Demand-Driven Supply Networks & Demand Management : Demand-Driven Supply Networks & Demand Management Supply Chain Executive Forum
October 26th, 2011
Maria Rey
maria.rey@isye.gatech.edu 1 (c) Maria Rey, Atlanta 2011
From the Classics to the Contemporaries : From the Classics to the Contemporaries From Jean Baptiste Say
“Supply creates its own demand”
Context?
To John Maynard Keynes
“Demand creates its own supply”
Context?
Today? 2 (c) Maria Rey, Atlanta 2011
Learning Points : Learning Points Connecting fundamental demand management concepts from an economic perspective with DDSN and SCM strategy
Demand-driven supply networks as the theoretical framework for supply chain management as a demand response component
Discussion on what means to be demand-driven and which processes need to evolve to become a DD organization 3 (c) Maria Rey, Atlanta 2011
Agenda : Agenda Fundamental concepts about demand
Demand-driven supply networks
Cisco (2001) Minicase
Demand response planning as part of demand management
How to transform supply chain processes into a demand-driven response organization 4 (c) Maria Rey, Atlanta 2011
A. Fundamental concepts About demand : A. Fundamental concepts About demand We do not plan demand.
We plan and manage our specific response to market demand.
Can we create demand? 5 (c) Maria Rey, Atlanta 2011
What is Demand? : What is Demand? Behaviors
Decisions
Actions What determines demand? 6 (c) Maria Rey, Atlanta 2011
Demand! : Demand! In economics, demand is the wish
To have something
The ability to pay for it
The will to do it
Demand means the ability to acquire a good or service and pay for it at a specific time and location Melvin and Boyes (2010) demand as a relation between price and quantities while every other factor remains constant (ceteris paribus). (c) Maria Rey, Atlanta 2011 7
How people make decisions? : How people make decisions? The study of economics starts with four principles of individual decision making:
People face tradeoffs
The cost of something is what you give up to get it.
Rational people think at the margin.
People respond to incentives. 8 (c) Maria Rey, Atlanta 2011
Determinants of Demand: Price and the Demand Curve : Determinants of Demand: Price and the Demand Curve 100 200 300 400 500 600 1 2 3 4 5 6 Price $ Quantity A demand curve for a “normal” good or service 9 (c) Maria Rey, Atlanta 2011
Other determinants of demand : Other determinants of demand Income:
A tale of two types of goods Normal Goods
Inferior Goods Price of Related Goods: Another Tale! Substituting Goods
Complementary Goods 10 (c) Maria Rey, Atlanta 2011
More Determinants of Demand : More Determinants of Demand Expectations Our own internal personal (very personal) forecasting! Tastes and Influences How to Spend It (Financial Times) 11 (c) Maria Rey, Atlanta 2011
Shift of Demand Versus Movement Along a Demand Curve : Shift of Demand Versus Movement Along a Demand Curve A change in demand is not the same as a change in quantity demanded. In this example, a higher price causes lower quantity demanded. Changes in determinants of demand, other than price, cause a change in demand, or a shift of the entire demand curve, from DA to DB. 12 (c) Maria Rey, Atlanta 2011
Generally, Determinants of Demand Include: : Generally, Determinants of Demand Include: Pricing
Income
Pricing of related goods or services
Tastes and influences
Expectations
Here is a common formulation for the demand curve: 13 (c) Maria Rey, Atlanta 2011
Demand Management for Supply Chain Managers : Demand Management for Supply Chain Managers Demand Management is a collaborative process for sensing, shaping and responding to demand
Supply Chain Management comprises all demand response processes including forecasting and planning:
What and when products are needed
Where and how many products are needed
More formally, it is the supply chain management process that balances the customers’ requirements with supply chain capacity Doug Lambert, Supply Chain Management (Supply Chain Management Institute, 2004) 14 (c) Maria Rey, Atlanta 2011
B. Demand-Driven Supply Networks (DDSN) : B. Demand-Driven Supply Networks (DDSN) The Cisco (2001) Mini-Case 15 (c) Maria Rey, Atlanta 2011
Demand Management at CISCO Systems : Demand Management at CISCO Systems A bit of business history: circa 2001
A “small “speed-bump! (c) Maria Rey, Atlanta 2011 16 Cisco CIO Peter Solvik says the company's disastrous third quarter would have been worse without its forecasting software. Why Cisco's renowned forecasting software couldn't stop an inventory disaster
The flaw in Cisco's touted outsourcing model
The danger of believing your own press clippings
What Went Wrong? : What Went Wrong? Demand Sensing
Demand Shaping
Demand Response 17 (c) Maria Rey, Atlanta 2011
Things haven’t changed much since modern economics… : Things haven’t changed much since modern economics… (c) Maria Rey, Atlanta 2011 18
Then, what is different? : Then, what is different? It essentially is a supply chain driven by your customers.
It means running your company on more real time information.
Fundamental shift on how to do business.
Linking supply with demand with products. (c) Maria Rey, Atlanta 2011 19
Today’s supply chain cannot deliver on many stakeholders’ expectations… : Today’s supply chain cannot deliver on many stakeholders’ expectations… Orders – 20%+ are filled imperfectly
Inventory - More than $1.7 trillion in the chain now
Markdowns - 78% of merchandise sold
New Products – 75% failed
Engineering – 70% of hours wasted 11/9/2011 (c) Maria Rey, Atlanta 2011 20
The Demand-Driven Supply Network Defined : The Demand-Driven Supply Network Defined 21 (c) Maria Rey, Atlanta 2011 A system of technologies and processes that senses and reacts to real-time demand across a network of customers, suppliers, and employees
Demand Driven Planning : Demand Driven Planning Forecast-Driven Planning
Predictive - use formulas and history to forecast demand
Uses “buffers” to absorb demand shocks
Expensive use of working capital Demand-Driven Planning
Demand Sensing: Uses demand signals to plan and manage supply
Demand Shaping: Uses strategies and information to shape demand
Demand Response: Fulfillment based on customer requirements 22 (c) Maria Rey, Atlanta 2011
What It Means - Demand Management : What It Means - Demand Management Sensing
Utilize granular data
Know and utilize causal factors and product attributes
Shaping
Optimize promotion effectiveness
Shape demand via sales and commercial strategies
Response
Validate operational plans
S&OP to synchronize company and partners 23 (c) Maria Rey, Atlanta 2011
Key DDSN Capabilities : Key DDSN Capabilities Reading Demand Signals
Understanding Demand Signals
Demand and Supply Visibility
Integration with New Product Development & Lifecycle Management
Event Driven Planning Processes with Fast Response Times
Real Time Demand Response
Real time is different from immediate! (c) Maria Rey, Atlanta 2011 24
Is there such a thing as Demand Management? : Is there such a thing as Demand Management? ∑ DDSn; DDSh; DDRes = Demand-Driven Supply Networks (DDSN) 25 (c) Maria Rey, Atlanta 2011
c. Demand Response Planning : c. Demand Response Planning What would 26 (c) Maria Rey, Atlanta 2011
Collaborate Internally and Externally : Collaborate Internally and Externally (c) Maria Rey, Atlanta 2011 27
The Role of Demand Management in the Supply Chain : What is the definition of Sales and Operations Planning? The Role of Demand Management in the Supply Chain *Sales and Operations Planning (S&OP) is the process of bringing together all plans (sales, marketing, finance, operations, etc.) into one integrated plan
This includes the Monthly Rolling Estimate and the weekly Operational Forecasts when they are originated from different sources of data and objectives *Source APICS Dictionary APICS.org 28 (c) Maria Rey, Atlanta 2011
Sales & Operations Planning : S&OP Management Meeting Demand Meeting
Consensus forecast
Causal factors Marketing / Sales Meeting
Product mix changes
Promotions
Sales quotas
Customer collaboration Supply Meeting
- Production plan
Inventory plan
Supplier collaboration Balance supply and demand
Synchronize all operational plans Sales & Operations Planning (c) Maria Rey, Atlanta 2011 29 Finance & Budgeting
Demand Management for a Demand-Driven Supply Network : Demand Management for a Demand-Driven Supply Network (c) Maria Rey, Atlanta 2011 30 Demand Driven Sensing Shaping Response Support Multiple Demand Sources
Flexible Data Models
Granular Visibility
Support VMI & CPFR Bayesian Markov
Mixed Model Forecasting
Support Causal Factors
Optimize Promotions Bottom Up, Top Down, Middle Out
Attributes & Characteristics
Chaining and Shape Modeling Collaboration
Exception Handling
Workflows and Worksheets
d. How to transform our system to become demand-driven? : d. How to transform our system to become demand-driven? Discussion 31 (c) Maria Rey, Atlanta 2011
Connecting with Sales and Marketing : Connecting with Sales and Marketing We’re here to sense, shape and respond to demand, not just to optimize resource utilization! 11/9/2011 32 (c) Maria Rey, Atlanta 2011
Our reaction to… : Our reaction to… New SKUs?
New markets?
Faster response times?
Better operational quality? (c) Maria Rey, Atlanta 2011 33
Learning Points : Learning Points Connecting fundamental demand management concepts from an economic perspective with DDSN and SCM strategy
Demand-driven supply networks as the theoretical framework for supply chain management as a demand response component
Discussion on what means to be demand-driven and which processes need to evolve to become a DD organization 34 (c) Maria Rey, Atlanta 2011
Demand-Driven Supply Networks & Demand Management : Demand-Driven Supply Networks & Demand Management Supply Chain Executive Forum
October 26th, 2011
Maria Rey
maria.rey@isye.gatech.edu 35 (c) Maria Rey, Atlanta 2011