Analyst: SCM can aid profitable growth

According to AMR Research, companies adhering to supply chain best practices have achieved cost savings of 10 per cent of revenue; a 20 per cent improvement in order-delivery performance; 50 per cent less inventory; and a 66 per cent quicker order-fulfillment cycle.

That might not be your company’s experience and if so, you are certainly part of the majority. Even the Boston-based research firm admits that SCM has failed to deliver on promises in many organizations, citing lack of demand visibility and poorly implemented, expensive projects.

AMR Research coined the term Demand-Driven Supply Network (DDSN) in January 2004 to heighten awareness for what they see as a much-needed supply chain strategy.

“We felt that everyone needed a new supply chain strategy,” explains John Fontanella, AMR’s vice-president of Supply Chain Services. “There wasn’t a lot of talk about strategy during the economic downturn. People focused on short-term results.”

In contrast, AMR is encouraging the idea of linking supply with demand, what Fontanella succinctly describes as to “make what you sell, not sell what you make.”

Even in industries that see themselves as supply driven, like the petrochemical industry, he says, this push for profitable growth will make them much more sensitive to filling customer demand productively and more efficiently.”

AMR’s DDSN takes into consideration that the much-anticipated economic recovery will be different from past ones where growth occurred while productivity often dropped and costs rose. In the current context of scrutiny, growth will be looked at both from overall revenue and from profitability, says Fontanella.

Also, most companies are forced to go overseas for lower cost goods, making the supply chain more global than ever. This adds time and complexity and becomes a real challenge to manage. He sees this as giving rise to a growth in outsourcing and contract manufacturing.

Those best practices referred to earlier revolve around achieving supply chain transparency, according to AMR.

“The big problem with supply chain today is that companies have not successfully tied together demand signal with the supply signal,” Fontanella summarizes. “You see a lot of words written about trying to make sense out of demand signals, whether it is point of sale from a cash register or forecast or a collaborative relationship you’ve got with your customer. There’s been a lot of time spent in how to get the best demand signal to drive your company’s production.

“A lot of people don’t realize there is tremendous variability on the supply side, too,” he continues. “Dockworker strikes, security threats, components going on allocation all affect how well you can service that demand.”

He says companies in the past depended primarily on forecasting demand. They thought that through statistical analysis of history they could project and anticipate demand in the future. “We’re finding that’s not true,” he counters. “With millions of dollars spent on forecasting, at best, 60 to 70 per cent is accurate. It is a huge gap in terms of accuracy and that has a big, big affect on costs and the products you make.”

DDSN promotes looking at demand by means other than just forecasting within your company based on the data that you yourself have. Fontanella says it calls for companies to work with customers and suppliers to build an organization that has the flexibility to respond more quickly to demand information. “On the demand side, there has been a lot of talk about collaboration and sharing forecasts; it’s been primarily lip service,” he says.

“Companies had a hard time learning how to ‘collaborate’ where they can jointly put together a forecast, jointly comply to that forecast and, most importantly, where they can reap the benefit from the forecast or plan together. We’re seeing cases now where it is a matter of necessity for survival. Companies have to work at this for their major strategic customers to agree on a baseline of demand for the year and then have the communication channels open,” he adds. “So, as things change during the year, those communications go back and forth very quickly to adjust the plan. That could be anything from promotions to introductions of new products.”

But where do you start? Fontanella says if he were thinking of revamping his supply chain so it conforms to the DDSN, he would begin by establishing a methodology based on the Supply-Chain Operations Reference (SCOR) model developed by the Pittsburgh, Penn.-based Supply-Chain Council as a cross-industry standard for supply chain management. (see

“Equally as important is that you’ve got to get a basic understanding of your own business,” Fontanella continues. “Some of the best practices I see there is this idea of customer segmentation. Who are my profitable customers and who am I not making money on? What’s my cost to serve different channels?” Many, many companies don’t capture activities at that discreet level today.”

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