Professor of Logistics, University of Tennessee April 14, 2011.
Companies have
historically separated the processes used to plan for, and manage, demand from
those used to supply the resources and labor to meet it. The problem with this
business model is that the companies using it are often unable to consistently
ensure that supply meets demand.
Too often, the demand
and supply functions are not synchronized, resulting in a shortage of the
products that customers actually want and/or a surplus of products that are not
wanted. Companies are trapped in a pattern of reacting to the whims of the
marketplace without developing a proactively designed supply capacity
Curiously enough, such
companies often are the victims of their own success – marketing programs that
are not integrated with supply capacity end up creating more demand than the
company can fulfill.
To create a more
efficient and effective business model, companies must acknowledge that they
need to integrate demand and supply systems. At the University of Tennessee, we
call this business model Demand
and Supply Integration, or DSI.
Dell serves as an
early example of successfully implemented DSI.
In 1999, the author
ordered a computer three weeks before Christmas. It was a gift for his sons,
and, as such, he had a very specific time frame in which to receive it. So when
he received a confirmation email stating the computer would be ready on
February 16, 2000, he replied that he needed the computer much earlier.
A service
representative researched the delay and explained that the backlog was due to
the fact that the 400 megahertz Pentium chip he had ordered was particularly
popular. Rather than leaving a customer dissatisfied, the service rep suggested
a way around the supply chain bottleneck. For an additional $50, Dell could
upgrade the Pentium chip and ship the computer within a week. The author
readily agreed, and the computer was received well before December 25. The
customer’s needs had been met and at a price that was reasonable to him.
What did Dell do
right? First they had a system in place enabling customer service
representatives to readily access sales, marketing, and supply chain
information. This system allowed the service representative to do far more than
just “empathize” with the problem. The service rep was able to work with the
customer within the company’s current supply chain limitations and ensure
satisfaction.
How often have you
gone to a store for a specific item only to be told that it will not be
available for a week or more? Frequently that is the only assistance you
receive. You either purchase the product somewhere else or become frustrated
with the delay. Either way, you are less than satisfied with the store’s
service.
Through close
relationships that facilitate information sharing at the system level, DSI
allows companies to serve end-users better. It empowers each member of the
supply chain to develop immediate and appropriate solutions to problems as they
arise. It requires that managers not only focus on their own goals, but also
learn to look to the larger organization (including external supply chain
members such as retailers and end-users) as a whole. Goals must be agreed upon
corporately and worked toward in unity.
One key element of DSI
is development of an integrated sales
and operations planning (S&OP) process to facilitate
systemic information sharing. This provides a formalized procedure to begin
synthesizing a company’s operational plan with its demand plan. The operational
plan consists of manufacturing, procurement, distribution, finance, and related
human resource plans
Operational plans
include such items as monthly production schedules, extended contracts for raw
materials with supply chain partners, and any plans to expand manufacturing
capacity internally and/or with partners. In the demand plan, sales and
marketing determine what should be sold and marketed… and when (given the
supply capabilities of the firm). Demand plans may involve suppressing demand
for products or services that are capacity constrained, or shifting demand from
low- to high-margin items.
Once more, Dell serves
as a model for effective creation and implementation of a sales and operations
planning process to facilitate DSI. In the fall of 2003, California dock
workers organized a strike that brought imports into the largest West coast
ports to a standstill.
While most companies
weather such supply chain disruptions by holding weeks (or even months) of
domestic safety stock, Dell’s business model only provides for a few day’s
supply of product on hand. Regardless, Dell needed to keep end-users happy. To
continue providing product to its customers, Dell was left with only one
option; it had to use expensive air freight to transport supplies from Asian
vendors to the U.S. Company executives realized that one major constraint to this
plan was the cost of transporting bulky cathode ray tube (CRT) computer
monitors by air
Dell’s demand and
supply managers created an alternative plan; they determined that they could
“shape demand” by offering end-users the opportunity to buy flat screen
monitors for the same price as the older ones. It would still be costly to
transport monitors by air, but the cost of moving the flat screens was much
lower than that for the bulkier and heavier CRT monitors
Dell might not make as
much money on the deal, but their end-users were significantly more satisfied
with their “free” upgrades. Essentially, they changed the monitor market
overnight, a development for which competitors’ supply chains were not
prepared. This sort of dynamic solution is only possible when organizations
embrace a business model that integrates demand and supply processes.
Lest we think Dell is
the only practitioner of DSI, consider the relationship between Whirlpool and
Lowe’s. Every week, this retailer and vendor have a DSI conference call to
discuss what appliances are selling in the stores and Whirlpool’s capacity to
make product. Often, the discussion revolves around a particular model that is
selling at a higher-than-expected rate in Lowe’s.
As executives from
both companies related in a speech to the University of Tennessee Supply Chain Management Forum,
this often results in Whirlpool quickly flexing its supply chain to make more
of the high-selling product and deliver it to Lowe’s customers (perhaps, in the
process, shifting capacity away from products for which Lowe’s is experiencing
lower-than-anticipated demand). However, sometimes the answer is that Whirlpool
and/or its suppliers do not have the capacity to make more of the product in
question. It then becomes a question of demand shaping for Lowe’s.
What promotions,
in-store displays, and sales incentives can Lowe’s implement to shift demand
from the capacity-constrained model to one that the supply chain has more
capacity to deliver?
In this way, Lowe’s,
Whirlpool, and their suppliers execute DSI across the entire supply chain,
recognizing that DSI is not just about managing supply, but also about managing
demand.
While the stories
shared here have been successes, incorporating DSI is not simple. There are
many potential obstacles. The most common pitfall is misunderstanding the role
of DSI within the organization. It should not be subject to company politics or
artificial financial targets or quotas. Rather DSI should be used to establish
organizational financial targets without preconceived ideas of the end result
Often this requires a
reframing of corporate (and even the entire supply chain) culture, a shift that
only occurs with a significant investment of time and labor on the front end.
In addition, DSI
necessitates another company change: strong, effective customer
integration. For that to occur, information must already flow easily between
departments. A company must shift its focus from product and supply to
customer, market, and supply chain. The transition is challenging, yet the
ultimate value of DSI is undeniable.
Source: http://www.scmr.com/
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