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.

---

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].