Synching Up for Demand-Driven Supply Chains

To remain competitive in today’s fast-paced, dynamic consumer marketplace, companies need to be able to respond efficiently and intelligently to evolving customer demand as well as supply chain disruptions. Demand-driven supply chains—those that focus on inbound logistics—play a key role.

Two of the biggest challenges facing modern supply chains are fickle consumers and an array of disruptions that can wreak havoc on supply chain effectiveness.

Case in point: 70% of shoppers responding to a recent survey say they are willing to switch to new brands, even for products they regularly purchase. Similarly, the percentage of customers who say they are loyal to certain retailers dropped from 76 to 66% between 2022 and 2023, according to the SAP Emarsys Customer Loyalty Index.

On the disruption side, consider this: More than four in five respondents to a recent Blue Yonder survey say their organizations have experienced delays and/or stalled production. Top causes include lack of materials, extended delivery times from materials suppliers, and labor shortages (see chart).

Shifting to a demand-driven supply chain can help organizations respond more effectively to both of these challenges. Demand-driven supply chains are “characterized by close synchronization with customer demands and the capability—through process, technology, and organizational resources—to efficiently manage and adjust the inbound flow of materials according to changing demand,” says Ling Lin, director and supply chain practice lead with Clarkston Consulting.

The benefit? “The organization is equipped to proactively detect and react to demand fluctuations, while minimizing inventory levels and without sacrificing service-level commitments,” Lin adds.

Becoming Demand-Driven

It’s not enough to simply understand demand. Organizations also need to understand their supply chain capacity and capabilities. Without this insight, they’re less able to identify the strategies that will best meet demand in a way that is profitable, says Vikash Goyal, vice president, product strategy with Oracle Cloud supply chain management.

Traditionally, supply chains frequently relied on demand forecasting processes that leveraged historical information. However, this assumes future demand will follow roughly the same pattern as historic demand. With customer preferences rapidly changing, as well as shifting economic conditions and unpredictable geopolitical tensions and trade policies, supply chains need new ways to quickly shift focus and tactics.

“The ability to sense, adapt, and respond to demand changes quickly is the key differentiating factor as compared to traditional supply chains,” says Srikanth Sripada, managing director with West Monroe.

Organizations that leverage demand-driven supply chains are generally better able to satisfy their customers, whether end consumers or other businesses.

For example, by employing a demand-driven approach and technology, one of West Monroe’s retail clients increased its on-time, in-full (OTIF) metric from 10% to 13%, Sripada says. This uptick boosted the client’s customer experience and satisfaction.

In addition, because they focus on product availability and responsiveness to customer demand, demand-driven supply chains typically are well positioned to capture sales opportunities and capitalize on demand fluctuations.

And by accurately analyzing demand, organizations can better assess how different products or services are impacting their top line. Ultimately, that can boost revenue.

Manufacturers with large, complex inbound supply chains can leverage a demand-driven approach to stabilize production schedules and avoid some changeovers when they try to accommodate demand surges, Sripada says. As a result, they often can more efficiently use their manufacturing capacity.

The data captured from a demand-driven supply chain can also help organizations boost inventory turns (because they’re responding to customer preferences) as well as reduce excess or obsolete inventory. As a result, they’re able to use working capital more efficiently, and rein in expenses.

Organizations that exercise better inventory control also can optimize their transportation, warehousing, and storage costs. In doing so, they’re often able to reduce energy and fuel use—key steps for organizations trying to hit sustainability goals.

First, Face the Challenges

At the same time, organizations shifting to demand-driven supply chains often must first tackle several obstacles. One is engaging suppliers, and working with them to respond to demand fluctuations.

Some suppliers may instead opt to “decouple” from their customers, and operate under their own set of conditions, says Charles Clevenger, principal with UHY Consulting.

This can be a result of operational issues. For instance, a supplier’s manufacturing process might be optimized when it’s working on standardized, high-volume runs. In contrast, one customer has a fair amount of variety in its products.

“The challenge becomes how do we harmonize that? How do we find a common ground that works for that manufacturer as a supplier and our supply chain and our customers?” Clevenger asks.

Before a demand-driven supply chain can take hold, many organizations need to break down internal organizational silos so all areas gain visibility to events across the supply chain. Establishing seamless communication and workflows across the network helps all functions respond more quickly to demand changes.

“Culture and collaboration ultimately empower agility and flexibility across the supply chain network,” Sripada says.

Data-Driven For Demand-Driven

Several tactics can help organizations address these challenges and gain the performance benefits that can result from demand-driven supply chains.

First, to really become demand-driven, organizations need to become data-driven, Sripada says. This means gathering granular, customer-centric data and transmitting the relevant information across the supply chain.

This shift can require data and analytics solutions that consolidate data in a central place and integrate disparate information systems, such as supply chain and transportation systems, to supplier and customer data.

Second, focus on the end-to-end value chain, rather than separate processes, says Simon Geale, executive vice president of procurement with Proxima, a procurement consultancy.

This may mean shifting reporting lines so that procurement reports to supply chain, for instance. This is most likely to occur for direct materials or goods for resale, and where procurement is part of a more holistic process. Or, procurement and supply chain might fall under a new, cross-functional ownership model.

No matter how the organizational chart changes, the basic principle remains the same: “Commercial process and product journeys are cross-functional and optimization means being able to see how these knit together,” Geale says.

Understand Customers

Third, demand-driven supply chain organizations need to understand and adapt to their customers’ operations and preferences. Clevenger provides an example from his days in manufacturing: when providing development samples, non-automotive customers required much faster turnaround than automotive clients. “We had to learn to adapt and make that speed part of our operating system,” he says.

Adjust Through Teamwork

It’s not always possible to adjust to every customer request. For instance, Clevenger once oversaw an assembly line that served more than 100 customers, making constant adjustments impossible. Instead, his team consistently communicated with suppliers, sharing customer insights and their responsive actions. This allowed suppliers to align their responses as appropriate, he says.

Agile procurement practices and diversified supplier networks can also help companies respond to customer demand. “Develop contingency plans to react to changing demand,” Lin advises. This also builds up resilience against unforeseen supply chain disruptions.

Along with securing inventory, implementing a demand-driven supply chain requires firming up transportation, warehousing, and labor capacity. “That means examining factors such as how much warehouse space and how many shifts and people you require,” Goyal says.

The Role of Technology

As companies consider real-time market signals, they can leverage advanced analytics “to course-correct while in motion in order to recover cost and improve service,” says Ann Marie Jonkman, vice president, industry strategies with Blue Yonder, a supply chain management company. Generative artificial intelligence (Gen AI) can “tie together planning, route optimization, forecasting, and execution across the supply chain,” she says.

To provide visibility across their supply chain networks, more organizations are implementing solutions such as supply chain control towers, or cloud-based solutions that leverage advanced technologies, like AI, machine learning, and Internet of things (IoT) to proactively manage their supply chains. These solutions can provide visibility both within the organization and across the network to suppliers, logistics providers, and others.

As supply chains become more interconnected, demand-sensing solutions that use real-time data and advanced analytics to anticipate and react to demand signals are starting to appear in some mainstream supply chain planning software solutions.

Forecasting technologies can help supply chain organizations understand, sense, and shape their forecasts, and then drive inventory and fulfillment policies based on expected demand, Goyal says.

Cloud technologies are now advanced enough that they can detect potential risks and disruptions ahead of time, and evaluate the actions an organization can take, should the disruptions occur. This includes actions that likely will occur outside the organization, such as collaborating with suppliers.

Central to demand-driven supply chains are technology platforms that allow demand planners and commercial teams to seamlessly collaborate, and to incorporate market and customer insights into their demand plans, Lin says. Advanced planning systems coupled with warehouse management automation tools can strengthen forecast accuracy and allow organizations to maintain leaner inventory levels.

Investing in strong supplier collaboration platforms to gain visibility into critical data, such as supplier inventory levels and delivery status, is also key, Lin says. Access to accurate and real-time (or near-real-time) data allows for scenario planning and the ability to adjust plans based on evolving demand patterns.

Centralized reporting that consolidates disparate data sources from across an enterprise enables supply chain organizations and cross-functional teams to work off the same source of truth and engage in meaningful discussions of trade-offs of different courses of action.

Two other solutions will be important in many demand-driven supply chains. One is a technology solution that can make multiple complex systems and processes work seamlessly together, or what Geale calls an “orchestration layer.” The other is “the data layer,” or systems that can capture data, figure out what is useful, and then leverage it to make smarter and faster decisions.

“Without those two guardrails, we risk creating science projects rather than recalibrating how businesses operate,” Geale says.

More to Come

The prevalence of demand-driven supply chains will increase as companies search for efficient, cost-effective answers to their challenges and as they strive toward a more transparent and connected world.

Technology is also driving this shift. With the growth of artificial intelligence and automation solutions, demand-driven supply chains will gain momentum simply because it will become easier to implement them.

AI can help identify trends and patterns, and pass along information, while automation can help streamline tasks and workflow. “We find more adoption and uptick with these solutions now that AI and automation are becoming prevalent in a lot of supply chain technologies,” Sripada says.

However, the shift to demand-driven supply chains likely won’t be a straight, vertical line. In the short term, the skills and technologies companies need to make this transition are within reach mostly for companies with budgets that are large enough to excite big tech vendors, as well as the clout to change supply markets, Geale says. For demand-driven approaches to be widely adopted, the sector needs access to scalable and affordable solutions.

Gaining access to supplier data is another “elephant in the room,” Geale says. Without this, the gaps in the information that companies can assemble often make it less reliable and useful.

Organizations that can tackle these challenges and establish demand-driven supply chains will reap benefits.

“Companies that do demand-driven well are more competitive and can better service their customers,” Clevenger says. “That’s what we’re all about: providing value and servicing customers effectively.”

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Demand-Driven In Action

Here are some examples of industries and companies known for embracing demand-driven logistics:

Retail: Many large retailers, especially those with strong e-commerce presences, utilize demand-driven strategies. Amazon, Walmart, and Target leverage real-time data on customer purchases and trends to optimize inventory levels and predict demand fluctuations.

Consumer Electronics: The fast-paced and ever-changing world of consumer electronics necessitates a demand-driven approach. Apple and Samsung utilize sales data and pre-orders to optimize production and manage inventory.

Food and Beverage: Demand for fresh produce and other perishables can be unpredictable. Nestle and Kraft Heinz use demand-driven logistics to forecast demand and optimize transportation and storage to minimize spoilage.

Manufacturing: Manufacturers that produce customized or build-to-order products benefit from demand-driven logistics. Dell and Nike are known for using these techniques to tailor production based on actual customer orders, reducing waste and lead times.

Smaller businesses can also benefit from these practices by implementing tools such as data analytics and collaboration with suppliers to better anticipate customer needs.

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