Demand-Pull Supply Chain Management

A recent study concluded that few companies achieved any return on their supply chain project investment. More than 850 companies were surveyed, including those that had highly publicized supply chain failures. One of the authors of the study, Vinod Singhal, said, “Much of the evidence [for payoff] is anecdotal.” Robert Austin of Harvard University, says, “Only a few lucky companies can prove that they achieved any real payoff from their SCM (supply chain management) efforts.”

Management has a powerful incentive to improve supply chain operations. The study shows companies that report supply chain glitches experience a 20% loss in shareholder value. Thus, we have the explosion of SCM software products in the marketplace and an increasing emphasis on collaboration among chain partners.

With all these smart people working on SCM, why are there so few examples of real successful SCM improvements? Why, if management spends millions of dollars on supply chain management technology, aren’t we seeing breakthrough improvements in supply chain efficiency?

Fundamental Mistakes in Supply Chain Management

Is there a way to ensure your supply chain improvement initiative results in real, bottom line improvement? There are never any guarantees of success, but you can avoid many fundamental mistakes, the first being that supply chain management is about efficiency. It is not. Management should be focusing not only on the efficiency of the supply chain, but also the reliability.

Yes, we should be cost effective, but if we can’t deliver consistently, our customers and our shareholders will punish us severely. Many managers underestimate the value customers place on reliability.

Second, an effective supply chain is not about technology, it’s about the process. Many times, supply chain improvement projects are approached as "technology" projects, instead of business projects. The problem with that approach is that most of the technology being offered is transaction support, not decision support; doing things faster, reporting history sooner. While there is a place for rapid feedback on actual performance, most solutions do not offer is the ability to do the right things. Thus, all that is accomplished in a typical implementation is streamlining activities that are wrong in the first place, providing the wrong information, to the wrong person, who cannot take the right action.

How can we expect a change in results if we do not change the design of the system (business processes) that produces those results?

Third, you can’t delegate supply chain design. It’s not something that happens “in the back room”. The performance of the supply chain affects every stakeholder in your business. As the research (and the marketplace) shows, SCM practices can make or break your business. Successful supply chains are customer-centric and built around the value proposition of the business. That kind of integration is not going to happen unless the entire management team is involved in the development and implementation of a system that considers the entire process, not just slices of it.

A Systems Approach to Supply Chain Management

The key to improve supply chain performance is to treat the supply chain as a system, where efficiency is a by-product of system performance, not a precursor to system performance. The emphasis in supply chain management must be first on performance – delivering product (and components) reliably. Only when that objective is accomplished, can managers focus on driving cost from the system.

Your priorities for supply chain improvement must be:

Improving Reliability
Return on Investment
Reducing Operating Costs

A reliable supply chain will not generate excessive investment. In fact, the existence of excessive amounts of inventory is the primary indicator of an unreliable process. High inventories and operating costs are often the result of resolving synchronization errors. These are the symptoms of poor performance, not the cause.

The supply chain improvement must focus on the root causes; not the symptoms. Using smart process design that integrates our understanding of human behavior and process variation, create a pull system for the entire supply chain. A system where your inventories and costs are minimized and reliability maximized. Treat your supply chain as an integrated system and deploy solutions that create lasting results, not a series of quick fixes.

The Demand-Pull Supply Chain System

With a push-based supply chain, products are pushed through the channel, from the supplier to production through to the distribution organization to the retailer. The manufacturer establishes orders and production at a level in line with historical ordering patterns from customers. The distribution points forecast orders based on what it believes will sell. When the market doesn’t react as it has in the past, it takes some time for the push-based supply chain to respond to changes in demand, which results in overstocking or bottlenecks and delays (the bullwhip effect), unacceptable service levels and product obsolescence.

In a pull-based supply chain, procurement, production and distribution are demand-driven so that all activity is based on actual customer orders, rather than forecast demand.

The pull demand system controls inventory investment, thus stabilizing supply chain performance, allowing supply chain managers to make rational tradeoffs and decisions regarding supply chain variables and performance. An example of a demand pull system is shown below.

Demand-Pull System Diagram

Getting Results in Your Supply Chain Improvement Initiative

The real results in Supply Chain Management are derived from business processes that are specifically designed to deliver those results. Technology is important and will help you do things you can’t do today, but it cannot deliver the results you need unless you also rethink your chain design and processes. Your supply chain project must take place in the context of your market mission and strategy.

As in all projects you undertake, remember to measure your results on throughput, inventory, and operating expense. If you can’t demonstrate or justify a change in these metrics, find something else to fix.

By purposefully developing your managers and the processes they use, you change the very core of how things are done; thus facilitating real, focused improvements in many different parts of your organization, not just your supply chain.