Over the past decade, the generic supply chain model (SCM) established in the 1980s has been shifting to a model that’s driven by demand. Enterprise businesses have led the way, but in the past few years, mid-sized businesses that work with custom goods have been seeking ways to work with the demand model. In this 4 part series, we’d like to look more closely at both models, gain an understanding of the turnaround where the customer has become the driver, and explore how sales configuration and product configuration can help businesses navigate a major change in business practices more effectively.
Supply Chain Management
Supply Chain Management literally means what is says—controlling the materials, entities, and processes that are involved in producing and delivering goods and services. Traditional Supply Chain Management is driven by planning and communication–planning future demand based on current and past demand, and working continuously to ensure that all stakeholders, whether it’s an actual manufacturing company or its suppliers, get the information they need at the right time and can respond without incurring errors, cost overruns, and delays. While the customer certainly drives demand, the companies that produce and deliver goods still hold the reins and determine what comes onto the market and when.
Demand Chain Management
With the demand chain model, we have a critical change in leadership—the customer is at the center of all work, and dictates how the supply chain operates. A demand-driven network involves everything that customers want—quick turnaround, ideas that turn into new products at warp speed, reduced costs, superb customer service—the list goes on. To sustain profitability, companies need to look at new ways of responding to demand and best practices for reducing operating costs while optimizing quality and service.
Demand driven supply chains must work as tightly integrated networks. All stakeholders need relevant visibility into what consumers want and what they purchase—for example, decisions about inventory and movement of materials need to work hand in glove with demand signals that can change very quickly. The supply chain is not linear—all parties need insight into real-time consumption and emerging buying patterns.
Theoretical differences between supply and demand chain management
Supply Chain Management aims to “optimize the flow.” All participating entities work to improve their specific processes, cooperate so that everyone benefits, and achieve an optimal end-to-end process. Demand Chain Management is more complex; upstream and downstream relationships between suppliers and customers need to be managed to deliver the lowest cost and the best value for the customer across the entire supply chain.
Customers, rather than companies, drive Demand Chain Management, which means that companies need complete, accurate, and proactive visibility into customer trends—this is the “pull” technique that differs sharply from the traditional supply chain “push” of goods based on incomplete and possibly inaccurate assessments of the marketplace. We’ll explore push versus pull in more detail in blogs to come. Right now, we’ll say that a “pull” technique gives companies more opportunities to share information and collaborate with others in the supply chain.
The demand-driven impact for sales and product configuration
Let’s use an iconic example that began in the 19th century as rugged work denims—blue jeans. For decades, men wore a limited set of brands for blue jeans, with a limited set of styles. When women started wearing jeans, they simply wore smaller sizes of what was available for men (Levis are a prime example—505 was a multi-gender favorite). The supply chain upped production and inventory, made smaller sizes more available, but the flow of goods didn’t change drastically. Volume and pricing exploded when jeans became a status symbol in some countries (the former Soviet Union’s love affair with Levi’s is a great example), but design variables weren’t impacted significantly.
That model has changed drastically, thanks to savvy companies who took hold of opportunity and made more choices available—to the point where customers cheerfully laid out hundreds of dollars for pre-ripped, pre-faded styles with a wide range of design, colors, stitching, pockets, buttons—you name it. A boatload of companies from K-mart to Yves St. Laurent seized the opportunity to produce jeans that captured loyalty for new brands and new interpretations of the 5-rivet workman’s denims.
At this point, the customer is in the driver’s seat—brand loyalty and even store loyalty have all but disappeared. Designer style jeans are available at half the cost of a brand name. Consumers can surf stores or the Internet and find a vast range of choices, and even customize their choice with special stitching, buttons, initials—and a business needs to be ready to meet demand and have it on hand or at the customer’s doorstep tomorrow (preferably today).
That’s a demand chain in action. The customer determines what he wants, how he wants it and when he gets it. A 360 degree custom fit is now the standard. The change in demand ownership has a profound impact on the supply chain network, and businesses need to be ready to accommodate.