Demand Driven Supply Chain

A Demand-driven supply network (DDSN) is one method of supply chain management which involves building supply chains that are responsive to varying demand signals. The main force of DDSN is that it is driven by customers demand. In comparison with the traditional push supply chain, DDSN uses the pull technique. It gives DDSN market opportunities to share more information and to collaborate with others in the supply chain.

DDSN uses a capability model that consists of four levels. The first level is Reacting, the second level is Anticipating, the third level is Collaborating and the last level is Orchestrating. The first two levels focus on the internal supply chain while the last two levels concentrate on external relations throughout the Extended Enterprise which is achieved by ERP applications extending through partners supply chains.

In Demand driven chain, customer activates flow by ordering from the retailer, who reorders from the wholesaler, who reorder from the manufacturer, who reorder raw materials from the suppliers. Orders flow backward, up the chain, in this structure.

The property of being demand-driven is one of degree: Being “0 percent” demand-driven means all production/inventory decisions are based on forecasts, and so, all products available for sale to the end user is there by virtue of a forecast. This could be the case of fashion goods, where the designer may not know how buyers will react to a new design, or the beverage industry, where products are produced based on a given forecast. A “100 percent” demand-driven is one in which the order is received before production begins. The commercial aircraft industry match to this description. In most cases, no production occurs until the order is received

Many companies are trying to shift from a build-to-forecast to a build-to-order discipline. Chase production planning strategy that includes meeting the demand at any given point of time is used over the level strategy where production happens at constant speed with full capacity. Chase strategy is boosted with subcontracting, Just in Time (JIT), KANBAN, Advanced Demand Planning and S&OP (Sales and Operations Planning) to increase the response time and satisfy the demand variations.

Key characteristics of Demand Driven Supply Chain are:

• Product movements driven by actual demand/consumption

• Real-time demand/supply visibility across partner tiers

• Inventory managed to dynamic target operating levels

• Early identification of demand/supply continuity issues before they impact production

• Single demand signal shared across partner tiers – one version of the truth

Demand driven supply chains align their planning, procurement, and replenishment processes to actual consumption and consumer demand. Becoming demand driven allows a company to be more responsive to consumer needs while increasing profitability.

Supply chains are becoming more complex as companies expand their geographic footprint, increasingly leverage outsourced manufacturing, and expand their channel partner network. Supply chain executives are looking for ways to obtain real-time, transparent visibility across all tiers in the supply chain so as to better align supply with actual demand to help reduce supply disruptions and capital expenses.

In order to evaluate whether our supply chain network is demand Driven, we must ask following questions:

• Do you have visibility to your total demand and supply picture at any point in time? Does this visibility extend beyond your first-tier partners?
• Are all material movements driven by actual demand or by forecast?
• How quickly can you identify and respond to a potential supply continuity issue?
•  Does your entire supply chain function as one virtual organization with everyone working with the same information, processes, and metrics?
• Does it take longer than a day for demand changes to propagate to your second-tier  suppliers? 

      Hence Demand driven supply chain prepares the organization for the new era of fluctuating demands and uncertain supplies by leveraging the benefits of advanced forecasting, S&OP, Trade planning, JIT, KANBAN, Partner Collaborations and Lean enterprise.

Crafting the Digital Enterprise Internally

Next Generation Digital Enterprise leverage

• The unique methodology to engage and determine the audiences across multiple media platforms
• Active participation and knowledge sharing across various groups
• Interactive initiatives and drives across organization
• New insights that can be obtained from this valuable data
• Know how this new data can be used to demonstrate the value of your audiences and sell more effectively

Executives in all industries are using digital advances such as analytics, mobility, social media and smart embedded devices as well as improving their use of traditional technologies such as ERP to change customer relationships, internal processes and value propositions. It helps to —speed up the day-to-day processes of learning, planning and sharing knowledge delivering all the services online.

—Key Facts of Digital Transformation in Major Industries :

• Roughly 30 per cent of firms are engaging in extension or transformation with mobile, social media or analytics technologies.
• Factories including both mobile and analytics technologies to improve production significantly.
• Analytics is used by 72 per cent of respondents, mobile and social media by 62 per cent of organizations, and embedded devices by 24 per cent, despite their relative nascence within most

Key Facts of M&E (Media & Entertainment) Companies:

• Digital revenue already exceeds 50%  of their company revenue for digital leaders
• 55% of all respondents rate internal use of mobile technology “very” or “extremely” important.
• 57% of top-line revenue will be derived from digital channels by 2015
• 68% say smart mobility will “moderately” or “substantially” drive revenue growth in the next 2–3 years.
• CTOs (24%) and CEOs (23%) have the most responsibility for digital vision and strategy.
• 49% of digital leaders say they are using second-generation mobile technology to develop products and services.
• Only 19% have deployed second generation big data analytics solution in generating revenue
• 64% of digital leaders cite creating a culture of innovation as top strategic priority

Approach for Digital Transformation:

• Establish a Cross Functional Digital council
• Appoint the digital leadership
• Define landscape
• Legal guidance
• Understand company vision & social media strategy
• Benchmark and Measure

Envision of additional features and Recommendations:

• Dashboards for collaboration and resource sharing
• Easy-to-use interface for fast user adoption
• Open API for integrating 3rd party content or self-made tools
• Integration with Management Information Systems
• Innovative project pages, digital tests, online discussion forums, blogs and video recorders 
• News programs, online exercises, encyclopedia searches,  images, videos, white papers
• Automatic reports to save time and effort
• Leverage the internal lessons learned for building client solutions
• Mobile support for all internal applications

Digital Transformation in the Utilities Industry:

• Utilities have only adopted digital technologies in specific areas of the customer  experience
• Analytics is not widely used to enhance either the customer experience or internal operations 
• Untapped opportunities may exist in worker enablement and process digitization
• Data and integration issues may present challenges in other areas
• Utilities’ digital transformation management practices are relatively more mature than their use of digital technologies

Demand Planning

Demand planning is a process of managing all the demands of the products to enable the Master Scheduler / Planner to plan the supply. The two main components of the Demand are ‘Forecast’ and ‘Sales Order’.

Kinds of Demand:

Dependent Demand: It is the demand for the product caused by the demand of other products. E.g. demand for the raw material like steel and rubber increases in case the demand for automobiles is increased.

Independent Demand: If the demand of the product is not dependent on any product, then it is independent demand. Demand for the automobiles in the above example is the independent demand.

Following are the sources for demand:

·         Referrers & Consumers
·         Dealers & Distributors
·         Intercompany
·         Service needs

Demand planning covers the following activities:

·         Forecasting
·         Order entry / Promising,

·         Branch Warehouse Requirements,
·         Interplant / Inter-organizational requirement,
·         Service Parts requirements

Demand planning also helps in long-term and short term process selection, capacity planning and facility planning.

Key Demand Drivers:

Customers: Customers are king in today’s era. Customer preferences, general perception, word of mouth etc. play a key role in demand generation.

Competitors: New competitors, competitor’s differentiation in product and technology are major threats to the business.

Economic Policies: State and Central government policies has major impact on the customer spending and hence on the demand of the products.

Regulatory Policies: Legal guidelines set by the authorities can increase or decrease the demand.

Order winners or Qualifiers: Customer expectations are based on cost, quality, delivery and after sales service are the order qualifiers. If the product / service have special characteristics that attract the customers over competitors are the order winners.

Marketing strategy: Determining the marketing segment, developing market niches, analyzing competition and increasing the market share are some of the key marketing strategies that boost the demand.

Customer Relationship: In today’s cut throat competition, customers are continuously required to be informed about the new products, sales, schemes, annual maintenance discounts and so on to develop loyalty.

Characteristics of Demand:  Trend, Seasonality, Random variations, Cyclical

Demand Planning consist of collation of data, selection of appropriate techniques, forecasting and then taking corrective action if actual demand varies significantly.

Demand Planning objectives:

• Planning of long lead time resources like assembly line installations, capital equipments
• Planning of medium or short term resources like material, human resources etc.
• Shorten customer delivery time

Key forecasting principles:

• Forecast will never be accurate
• Forecast shall include estimate of error
• Forecast is more accurate for shorter periods
• Forecasts are more accurate for a family or group of products

Forecasting Methods:

·         Qualitative Techniques:

o   Grass roots

o   Market research

o   Panel consensus

o   Historical Analogy

o   Delphi Method

·         Quantitative Methods

o  Extrinsic technique: Certain set of external factors are taken into consideration like independent demand, GDP growth, agricultural production, steel production, oil prices, housing sector growth etc.

o    Intrinsic techniques: These use the historical recorded data for future estimates.

§  Average demand

§  Simple moving average

§  Weighted moving average

§  Exponential smoothening

§  Seasonal index

§  Regression Analysis

Planning Cycle

The base for the entire planning is the strategic business plan. Strategic business plan incorporates all the plan of marketing, finance and production. These are high level plans based on overall organizational perspective and devised by top management. they span across 2 to 10 years and talk about the strategic direction of the company.

Business Planning is based on the strategic plan and define the objective of various functions at an aggregate level. These are more financial oriented and address the sales, manufacturing, finance and other activities to achieve the strategic objectives. The horizon extend from 12 to 18 months.

Sales and Operations Planning include the planning of the manufacturing facilities required to support the business plan. It determines the overall level of manufacturing output broken down by quarterly / monthly time periods and ensures the integration between the production function and business plan. S&OP is responsible to determine the production rates, desired inventory levels and resource requirements for the end items / product families. Rough Cut capacity planning at this level helps in identifying and evaluating the bottleneck resources involved in the achieving production schedule.

Material requirement planning drills down further the requirement of the number of manufactured and purchased components. it is a plan for determining the production and purchase of the various components of the end items to support S&OP. Capacity requirement planning determines the detailed requirement of the labor and equipment resources needed to achieve the production of components as per MRP.

Financial Fundamentals for SCM

SCM Practitioners need to understand the cost structure of every organization in supply chain. Following diagram shows the impact of cost structure of one entity on the other entity.

An important activity in managing the SCM is to reduce costs in the entire supply chain network. In order to achieve this, first we need to understand the inventory valuation or costing methods that help to arrive at product cost. Following are some standard costing methods used across world:

• Standard Costing method: In this method, the standard cost of the items is defined by cost accountant and it is updated periodically to reflect the changes in the actual prices.

• First in First Out (FIFO): The cost of goods sold is based upon the cost of material bought earliest in the period, while the cost of inventory is based upon the cost of material bought later in the year. This results in inventory being valued close to current replacement cost. During periods of inflation, the use of FIFO will result in the lowest estimate of cost of goods sold among the three approaches, and the highest net income.

• Last in First Out: The cost of goods sold is based upon the cost of material bought towards the end of the period, resulting in costs that closely approximate current costs. The inventory, however, is valued on the basis of the cost of materials bought earlier in the year. During periods of inflation, the use of LIFO will result in the highest estimate of cost of goods sold among the three approaches, and the lowest net income.

• Weighted Average: Under the weighted average approach, both inventory and the cost of goods sold are based upon the average cost of all units bought during the period. When inventory turns over rapidly this approach will more closely resemble FIFO than LIFO.

Following are the major steps in the accounting cycle that will help to understand the fundamental aspects of accounting:

• Analyze Business Transactions
• Record entries in Journal
• Post entries to Ledger
• Prepare a Trial Balance
• Prepare Adjusting entries and Post to the Ledger Accounts
• Prepare Adjusted Trial Balance
• Prepare Financial Statements
• Profit and Loss Statement
• Balance Sheet Statement
• Closing entries are made

Balance Sheet:

It is a financial statement that summarizes organization’s financial position at a specific point of time. It’s a numeric illustration of the balance between a firm’s assets on one hand and its liabilities and owner’s equity on the other hand in a given point of time.

To Analyze the cost structure of the Supply Chain Network, following financial ratios are widely used:

Liquidity Ratios: Liquidity Ratios are used to examine the firm’s ability to meet short-term cash outflow

needs.

Profitability Ratios: Profitability Ratios are ratios used to measure the profitability of the firm.

Activity Ratios: Activity Ratios are ratios used to measure the efficiency with which the firm conducts its

business.

• Inventory Turnover: measures number of times that average inventory turned overduring a period of time. Inventory Turnover Ratio = Cost of Goods Sold (COGS) / Average Inventory (inventory of finished goods)
• Accounts Receivable Turnover: the average length of time it takes to collect the sales made on credit. Accounts Receivable Turnover =Sales/Average Accounts Receivable (Sales/Accounts receivable)
• Days (Inventory/Receivable) Outstanding: measures number of days each is outstanding. Days (Inventory/Receivable) Outstanding =365/Inventory Turnover; 365/Accounts Receivable Turnover
• Total Asset Turnover: a measure of the utilization of all the firm’s assets. Total Asset Turnover = Sales/total assets during period

Leverage Ratios: Leverage Ratios are ratios used to measure firm’s ability to meet its long-run debt service obligation.

Supply Chain Management Basics

Supply Chain: The supply chain encompasses all activities associated with the flow and transformation of goods / services from the raw materials stage (extraction), through to end users, as well as the associated information flows.

SCM is the integration of all the activities in the supply chain to achieve a sustainable competitive advantage. Supply Chain can be broadly classified of comprising of three networks – Supplier, Firm and Distribution.

Logistics: Logistics, also called as Physical distribution, focuses on the physical movement and storage of goods and materials. Logistics is that part of the supply chain process that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption.

Elements of Supply Chain : Customers, Producers, Suppliers

Suppliers > Produers > Customers / Suppliers > Manufacturing Facility > Customer

Three distinct phases of evolution of SCM:

Pre-1970 era:

• Supply Chain was not considered as a competitive unit. Companies seek more profit by maneuvering their suppliers and customers.
• Scientific methods like EOQ and SPC were applied.
• Companies attempted at Vertical integration – themselves

1970 – 1980 era :

•   Holding inventory becomes key due to Oil shock
•  TQM and JIT practice becomes popular in Japan
•  Distribution is not yet the focus area
•  MRP systems gain popularity in US and Europe

Post 1980 era :

•  Inventory profits dry up as inflation reigns in US manufacturers embrace JIT philosophy. JIT pushes inventory upstream.
•  Lower setup times, lower batch quantities result in reduction in lead times and drastic improvement in customer responsiveness.
• Suppliers and customers considered as part of the organization network. We against them philosophy fades away.
• MRP systems give way to MRP II systems, ERP and then to advanced supply chain systems involving optimization.

21st Century era :

•  Advanced Supply Chain Planning methods due to globalization
• Combination of Advanced MRP for finished goods and critical assemblies and JIT for raw material / common assemblies inventory
•  Evolution of new philosophies like TOC (Theory of constraints), Constraint based planning, Global Supply chains, Global Procurement, Hub and Spoke distributions etc.

 Business Processes that connect various elements in the SCM:

• Design to Release: Product development and Engineering
• Supply Chain Planning: Purchase planning & Production Planning
• Procure to Pay: Sourcing and Purchasing of the components
• Production Plan to Schedule: Detail scheduling of the resources and jobs / batch
• Schedule to Build: Production / Manufacturing of the Product
• Order to Cash: Order orchestration and Order fulfillment
• Demand Management: Forecasting and Demand planning
• Customer Relationship Management: Maintaining and increasing the customers

Production Environments:

• Design / Engineer to order: ETO environment caters to specific customers’ requirements. The process starts with the preparation of unique / highly customized engineering designs of the product, with the close involvement of the customer. Delivery lead is maximum in this environment. Typical product topology is project based.
• Make to Order: In this environment, the final product is made after the receipt of the customer order. Standard components are purchased / manufactured and are usually stocked as raw material inventory. On receipt of customer orders, the product is made from these standard components and the process may include minor customizations of the design. Lead time is less than Engineer to order due to lack of significant change in the design. Production is project based or in small batches.
• Assemble to Order: In this environment, the standard components and sub-assemblies are manufactured and stocked in the form of component / sub-assembly inventories. Delivery lead time is the time required to assemble and ship the product. Production is in batches like that of Automobile industry.
• Make to Stock: In this environment, the products are completely manufactured and the finished goods are stocked as end item / finished goods inventory. On the receipt of customer orders, the goods are packed and shipped to the customers and hence the delivery lead time in this environment comprises of only the shipping time.

Supply Chain Domain Certifications

Following are major domain SCM Certifications:

APICS Certificates: The Association for operations management:

1) CPIM - Certified in Production & Inventory Mangement

The APICS Certified in Production and Inventory Management (CPIM) program is recognized worldwide as the standard of professional competence in production and inventory control and supply chain management. Obtaining APICS certification shows a commitment to the profession that leads to a sense of accomplishment, demonstrates value to the employer, enhances earning potential, and provides a path to career advancement. The APICS CPIM program is divided into five process-oriented topic areas to provide participants with the best possible educational assessment and knowledge base.

 Entry Module 

•      Basics of Supply chain Management

  Core Competency Modules

•       Master Planning of Resources
•       Detailed Scheduling and Planning
•       Execution and Control of Operations

  Capstone Modules 

•       Strategic Management of Resources

2) CSCP: Certified Supply Chain Professional

The APICS Certified Supply Chain Professional (CSCP) program is recognized worldwide as the premier supply chain management education and certification program.

The APICS CSCP program takes a broad view of operations, extending beyond internal operations to encompass the entire supply chain—from supplier, through the company, to the end consumer. The program provides professionals with the knowledge necessary to understand and manage the integration and coordination of end-to-end supply chain activities. The APICS CSCP program is divided into four modules to provide participants with the best possible educational assessment and knowledge base.

A CPIM / CSCP Education can help you to:

•   Increase your functional knowledge of production and inventory management.
•   Improve efficiency across the processes of your organization's supply chain.
•   Streamline operations through accurate forecasting.
•   Predict outcomes more accurately.
•   Maximize customer satisfaction by delivering products and services Just-in-Time.
•   Increase profitability by optimizing your organization's inventory investment.
•   Enhance your credibility among employers, and customers

3) CTL: Certified in transportation & Logistics 

The CTL designation may be used just as similar recognitions are employed in accounting, insurance, medicine, law, and other professions. Either the full expression or the initials may be used after the individual’s name on business cards, stationery, etc. The CTL credential remains valid with active membership in AST&L

4) PLS: Professional designation in logistics & Supply chain management

professionals seeking an understanding of the key strategies for improving customer service and increasing the efficiency of their logistics and supply chain operations. The purpose of the PLS is to recognize individuals that have completed a course of study examining the strategies for improving logistics and supply chain operations and are seeking to apply this knowledge within their profession.

References:

www.apics.org

www.astl.org

www.knowerx.com (India Partner)