that 2003 should be the year manufacturing will become more flexible so firms can pilot consumption-driven production instead of simply building inventories and then worrying about carrying costs. As an example, Forrester says, "First, with VMI orders of short-cycle re-occurring goods, manufacturers like HP can link specific orders to production changeover and ship product from the production line directly to retailer stores." Kimberly-Clark and other consumer goods retailers also use collaborative planning forecasting and replenishment (CPFR), which moves beyond VMI and involves collaboration between the consumer goods retailer and a buyer such as Wal-Mart.
Throughout the analyst community "adaptive" has become the word of choice when discussion centers on demand chain management. At its core, they advocate applications that will help a firm's demand management efforts turn on a dime without going back to square one when assessing forecast data and inventory levels.
In addition, there's lots of talk about demand chain management taking front and center stage, similar to what's happened with supply chain management over the last several years. "The important difference between demand chain management and supply chain management is that demand chain management's role is to transfer demand from markets to suppliers, while supply chain management transfers materials and goods from suppliers to markets or consumers," says The Yankee Group's Huang. "This reflects a pull approach for demand chain management versus a push approach in traditional supply chain management."
Huang goes on to explain that in demand chain management, the primary concern is with the management of finished goods and not materials management. "Companies independently have tackled pieces of demand chain processes, whether it's demand planning, order management or pricing optimization. An integrated demand chain management solution is distinguished by its ability to address the relationship between customer-facing systems and systems that touch inventory, between order management and lead management systems, and between partner management and demand forecasting applications."
Today, the traditional supply chain applications help plan demand and manage inventory internally against the middleman's demands stated above. However, they don't manage order and inventory management outside their four walls, and they don't allow demand to be driven by the customer.
But as companies come to realize that you cannot create demand you must obey it tools reflecting that mindset will be evident in the coming year. According to the analysts, 40 to 50 percent of the big firms have some type of demand management software in place. In a few years, they suggest that all major firms will be dependent on demand management software that helps organizations quickly respond to demand.
Says Aberdeen's Allen: "Leading companies in numerous vertical sectors are now deploying sell-side applications that automate processes throughout the demand chain. In doing so, they are speeding up cycle times, eliminating redundant activities, extending market reach and, most importantly, enabling the buying community with more choices and greater input into, and control over, relevant business processes."
With regard to the enterprise resource planning (ERP) players, most of the transactions processed across the demand chain are taking place in firms' ERP applications. As a result, ERP players like SAP and PeopleSoft will create adaptive demand management portals, embedding point solution providers like a Celarix or Vizional for connectivity and corrective intelligence. Forrester considers PeopleSoft to be out the gate first, possibly "buying embedded Vigilance and suffering Manugistics for expertise in event management, VMI and replenishment." Additionally, Forrester suggests SAP's methodical approach will stall acquisitions until late 2003, when they predict a niche player, such as Vizional, will be bought.
So, overall the ERP suppliers can be the single points of reference for an end user, consolidating all demand management activities into a single activity.
"Key activities can and should happen in the best-of-breed providers," says Chew. "The cool functionality can be embedded in the startups. Taking the leading-edge thinking from these smaller enablers and embedding it in the ERP suppliers will create valuable solutions for organizations across verticals."
Based on this, look for Viewlocity (recently acquired by SynQuest), Yantra and Celarix to exhibit leadership in both their current offering and product strategy because of their ease of integration, personalized event management and process synchronization strategy. Yantra and Escalate are also valuable for helping with collaborative fulfillment.
With a strong customer base, Descartes leads in shipment management capabilities for fulfillment requirements while WorldChain and Exemplary are up-and-comers. Their strengths lie in trend analysis and ease of integration and shipment support.
Logistics-centric players Elogex and Schneider Logistics provide good event management and alerting features, according to Forrester. Valdero and Vizional have robust agent and trending features. The market leaders in the space include Manhattan Associates and RedPrairie, as well as SAP's logistics software partner Catalyst, EXE, Optum, HighJump and ProVia.
For spare parts services, Forrester evaluates Optum and SynQuest's Viewlocity as strong players for multisite spare parts allocation and management. Manugistics and i2 should also be considered.
Other players to take a serious look at in the demand management space include G-Log for global-shipment resolution, i2 for order notification and tracking; IMI and HAHT Commerce for order and data management; Manhattan Associates for adaptive execution, technology strategy and financial viability; and Vigilance for event tracking and demand resolution. Additionally, Prescient Systems and SmartOps are a consideration for basic forecast demand and inventory requirements.
Says the Yankee Group's Huang: "Does the rise of demand management spell supply/demand nirvana? Contrary to the notion that one day supply will meet demand, the value may not actually reside in bridging the two sides, but simply in automating each end of the value chain so that the order-in and the order-out process can be more efficient. Companies will have better visibility as incoming orders can inform replenishment, inventory and fulfillment planning activities."