I have to confess that I was somewhat disappointed in reading Gene Tyndall’s white paper for Tompkins International “Demand-Driven Supply Chains: Getting It Right For True Value” [Tyndall, Gene. Demand-Driven Supply Chains: Getting It Right for True Value. White Paper. Raleigh, NC: Tompkins International, 2012. Print.].
Of course, Tyndall is correct when he says, “Developing a ‘demand-driven business’ is an emerging goal of business leaders. Knowing what customers bought yesterday and what they want to buy today is not enough…. [T]he common views about supply and demand are no longer adequate.”
Tyndall gets off on the wrong foot, in my opinion, in the very next paragraph... where he opines: “While it is more important than ever to have near real-time information, even this is insufficient for today’s business leaders. Instead, companies must find ways to differentiate based on latent demand, unmet demand, and even emerging demand. Why customers buy is more important than who they are or what they buy.”
Don’t Get Me Wrong!
Please don’t get me wrong. I surely believe that it is important for participants in the supply chain to consider carefully matters affecting demand and demand variation. We all need to understand as much as possible about “why customers buy.” Unlocking “tribal knowledge” within our own organizations and across the supply chain can certainly help us create “irrefusable offers” (sometimes called “Mafia offers”) that are built upon what we know, what may be safely discerned, and what we can learn about the real drivers behind our customers’ willingness to buy. Such knowledge can help lead us to effective market segmentation and dramatic increases in Throughput.
What I am opposed to is calling speculation about the “quantities”—the number of units to be sold—in “unmet demand,” “latent demand” and “emerging demand” -- "demand-driven". This is not "demand-driven" operations. It is "speculation-driven" supply chain management. More always incorrect forecasts are not enhanced by more speculation about demand. Moreover, the supply chain is not made more "demand-driven" by adding more layers of speculation.
In the white paper, Tyndall hits the nail on the head once again with regard to the concerns of supply chain managers and executives. He states:
Chief Supply Chain Officers (CSCOs) and other senior executives across all industries must now react to volatility and unpredictable events more than ever before. Many relate that their operating plans are impacted even before they reach a steady state, that capacities are either over or under-utilized, that product inventories are either excessive or out of stock, and that flexibility is elusive no matter what they do to prepare for it. Global supply chains, especially, are at high risk, although domestic issues are just as prevalent.
CSCOs also report that they are especially concerned about supply chain innovations in the short term [and] about SKU complexity.
He even recognizes the bane of the existence of executives and managers of almost every ilk:
“In complex operations… the same starting conditions can produce different outcomes. Unintended and surprising consequences can arise from seemingly simple actions.”
What Tyndall fails to point out—and what is missed by so many executives and managers—is that the “unintended consequences” do not point to complexity. Rather, they point to the fact that “the system”—the actual cause-and-effect relationships at work—is not properly understood by those pulling and pushing the levers of change.
After all, even in a simple system (a system with only two or three moving parts), if cause-and-effect is not properly understood, actions taken to affect the system will lead to unanticipated outcomes.
Tyndall employs the following example:
For example, when actual demand for a product category is less than the sales forecast, the natural action is to slow down its production and work through available inventories. But, this could change dramatically the next month and create product outages because ramping up production may require several weeks or even months in today’s complex world.
Sadly, there are already solutions available to the supply chain to dramatically reduce the problems described in this example. The examples have been expounded in many places, in many ways and been proven time and again in practice. The solutions offer a path toward the virtual elimination of reliance upon sales forecasts. Here are a few of the solutions that have been offered and proven:
- Smaller batch sizes for production and transfer
- Increase supply chain agility and reduce risk by buffering with capacity rather than inventory
- Reduce the replenishment cycle (lead times), making each replenishment cycle in the supply chain as short as possible
- Provide near real-time feedback of actual demand across the whole supply chain in order to dramatically reduce the damaging “bullwhip” effect
If supply chain executives and managers have not moved in directions indicated by the four concepts stated above, then it is clear that they do not yet recognize the true cause-and-effect driving outcomes in their supply chains. I cannot think of any other reason for not making some significant move toward these DDSC principles.
Restating the Obvious About Forecasts
Tyndall states what is already well-recognized by most in the supply chain management world:
Demand forecasting is particularly affected by increasing complexity. Most forecasting models are based on assumptions that do not cooperate with complex current conditions, such as: (1) that behavioral observations are truly independent, and (2) that it is very likely that we extrapolate average responses. Neither is true in today’s complex markets; no degree of past business intelligence is adequate for predictive purposes.
Please allow me to restate this in simpler terms: Forecasts are wrong, and we all know lots of reasons for their being wrong.
Now we are getting somewhere. Tyndall states flatly—and accurately:
Companies are facing new and unprecedented business challenges and trying to solve them with outdated tools and practices, which worked well (for some) in the past, but are not equipped to deal with the degrees of volatility, uncertainty, and complexity of today’s world.
In our next post, we will continue our study of what the Tompkins Group’s Tyndall has to say about demand-driven supply chain solutions.
[To be continued]
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