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Demand-driven supply chains demand new metrics

When customer demand drives supply chain activities, performance should be judged by customers’ service metrics.

As companies try to manage volatility in a global economy, more are expected to embrace demand-driven supply chains. Unlike traditional supply chains that base forecasting on historical data, demand-driven supply chains (DDSCs) use demand signals such as point-of-sale data to determine replenishment and production. The demand signals are then shared with all partners in the chain.

Interest appears to be growing in DDSCs. The consulting firm KPMG’s 2013 global manufacturing outlook survey found that for companies with more than $5 billion in revenue, demand planning was the number two supply chain priority. It’s easy to see why, since demand planning can reduce inventory levels and thus save working capital. The Boston Consulting Group recently said that, based on its research and experience with clients, companies with advanced DDSCs (those that provide end-to-end visibility of consumer purchases all the way back to suppliers) carry 33 percent less inventory than do companies with other supply chain models.

A DDSC forces suppliers, manufacturers, and retailers to work more closely together than has been the case in the past. For a demand-driven supply chain to work properly, they all have to be pulled in the same direction; in other words, information from the retailer has to serve as the basis for replenishment. But because manufacturers and retailers evaluate their supply chain performance on different metrics, that could create misalignments.

Take retailers. They often evaluate supply chain performance on such metrics as in-stock rates and order-to-delivery time. Manufacturers, however, judge performance on fill rates at their DCs for customer orders. That’s among the reasons why one large consumer packaged goods manufacturer has proposed that DDSCs judge performance on “service as measured by the customer.” Since the customer is pulling the product based on demand signals, then the customer should set the pace. Gene Tyndall, a consultant with Tompkins Associates who has written about demand-driven supply chains, said that the CPG company (which does not want to be named) believes its current service-level metrics should be synced with the measurements its customers use.

As more companies look to initiate DDSCs, supply chain executives need to have a discussion on whether new, holistic metrics that measure supply chains on end-to-end flow will be required to make this approach work.

By James A. Cooke, Editor