Preparing for the Reemergence of Demand

Many economic indicators point to new growth in consumer demand in the coming months. But when will it happen? And is your supply chain equipped to handle it?

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Businesses around the world are closely monitoring market trends and economic indicators, watching to see if consumers are feeling confident again — and if demand is beginning to rebound.

While the reemergence of demand is certainly welcome, it's also fraught with risk. Raw materials and transportation prices will likely increase, and companies will have to ramp up production with a reduced workforce, constrained capacity and lower inventory levels they established during the downturn. A recent study by AMR Research revealed that 44 percent of executives believe their greatest risk in 2010 will be managing the economic recovery, while only 23 percent are concerned about the effects of a continued recession ("Better Times Right around the Bend? Executives Downgrade Supply Chain Risks." AMR Research, September 28, 2009).

As we prepare for the reemergence of demand, it's critical to recognize that "business as usual" is a thing of the past. Our world has dramatically changed in the past two years. Companies must learn to approach the marketplace differently, poised to react to any future demand shifts with agility and responsiveness. Businesses must actively prepare to reenergize their supply chains to meet upward demand trends while mitigating exposure to financial risks in a market characterized by unpredictability. To effectively manage these risks, every business needs to take a hard look at its approach to the marketplace and come away with changes in mindset appropriate for today's radically changed world.

Replace "Planning for Execution" with "Planning for Discovery"

One of the most significant shifts involves rethinking the purpose of planning and forecasting activities. Businesses of all types should move away from the idea that the goal is to achieve the most reliable execution plan possible and instead recognize that real value and agility result from "planning for discovery."

If the last two years have taught us anything, it's that even the best forecast is still only a forecast. The question executives should ask is not, "Will our forecast be wrong?" but instead "When will we first know the forecast is wrong and how will we correct our course?" In today's volatile markets, plans can no longer be thrown over the wall periodically to be executed in an open-loop, single-direction manner — feedback and correction must become part of the process.

In response, many businesses have created plan-do-check-act (PDCA) cycles that continuously monitor supply chain performance and make adjustments as needed. Before the economic downturn, most of these organizations were investing significantly in the "plan" and "do" phases: creating elaborate supply chain plans based on historic demand levels and executing them. But as demand uncertainty increased, these plans rapidly lost relevance and companies were left scrambling to re-plan and re-execute.

In the new business world, the final stages of the PDCA cycle — "check" and "act" — have become as important as the initial planning and execution phases. Instead of being rigid and difficult to change, today's plans must be flexible enough to accommodate the constantly changing parameters under which supply chains are operating.

The new proactive paradigm of "planning for discovery" takes PDCA to the next level. Not only should companies monitor performance against actual demand, they should also answer more complicated questions: "Were our assumptions correct? Did we anticipate and manage risks effectively? Did we apply the right levers to correct our course?" This is a much more sophisticated process than simply measuring forecast accuracy.

In addition to anticipating disruptions, the new paradigm of PDCA requires learning opportunities be built into plans. Rather than simply making corrections, true supply chain leaders use disruptions as chances to drive ongoing learning through systematic postmortems of results. As they do so, they are improving future assumptions, risk management strategies, process playbooks and other plan components as part of a closed-loop, ongoing process of discovery.

While the typical organization may require a dramatic mindset shift to make these changes, new technology solutions are emerging to support this process, from early warning systems to process playbooks that gather inputs from across the end-to-end supply chain and respond with corrective actions. These tools are growing in sophistication, reflecting the emerging needs of a volatile business world. Some supply chain events trigger an automated response that redefines the policies that govern the entire value chain, while other events may be escalated for further investigation by executives. Often, these investigations — triggered by performance exceptions — can reveal subtle, but significant, demand shifts in the marketplace.

One company that uses i2 solutions to monitor buying behavior offers a good case in point. Although its portfolio consists of thousands of individual products, i2 helps the organization discover changes in buying patterns for specific SKUs. Occasionally, these "micro" changes can signal "macro" marketplace trends. For example, i2 solutions uncovered a change in demand for just seven parts, which triggered an in-depth root-cause analysis. This investigation suggested that a broad shift in demand was imminent, and the entire value chain was able to prepare in advance. This kind of organizational insight and learning is preparing many businesses to not just survive but thrive in today's unpredictable environment.

Focus the Entire Value Chain on the Single Moment of Truth

In addition to changing their fundamental approach to planning, supply chain leaders are making a second shift. They are realizing that the entire value chain must work together to support a single moment of truth: the moment when a shopper enters a retail aisle, finds a product and makes a decision to purchase it. Understanding consumer behavior has traditionally been viewed as a sales and marketing responsibility of the brand manufacturer, but the economic downturn clearly demonstrated that the entire value chain is impacted by changing end-user preferences and actions. Every stakeholder in the value chain, from suppliers to channel partners, must focus on the buying decision — the pivotal moment that represents ultimate success or failure.

How can companies better prepare themselves to win at this all-important moment? A number of core competencies within the business must be aligned to create a value chain that is truly "shelf-aware," including:

Focus on consumer demand. In the traditional demand-driven paradigm, all participants waited for demand signals from their own immediate customers. Today, all players in the value chain need to develop their own firsthand understanding of broader consumer behaviors and preferences. Forward-looking organizations are using a variety of sophisticated means — including real-time, in-aisle data sent via mobile devices and "street intelligence" about competitor promotions — to sharpen their focus on end-user demand.

Intelligent use of channel data. Value chain partners enjoy greater access to channel data information than ever before, but most struggle to make sense of it. By applying proper analytics, channel data can be translated into valuable information. For example, a misalignment between sell-in and sell-through trends can signal to upstream partners broad market changes.

High in-stock availability. Even the most appealing product will not win the sale unless it is actually on the retail shelf when shoppers enter the aisle. High in-stock availability — at a relatively low risk — can be achieved via inventory right-sizing strategies and pull-based replenishment schemes that take an integrated view of the value chain. Channel managers must work to build retailer trust by demonstrating both forecast reliability and stocking flexibility so retail partners are confident that products will be on the shelf without excess inventory on hand.

A truly shelf-aware and consumer-focused value chain enables all participants to have the agility necessary to shift their supply chain strategies — including their inventory and replenishment policies — to reflect what is actually happening in the retail aisle and at the cash register today. This mindset shift places new demands on most businesses. The good news is that innovative processes and technology solutions are making it easier to focus on consumers and align the end-to-end value chain against the ultimate "moment of truth" — ensuring that the end result is in high availability and an attractive selling proposition.

Looking Ahead: Assume a More Proactive Stance

While many businesses have suffered setbacks in the last 18-24 months, the economic downturn has provided an opportunity for every organization to reexamine its fundamental supply chain principles. The greatest lesson we can collectively learn is to take a more proactive posture as we look toward the future — not waiting for the next dramatic change, but anticipating it and ensuring that we are poised for immediate action. Every business can proactively create a closed-loop learning organization that makes agile supply chain adjustments in response to market changes, and that can capture knowledge to improve future assumptions and results. In addition, value chains can incorporate a consumer focus that senses upturns and downturns before they happen to avoid being unprepared. These changes will separate the leaders from the followers as we continue to navigate this uncertain consumer marketplace.