The 21st Century Demands a Combination of the Demand and the Supply Chain
November 9 2011 by Rick Kash and David Calhoun
For 30 years, CEOs have relied on their supply chains to take costs out of their businesses and create real competitive advantage. They accomplished this by better aligning the traditional functions which are part of the supply chain – like sourcing, manufacturing, transportation, and customer service. In looking at the supply chain process from end to end, they dramatically reduced cycle time and eliminated waste. It was an opportunity rich environment.
It seems we all take supply chain for granted in our business strategy and our financial planning. While it may seem surprising, the discipline of the supply chain is only 30+ years old. Like many important ideas, it grew out of a simple but powerful observation. While departments like sourcing, manufacturing, and transportation were working cooperatively, their interactions lacked the discipline of process and structure. Also missing was a set of metrics to keep track of improvements which, in turn, became increased profits.
The rest is history.
Fast forward to 2011 and the same lack of precision and discipline which gave birth to the supply chain still characterizes the demand side of most businesses. Think about what your company spends on marketing, advertising, promotion and sales. Then add the costs and complexity of managing customer relationships and you come to a compelling opportunity.
What if you could bring the discipline and precision of process, structure and metrics to the demand side of your business in the same way you use them on the supply side of your business? And, what if the results continuously increased revenues, margins, and profits? Well, some of America’s most successful companies have answered these questions and found powerful and enviable results.
Introducing the Demand Chain
The demand chain introduces a powerful new concept, “the reduction of wasted opportunity.”
Where a supply chain continuously seeks to reduce waste, a demand chain continuously uses a deep understanding of customer demand to enable your supply chain to close the gap between the profitable demand available to your company and the profitable demand which your company captures today.
The combination of continuously reducing waste while simultaneously reducing the amount of your wasted opportunity creates the power of a new organic growth engine. Thirty years of profitable experience has taught us that there is no substitute for supply chain management. However, that doesn’t mean that supply chain management can’t be improved. What the demand chain does is improve the responsiveness and precision of the current supply chain. Armed with an understanding of current and latent customer demand, the demand chain informs the supply chain with an understanding of how to capture the fullest level of opportunity, and how to bring greater precision to its energies, planning, and resources.
Demand chain is both the counterpart of supply chain and its forward-looking and forward-understanding eyes and ears. But most of all, the supply and demand chains, working together, creates a kind of collaborative network that, for the first time, enables suppliers and retailers to actually work together and improve each other’s performance by combining an understanding of customer demand and the historical performance of supply. And when you can tie suppliers, manufacturers, and retailers together in the common cause of providing the most desirable products to the highest-profit customers and consumers, you have the best possible recipe for success.
These collaborative networks become profit search engines for every participant in the demand chain. By sharing data at entirely new and deeper levels and participating in the Demand Chain, manufacturers, retailers and even media companies all find revenues and profits increasing.
Demand Chain in Action
An early demand chain example belongs to one of America’s largest beverage companies. This company sells its 60+ brands in 300,000 retail stores across America, from downscale rural neighborhoods to the most upscale urban communities.
By applying a precise and disciplined demand-based model, the company has achieved a level of precision which would have seemed impossible. For every one of these 300,000 individual stores, there is a detailed plan which determines five enormously important factors for each store.
Depending upon the type of consumer who shops in that store (young vs. old, ethnicity, middle class, affluent, etc.), the demand model determines:
- Which of the beverage company’s 60+ brands should be in that store
- What pack sizes and container sizes maximize sales
- What is the optimum assortment and space allocation across the brands and multiple pack type for that store
- What price should be charged
- What will be the most motivating point of sale materials to use in that store
The results in test markets?
Revenues and profits increase beyond expectations for both the manufacturer and the retailers. Inventories turn faster, out of stocks are reduced, consumers purchase more on each trip, working capital ratios are more attractive, and competition has been redefined to the benefit of the beverage company’s long-term advantage.
McDonald’s, one of the most admired companies in the world, was recently featured in, “How Companies Win: Profiting From Demand-Driven Business Models No Matter What Business You’re In” (Harper Press). Few companies provide a better example of combining an understanding of Demand to enable one of the world’s great supply chains. McDonald’s has long understood that linking demand and supply enables the constant reduction of waste while enabling the constant reduction of wasted opportunity. McDonald’s addressed consumer demand in a variety of ways, two of which were by providing healthy options and slowing down expansion to concentrate on quality. As a result, McDonald’s total sales increased from $50.8 billion in 2004 to $72.3 billion in 2009, a jump of more than 42 percent. Meanwhile, net income increased 96 percent in that same time frame.
At a recent industry conference, attended by hundreds of CEOs and C-level executives, the CEO of Hershey, the chief merchant and EVP of Sam’s and the CEO of Anheuser Busch all shared their experience, their enthusiasm, and their plans for how to utilize both the Demand Chain and the supply chain in their businesses.
The new business model for the 21st century is the combination of the demand chain and the supply chain. Why? Because the demand chain puts revenues and profits into your business, while the supply chain takes costs and complexities out of your business. The combination creates a continuous growth, competitively advantaged and high-performance company.