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How can a demand-driven supply chain help my company?

A demand-driven supply chain is built to be responsive and needs to minimize lead times and enable early change detection. Here's what else you should know to make it a success.

Being demand driven means that products are made and moved only in response to demand. From a strictly literal...

standpoint, a demand-driven enterprise has no inventory and does not make anything that has not already been sold. Few, if any, companies or supply chains can be purely demand driven.

Realistically speaking, a demand-driven supply chain has a minimum amount of inventory and the shortest possible lead times so that it can be as responsive to demand as possible. Contrast that with the traditional "push" approach where inventory is made and positioned to support a forecast of expected demand. According to these myopic definitions, every supply chain for every product on earth must be forecast driven unless the product is purely made to order.

A demand-driven supply chain as we define it today is built to be responsive to demand by minimizing lead times and by early detection of impending demand changes through collaboration with customers, distributors and suppliers. Inventory that is in stock (not in transit) is considered wasteful and should be reduced or eliminated. And that's the dilemma with lean or demand-driven operations -- inventory is the easiest way to shorten lead times and improve responsiveness to demand, but inventory is inefficient, wasteful, full of risk (of obsolescence, theft, damage, etc.) and reduces flexibility. If demand shifts to another product or another location, the inventory is of no help and still incurs the costs and risk.

Each market may take a different approach to creating a demand-driven supply chain based on the specifics of demand and supply. In consumer goods markets, manufacturing bets on economies of scale to keep product costs down so demand-driven efforts focus on management of the inventories in the distribution chain approaches like collaborative planning forecasting and replenishment.

Other markets like industrial equipment or electronics producers do not typically have a lot of finished goods inventory to distribute. Rather, these companies focus on short lead time production and procurement, late personalization, component stocking strategies and efficiencies in the engineering arena to get products to market quickly.

Inventory is a fact of life for manufacturers and distributors. Demand-driven supply chains strive to minimize inventory. Although strategically placed inventory can shorten response time (lead time) to the customer, it hampers flexibility and carries other costs and risks. Short lead times for production, procurement and distribution are far more powerful and desirable weapons for becoming demand driven.

Next Steps

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This was last published in November 2016

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