Originally posted on on the e-Sourcing Forum [WayBackMachine] on Sunday, 6 August 2006

In Friday’s post we introduced you to demand driven supply, succinctly defined as a pull-based customer-centric approach to supply planning and indicated why DDS was important. Yesterday we defined the different stages of DDS deployment, reviewed AMR Research’s recent findings with respect to the 2007 DDS marketplace, and recounted some basic statistics that demonstrate the double-digit percentage improvements that DDS can deliver across the board. Today we discuss some of the challenges associated with the implementation of DDS, review some best practices, and indicate how DDS affects the traditional (e-)sourcing cycle.

As with traditional best-practice sourcing, the first major challenge will be bringing everyone together to work as a single cross-functional sourcing team. Everyone has to work off of the same processes, the same forecasts, and the same plan.

The second major challenge will be orchestrating the implementation of new collaborative web-based technologies that will interconnect your enterprise while connecting you to your partners on both sides. These new technologies must enable real-time capture of consumption information and new analytical capabilities that can use the regularly updated market data to refine forecasts using advanced prediction techniques.

The third major challenging will be implementing a paradigm shift that transforms reactive demand forecasting to proactive demand management. This extends beyond monitoring consumer consumption on a regular basis to joint promotion management with your distributors and retailers to allow you to anticipate demand changes before they happen.

Successful demand driven supply sourcing strategies are built on understanding. As an organization, you need to understand your customer, your product, your processes, your performance, and your competitors. Who is your customer, what influences their purchasing decisions, and what can you do to increase demand? What is the end-to-end lifecycle of your product and how can you improve it? How can you improve your processes, systems, and methodologies to allow you to be more flexible and agile? How are you performing as a whole and where are your bottlenecks? How do your competitors compete on pricing, features, functions, delivery, and service and where can they out-perform you? Answering these questions will help you define efficient demand driven sourcing processes.

These demand driven sourcing processes can also take advantage of the following best practices.

• Identify where you are in the demand driven journey and outline precisely what you need to do from a people, process, and technology viewpoint to get to the next level and work as a team to get there. Bring in external consultants who are experts in demand driven sourcing and change management if needed.
• Use an iterative demand management process that generates multiple “what if” scenarios at different demand volumes in the potential demand range to determine the supply strategy with the best overall value using optimization techniques. (See my post on Lead Time Optimization for a better understanding on why you should look at ranges and not fixed numbers early in the planning process.) The best buy is not the supplier mix that is optimal at a specific demand, but the supplier mix that is optimal for most of the potential demands. After all, this is the Foundation of advanced Total Value Management that incorporates Procurement Lead Time Optimization.
• Incentivize each unit on the cross-functional sourcing team on appropriate metrics that include forecast accuracy, inventory turns, and profit targets. This will insure that everyone works off of one forecast and works together to keep it updated.

As you progress through your DDS journey, you will continuously update each step of your sourcing process to have a demand-driven focus. From a macro-level view, the sourcing process will mature as follows.

(1) Spend Assessment, Strategy Formation & Opportunity Prioritization

Price modeling and simulation to determine which products have the most profit potential will be included as an integral component of opportunity prioritization. Opportunities will be prioritized according to which have the best value from a combined bottom line perspective when profit and savings are analyzed collectively.

(2) Project Data Collection & Strategy Formation

An integrated demand forecast that takes into account retailer and market inputs is prepared as well as a methodology for updating the forecast on a regular basis during each pull cycle.

(3) eRFX & Supplier Qualification

Suppliers are qualified according to their demand-driven abilities to participate in demand planning and respond quickly to changes in demand or product cycles in addition to their manufacturing capabilities. Suppliers are also asked about their ability to scale and if they could offer discounts if demand increased beyond a certain (guaranteed) baseline.

(4) Bid Collection & Negotiation

The forecasted demand from phase 2 is updated at the last possible instance before (sealed) bids are collected or the products are put up for auction. Suppliers are asked to bid at multiple demand levels and offer tiered bids or discounts if demand should increase (based on economy of scale).

(5) Decision Optimization

Multiple what-if scenarios are run at different demand levels to determine the “best” mix of suppliers and the optimal demand allocation between the “best” mix of suppliers. The “best” mix of suppliers is the mix that can provide competitive pricing across volume levels, assist in risk mitigation (by way of overflow capacity and the ability to respond rapidly to changes in demand), and work with you to facilitate improvements across the board on both sides of the relationships.

(6) Award & Contract

Contracts are defined against a demand range. The buyer will guarantee a certain level of commitment, at the low end of the predicted demand range, in return for the supplier guaranteeing additional availability and discounts or rebates if demand spikes, which will allow the supplier to take advantage of economies of scale.

(7) Contract Monitoring (Performance & Compliance)

Customer consumption will be monitored regularly, at least weekly, and immediate action will be taken if a significant spike or drop in demand is noticed. This will generally be a combination of forecast updates, pull modifications, and / or cycle length updates. Collaboration with suppliers will occur regularly in joint efforts to improve productivity, reduce costs, and increase margins on both sides.

This concludes our introduction to demand driven supply, a logical evolution of a Total Value Management (TVM) enabled (e)Sourcing process.

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For more information on demand driven supply, see the “Demand Driven Supply: A pull-based customer-centric approach to supply chain planning and execution” wiki-paper over on the e-Sourcing Wiki [WayBackMachine].

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Saturday, 5 August 2006

Yesterday we introduced you to demand driven supply, succinctly defined as a pull-based customer-centric approach to supply planning that allows demand to drive the process. We emphasized its importance by way of an AMR Research statistic that found that companies who fail to adequately focus on customer demand incur an average cost disadvantage of 5 percent of revenue due to poor forecast accuracy. In addition, AMR Research has found that the distortion in non-demand driven forecasts can often cost a manufacturer more then 10% of the COGS.

Today we are going to talk about the stages of demand driven supply and AMR Research’s DDS(N) implications for manufacturers, retailers, and software providers for 2007, as noted in a recent article (and a corresponding report). But first, we are going to review some compelling statistics that serve to stress the rising importance of demand driven supply and why you should take it seriously.

According to the “Demand Management Benchmark Report” issued in December 2004 by Aberdeen Group, companies that are best in class in Demand Driven Supply outperform their competitors according to the following table:

	Gross Margin	Inventory as % of Sales	Forecast Accuracy
Industry Norm	12%	15%	17%
Laggards	16%	20%	26%

Furthermore, more then 85% of all companies that have implemented a program to improve demand management have generated significant improvements in performance across the board, including average improvements of 4.7% in gross margin, 24% in inventory turns, and 13% in forecast accuracy. In addition, you can expect to realize in-stock improvements of 2 to 8% (significant when the average stock-out rate is 8%, or higher), customer service improvements of 18 to 25%, productivity improvements of 13 to 20%, and purchase cost reductions of 9 to 13%.

A review of the literature indicates that there are essentially four steps or stages to DDS proficiency. Although each research group (Aberdeen, AMR Research, etc.) has their own set of terminology for the stages, they essentially agree on the definitions. We will use a generic categorization of novice, beginner, intermediate, and advanced, which will be sufficient for our purposes.

Novices have not yet begun the identification and integration of DDS processes and strategies into their supply chain planning and sourcing function. They still use traditional stovepipe forecasting techniques and are constantly having to react to stock outs and stale inventories.

Beginners have just set out on the DDS journey. They are still in the process of implementing basic (e-)sourcing best practices, they have just completed integration of their enterprise systems, and all key divisions, namely product management / production / R&D, sales and marketing, and sourcing, and are all starting to work collaboratively as a well-oiled team. Although they are still using traditional forecasting methods, each department is working off of the same forecasts and they are updating those forecasts before every pull cycle. Although they have yet to realize significant benefits, they are beginning to notice improvements in inventory turns, productivity, and customer service.

Intermediates have been on the DDS journey for some time. In addition to having interconnected enterprise systems and corporate experience working as one team, they are also externally connected to business partners with whom they are starting to collaborate. Specifically, they are working closely with key suppliers to insure that the suppliers can respond quickly to changes in demand forecasts and with their major distributors and / or customers to collect actual sales data on a regular basis. If necessary, they can shorten or lengthen their pull cycles to minimize the chances of stock outs or stale inventories. Intermediates notice a number of improvements from their demand-driven processes that include improved forecast accuracy, inventory turns, productivity, and margins, although these returns are not as good as their-best in class peers, who are at the advanced stage.

Advanced Practitioners have mastered DDS and have tight interconnected systems with their suppliers, distributors, and major customers with whom they collaborate on a regular basis. They have supply chain visibility on a daily basis and monitors in place that capture significant, unexpected, spikes or drops in demands and automatically alert the sourcing team that they might need to take action, which could be a combination of forecast updates, pull modifications, and / or cycle length updates. They are maintaining significant double-digit percentage improvements across the board.

In tomorrow’s post, we will describe the challenges you will face on your demand driven journey, some best practices that you can use to begin updating your traditional (e-)sourcing process to a demand driven one, and the major changes that will occur in each major phase of the sourcing cycle. But first, we would like to discus the recent article from AMR Research that summarizes DDS(N) implications for manufacturers and retailers in the year ahead.

In 2007, DDS(N) Manufacturers:

• will be focused on customer service,
• will face increasing supply network complexity,
• will still be more confident in supply processes than demand processes,
• will see supply chains as more strategic, and
• will have a DDS(N) maturity based on their application deployment.

In 2007, DDS(N) Retailers:

• will continue to be slightly better than manufacturers at demand sensing,
• will forecast more frequently, and
• will continue to focus on DDS strategies to cut costs.

Furthermore, in 2007 demand-driven strategies are expected to fuel a 4% increase in SCM spending and companies with >1B in revenue will fund 34% of software purchases in the UK and 27% in the US. Furthermore, the market is shifting towards best-of-breed products that support an ERP backbone.

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For more information on demand driven supply, see the “Demand Driven Supply: A pull-based customer-centric approach to supply chain planning and execution” wiki-paper over on the e-Sourcing Wiki [WayBackMachine].

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Friday, 4 August 2006

Demand Driven Supply (DDS) is supply management with a heightened focus on customer demand. Unlike the traditional push-driven model where manufacturers plan their operations based on factory capacity and asset utilization, the demand driven supply model operates on a pull-based customer-centric approach and allows demand to drive supply chain planning and execution.

Demand Driven Supply is a model of supply chain planning that is an extension of the Demand-Driven Supply Network (DDSN) model pioneered by AMR Research over the last few years applied to a Total Value Management (e-)sourcing process (see “Purchasing Innovation VI: Crowdsourcing”). AMR Research defines a Demand-Driven Supply Network as a system of technologies and processes that sense and react to real-time demand across a network of customers, suppliers, and employees.

This is the first post in a three-part post on demand driven supply and the impact that it will have on your supply chain planning and sourcing cycle. Collectively, the three-parts will form a mini-white paper that you could use as your introduction to demand driven supply and its associated benefits. The three-part post is organized as follows:

1. Introduction
   • o Demand Driven Supply Focus
   o Why Demand Driven Supply?
2. Stages and Implications
   • o DDS Statistics
   • o DDS Stages
   o AMR’s DDS(N) Implications for 2007
3. Challenges and Implementation
   • o Challenges
   • o Best Practices
   o The New Sourcing Cycle

The ultimate goal of Demand Driven Supply is the management, selection, and shaping of the best mix of customers, products, channels, geographies, and prices for the dynamic marketplace. This requires the identification of emerging, as well as existing, customer and product winners for maximum market penetration.

Companies with a Demand Driven Supply focus often use advanced forecasting applications to improve forecast accuracy and reforecast frequently. They will run what-if scenarios on multiple demand forecast variations to identify market risks and opportunities and determine an overall “best” buy from a value-based perspective. They will continually re-asses the criteria they use for forecasting, product prioritization, and market segmentation to insure that they are using the best criteria possible.

The simultaneous convergence of a large number of market forces and supply pressures are increasing the stresses on a business across the board. The increasing globalization of the marketplace, the constant uncertainty of the global economic outlook, rampant inflation in energy and raw material costs, increased product customizations, SKU proliferation, and the ever-increasing rate of new product introductions are all driving a need to improve operations across the board. Add to this shorter product cycles, limited global transportation capacity, increased outsourcing, constrained market capacity, and a plethora of opportunities for supply disruption that include, but are not limited to terrorism, natural disasters, strikes, slowdowns, geopolitical events, and supplier financial failure, and the need for constant supply chain improvements becomes critical. Especially when today’s consumer expects that the prices of products and services should continue to decrease.

Traditional Supply Chain Management (SCM), tailored for steady state demand periods of a product life cycle, deals poorly with rapid change. In today’s market, supply chain variability is a major threat to profit margins. When you consider AMR Research’s finding that companies who fail to adequately focus on customer demand incur an average cost disadvantage of 5 percent of revenue due to poor forecast accuracy, which typically has a large double digit impact on profit margins, the importance of demand driven supply strategies is rising rapidly.

Simply put, traditional SCM, which relies heavily on up-front forecasts, does not incorporate regular forecast revisions or the demand signals necessary to determine when a shift in demand is needed. (This is why I promote Total Value Management and regular demand forecast updates.) A revised sourcing cycle that accounts for variable demand and incorporates demand oriented processes, technologies, and cross-functional teams is needed. As we hinted at in our purchasing innovation series, SCM is no longer a four-walls activity – it encompasses every area of the business, including suppliers, distributors, and/or retailers. Only your retailers can tell you how fast your product is, or is not, moving and how likely demand is to change as a result of promotions and only your suppliers can tell you how long they need to accommodate variances in demand. Demand Driven Supply can then be viewed as the balancing act of having enough inventory to meet demand spikes but not so much that you are eventually forced to mark-down a significant amount of inventory to move it.

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For more information on demand driven supply, see the “Demand Driven Supply: A pull-based customer-centric approach to supply chain planning and execution” wiki-paper over on the e-Sourcing Wiki [WayBackMachine].

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Sunday, 25 June 2006

On Demand is here to stay. Oracle CEO Larry Ellison recently said that he expects the on-demand business model to be an increasingly influential one and he personally owns large stakes in a number of on-demand companies that have been making headlines. Even Microsoft CEO Steve Ballmer has called on-demand software the most important trend in the software market over the next two or three years.

On-Demand software allows Supply Chain Management (SCM) to spur creativity and business innovation by freeing them from mundane administrative tasks. After all, the future of software will not only be about how software is supported and delivered, but about how it can make critical information more accessible and usable for tomorrow’s knowledge workers.

On-demand is the natural evolution of software. Some people are calling it a revolution and saying the best is yet to come. For example, Jason Busch, founding partner of Azul Partners and blogger extraordinaire of Spend Matters recently stated that he predicted the next generation of on-demand software will:

• incorporate external content and insight as a fundamental part of its
  value proposition,
• leverage community and shared instances for the benefit of all participants, and
• transform internal spend management service delivery models.

To a large part, I believe this to be true, though in reality the implementation and usage will likely be slightly different then what Jason is predicting.

However, one of the things that the evangelists, and there are many, are overlooking is that one of the key benefits of future software-as-a-service offerings is the forthcoming transformation to software-with-a-service. With software-with-a-service, offerings will be inherently customizable and provide instant integration (or touch) points to related on-demand services and value added offerings.

Furthermore, there’s this new evolution of rule-based programming called business process management (BPM) which has led to the development of workflow and process-focused development languages such as java Business Process Management (jBPM) and Business Process Execution Language (BPEL) which allow for the development of a new generation of workflow driven applications. These new workflow applications can be customized on-the-fly to incorporate modified processes and workflows that not only allow for the construction of more versatile and configurable applications then before, but also allow trained business users to define their own workflows through a visual environment. Furthermore, since these technologies are being built hand-in-hand with web-services, it should be obvious that on-demand offerings are going to be the first to incorporate these new capabilities.

The future of on demand is coming, and it’s going to be awesome!

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Saturday, 24 June 2006

Yesterday we discussed the considerable benefits of on-demand software which delivers functionality over the Internet from an application instance that may be shared across many clients, the increasing adoption rates, and the overwhelming benefits that were discovered by Aberdeen Research in a study released earlier this year. We also pointed out that there still remain some naysayers with a much darker view of the model who have done nothing but offer up a myriad of critiques. (I should note that many of these naysayers are also sellers of traditional enterprise software packages who get huge commissions with every sale and have every reason not to like a new model that slashes prices which used to fatten their bank accounts.)

However, since I would personally question any promoter of on-demand software who fails to address each and every potential concern brought forward, here is the long list of concerns that I have found and the associated truths that should set your mind at ease.

( 1) Your Data is Not Secure (especially in a multi-tenant model)

I think PepsiCo’s CTO said it best: “Our data is probably safer behind [the provider’s] firewall than behind our own”. IT is your provider’s business, and the security of their data and yours is their utmost concern. Not only will they have developers on staff with security expertise, but many work with leading security firms who will conduct regular audits and monitor your provider’s domain(s) for external assaults, stopping them before they even get to the firewall.

( 2) You cannot guarantee reliability

Aberdeen’s recent study found that even in areas such as system uptime and application response time, more enterprises reported that these solutions out-performed traditional enterprise applications run by their internal IT department or a third party ASP. Remember, your uptime is your on-demand provider’s business. Since you can leave if you’re not happy, they tend to be much more responsive then your IT department whose jobs are a lot less dependent on the up-time of any single application.

( 3) You cannot manage your own data

It is true that you have less control over how it is distributed across the database instances, but it is also true that you do not want this control. Unless you are a database expert, you will not know how best to partition your data for maximum performance. Furthermore, as we discussed yesterday, chances are your provider is much better at backing up your data for quick recovery than your internal IT department.

( 4) New on-demand offerings lack functionality

Opponents state that many on-demand offerings only have 70% to 80% of the functionality offered by their traditional behind-the-firewall installed applications. I will concede this point, but then remind you that most organizations use less then 50% of the functionality offered by most applications. Therefore, these offerings are still offering you an average of 33% to 50% more functionality then you will actually use, so this is a moot point.

( 5) You have no control in a disaster

True, but this is not something you want. When a disaster happens, you want someone to clean up the mess for you. And more importantly, you want someone who is prepared. For a software-as-a-service provider, application uptime is their core-business, downtime will kill them. If you are a manufacturer, this isn’t nearly as true and chances are your IT department is so swamped that they haven’t even thought about disaster recovery recently while most on-demand vendors will have detailed plans that they will run through and up-date on a regular basis.

( 6) A vendor can afford to be sloppy

Providers of traditional software argue that because on-demand software providers always have immediate access to their software, they can afford to be sloppy and roll out upgrades without a lot of quality testing, adopting the “if something happens, we’ll just fix it later” attitude. In fact, the opposite is true. Since most on-demand providers use a multi-tenant model where all customers are on the same instance, a single bug, no matter how minor, could bring down all of their instances, and customers, simultaneously! In contrast, even a bug in a commonly used feature will generally not affect more then a small number of customers in an enterprise software provider’s user base. Thus, on-demand providers are generally much more diligent and thorough when preparing to roll out upgrades or modifications. After all, if they go down, chances are every customer is going to be calling in within an hour wanting to know what’s going on – and no one wants to be around when that happens.

( 7) Upgrades are forced upon you

I’ll concede this as a truth as well, but would like to know why this is bad? On-demand providers understand that the last thing their customers want is the rug to be pulled out from underneath their feet and take great pains to minimize the impact on what’s already there when planning an upgrade. Often the net effect is that if you do not look for it or read the upgrade announcement, you might not even know a new feature is there. I like to compare the free upgrades to your cable company deciding to offer you more channels for free (even though I know this would never happen in reality, or at least not with my cable company). You wouldn’t be forced to watch them, but if you wanted to, you could. What would be wrong with that? Compare this to traditional enterprise software providers who think nothing of rearranging the entire interface between releases and forcing you to relearn the entire product, just because they thought the new interface was better. (Something even Microsoft is guilty of. Last time I upgraded Word, half of the few features I actually used weren’t where they used to be.)

( 8 ) Because they have your data, they lock you in

In these situations, I think the author is confusing old-school ASP with new-wave on-demand. Any true on-demand application is going to come with good data import and export utilities. Furthermore, you can verify up front that you can export your complete database at any time and most vendors will even allow you to build export support upon termination into the contract. (They might charge a small service fee for their representative’s time, but nothing compared to what your application integrator would probably charge.)

( 9) You lose the ability to customize the application any way you like

This is partially true, but again, this is not a bad thing. Name something you rely on everyday whose inner workings you do not fundamentally understand that you would honestly risk attempting a major customization on. If you were not a professional mechanic, would you risk rearranging the internals of your engine? If you were not a certified electrician, would you risk re-wiring your primary panel? Software is just as complicated, and extensive customization is best left to those that understand the inner workings.

Furthermore, nothing prevents a multi-tenant on-demand instance from being downgraded to a single-tenant instance on its own (set of) server(s), at which point, you or the on-demand provider can customize it to the nth degree. Most providers will happily give you a single-tenant instance if you do not mind covering the extra costs (which are probably still substantially less then traditional ASP rates), and many will do customized development if you are willing to cover the costs. Some will even sell you a license to customize and deploy the instance behind your own firewall if you so choose, but then you lose some of the on-demand advantages, and the advantage of having someone else administer and maintain the application in particular.

Finally, many on-demand solutions are built from the ground up to support a basic amount of customization capability on the UI and workflow so that the application can be configured to each customer.

(10) You risk losing everything if the provider goes belly up

This is probably the only real viable concern I’ve ever heard, but this risk is not unique to on-demand software. This inherent risk is always present when using a third party for any service, and you always deal with it in the same way – you have a back-up plan.

If your data is important, make sure you know how to do a full export and have someone do it on a regular basis. If your data base is very large, contract with the on-demand provider to do a full-export to tape on a regular basis for you and have that provider either send the tape to you or to a 3rd party storage facility.

If the software is important, look for a provider with an escrow agreement where their customer’s get a license to the source code and installation manuals should they ever go out of business. Then you could always have your IT department run the application internally until you found another provider. But if you choose a stable provider who is growing, chances are this is not a big risk.

(11) Where are the SLAs

I really do not know where this concern came from. Most serious on-demand software providers these days offer SLAs, and some to five nines reliability. What more do you want?

(12) Where are the value added services

Most traditional software providers argue that their offerings have more value because they often bundle a slew of value added services, such as consulting time, services, and free access to resource libraries as compared to on-demand offerings which often just offer the software. This is true, but it is also true that traditional offerings cost 5X to 10X as much. Let’s repeat that: 5X to 10X as much! With those profit margins, they can afford to throw in a consultant or two – they’re still making obscene amounts of money.
Therefore, this isn’t a fair question as the comparison is not fair. Traditional services build in a cost for every possible service you might use, even though they know most of their clients will not use most of the services. On-Demand providers charge you a minimal fee based on what you say you will use. Most providers will offer additional value added services that complement their counterparts for a small fee. Furthermore, when you add up the total cost from the on-demand provider for every possible service and compare that to the traditional enterprise price tag, you will still find that on-demand providers are still at least 3X cheaper when you consider what you actually will use.

(13) You don’t have control

As you’ve probably figured out by now, this isn’t true. They control the software, but you still own your data, and, more importantly, you have the leverage. If their service sucks, you can leave. If too many customers leave, they’ll go out of business. You have control, and don’t let anyone fool you into thinking otherwise.

And it’s only going to get better. Stay tuned!