demand-driven supply networks: advancing supply chain management

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DEMAND-DRIVEN SUPPLY NETWORKS: ADVANCING SUPPLY CHAIN MANAGEMENT SAP INSIGHT

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Page 1: DEMAND-DRIVEN SUPPLY NETWORKS: ADVANCING SUPPLY CHAIN MANAGEMENT

DEMAND-DRIVENSUPPLY NETWORKS:ADVANCING SUPPLYCHAIN MANAGEMENT

SAP INSIGHT

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Table of Contents

Executive Notes 1

Focus on Real Demand 2

The Challenge: Changing the Status Quo 3

The Problem with Planning 4

How DDSN Changes Planning 5

Another Shift: Manufacturing to Satisfy Demand 6

Alerts and Simulation Tools to Deal with Contingencies 7

DDSN and a New Formula for Success 8

Advantages Across the Supply Chain 9

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DEMAND-DRIVENSUPPLY NETWORKS:ADVANCING SUPPLYCHAIN MANAGEMENTMark Panley, Value Engineering, SAPStefan Boerner, Industry Solution Management, SAP

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Most consumer products companies realize thatdeveloping a demand-driven supply network(DDSN) could provide the pathway to true customerfocus. These supply networks depart from the tradi-tional systematic manufacturing “push” of productsto market – which meets the demand of the distribu-tion center, but not of the end customer. Becauseactual buying decisions are made with the shoppingcart, not the warehouse picker, DDSN turns the busi-ness around: customers actually “pull” products tothe point of sale.

While the proposition may seem somewhat com-monplace, achieving it requires a major strategicshift. Being “demand-driven” requires an instanta-neous sensing of customer demand and an immedi-ate supply chain response to get the product to thecustomer when the customer wants it. The criticalelement is collaboration among partners in the sup-ply chain, enabling manufacturers to produce exact-ly what the customer is poised to buy.

DDSN is the next step in the advancement of supplychain philosophy, which has included responsivereplenishment; collaborative planning, forecasting,and replenishment; and others. These advancesstreamlined the supply chain to deliver greater prof-its through efficiencies and collaboration amongtrading partners. DDSN, however, is a mind shift thatcombines traditional practices with new elements inan evolutionary way.

DDSN translates into real money on the bottomline. Based on existing customer studies, analystcomments, and industry polling, SAP has deter-mined that consumer products companies canachieve significant value by adopting the DDSNmodel, as illustrated below.

Revenue

� Increase fill rates and reduce out-of-stocks3%–10%

Operating cost

� Increase production efficiencies 1%–5%

� Decrease freight costs 5%–15%

� Improve personnel productivity 7%–12%

� Reduce obsolescence and waste 35%–50%

Working capital

� Reduce inventory levels 7%–15%

� Improve asset utilization 10%–15%

� Decrease cash-to-cash cycle 10%–30%

In addition, DDSN will help businesses realize thefollowing advantages:

� Fewer deductions based on more perfect orderfill

� Better use of promotional funds based on moreaccurate and timely marketing information andfaster response to changes in demand

� Faster, more effective product introductions (andphase-outs) based on a more flexible, responsivesupply network

For the past several years, SAP has been working withour customers to enable this vision. They will enableDDSN by combining existing technology such asadvanced planning and optimization with the fol-lowing capabilities as they evolve:

� Dynamic sales and operations planning (S&OP)

� Global data synchronization

� Radio frequency identification (RFID)–enabledprocesses

� Point of sale–based analytics

� Integrated trade promotions management

� Responsive replenishment

� Multitiered collaboration and shared scorecards

� Adaptive manufacturing

� Event management

� Innovation and design collaboration

In the following SAP Insight, we will explore the cur-rent approach to managing the supply chain, thechallenges to that approach, the benefits of DDSN,and what SAP is doing to support this evolution.

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EXECUTIVE NOTES

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FOCUS ON REAL DEMAND

In consumer markets, customer expectations havecompletely changed. With more products, morechannels, more outlets, and more product informa-tion, customer choice reigns. Unconstrained bygeography, a consumer might choose to buy from abrick-and-mortar retailer nearby, but can also shoponline for better availability, selection, and price.

To succeed with this more demanding and well-informed customer, consumer products manufac-turers must be precise with their product line andin-stock levels. If a manufacturer permits an item tobe out of stock, consumer products companies can-not assume that the customer will come back anoth-er day. Someone else will fill the gap. Companiesmust change the whole approach to forecasting andproduct distribution, which is mired in assumptionsthat are no longer valid.

The answer is DDSN, which ties supply to actualdemand. DDSN provides real-time sensing andresponse, as well as visibility, collaboration, andanalysis, throughout the network. In its mostadvanced form, DDSN can better inform the productinnovation process for targeting consumers’ trueneeds and desires, creating a powerful competitiveadvantage. And beyond its immediate uses, DDSNwill also reveal intelligence that enables the ability tosense – and act upon – small shifts in demand thatcan sometimes provide a preview of an importanttrend. Consumers want different things at differenttimes. The goal of DDSN is to be the first to sensethose desires and fulfill those expectations – withincreased sales of full-priced merchandise as thedesired result.

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� Synchronize supply to demand – Balance push and pullnetwork-planning processes. Replenish inventory and executeproduction based on actual demand

� Sense and respond with an adaptive supply chain network –Drive distribution, transportation, and logistics processes thatare integrated with real-time planning processes

� Provide network-wide visibility, collaboration, and analytics –Monitor and analyze your extended supply chain

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But the advantages of DDSN are more obvious thanthe route to implementation. Even companies thatprofess to be customer-focused are not truly opti-mized to respond to consumer demand. In fact, thepath to becoming a demand-driven company isstrewn with many obstacles.

Traditionally, forecasting, planning, and executionhave formed the foundation of the modern supplychain. The products pushed out to the distributioncenter and into the marketplace are those that man-agers – and their forecasters – believe consumers willmost likely purchase. Ultimately, this approach isflawed because of the following realities:

� Production is driven by forecasts at the distribution-center level or by operational metrics instead of actual demand.

� Even when planners recognize demand, the system cannot respond fast enough to meet it. Inmost consumer products companies, the pro-duction line cannot meet a sudden surge indemand. In the classic scenario, a company regularly processes orders on Wednesdays, leaving a demand spike sensed on Thursdayunfulfilled for a week.

� Consumer products companies struggle to com-municate effectively and efficiently with tradingpartners, which forces them to respond to stock-outs by carrying more inventory.

� Trade promotion planning and execution are notfully integrated into demand or productionplans.

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THE CHALLENGE: CHANGING THE STATUS QUO

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THE PROBLEM WITH PLANNING

Many companies have a less-than-perfect planningprocess, but loath to admit it. The management incharge of forecasting will often describe the ideal asthough it were reality: the planning process identi-fies the forecasted demand for products, arranges forthe appropriate materials and manufacturing capability, and ensures that the shipping and ware-housing resources will be in place. As a result, thecompany delivers the product to the shelf when theforecast predicts demand at the retail level.

But companies rarely reach this ideal. No matterwhat the statistical models show, business decisionsare predicated on hunches or history. Forecasts arebased largely on empirical data, with planningdependent on projections from historical demand.What’s more, various stakeholders will not find thedata they need to make a case and influence a deci-sion – often because finding the truth is just too dif-ficult. For example, data may have been recorded onspreadsheets, using different metrics or units.Making updates is tedious and slow, even as pressingdemands change or problems arise. Everyone strug-gles to make sense of the data, and end up simplyverifying what they already know. Divisions of thesame company operate autonomously, sometimesusing different terms for the same items and actions.And when the divisions do communicate, they oftenfocus on common information, because it’s mucheasier – and because common information is morepositively rewarded than attempting to argue from a more unconventional and often unpopular viewpoint.1

Even if the operations team can get the right materi-als into the factory and make a product according tothe plan, they focus on getting the product to thedistribution center. Meanwhile, the consumer mayhave lost interest in that product. Demand may haveshifted. Couple this with product innovation andother changes, and most organizations struggle justto keep up. The process barely works – let alonebeing dynamic or responsive.

The best distribution system still has inefficiencies,time lags, and “lumpiness.” Instead of a steady flowto the shelf to match the customer demand in thestore, the merchandise arrives by a weekly shipment,or is reordered on a weekly basis, or the warehousewaits for a full load before making a delivery.

Direct-store delivery (DSD), which determines dailythe needs at the retail outlet, can partially solve theproblem. A sales rep for a snack food company, forexample, can follow a daily schedule like clockworkto visit every retail customer and fill every emptyshelf. But even that level of customer service is stillreactive. The shelf remains empty until the sales reparrives – and remains empty if the warehouse is outof stock. Furthermore, running a DSD networkis not feasible for most consumer products manufactures.

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1. “Decisions Without Blinders,” Max H. Bazerman and Dolly Chugh, Harvard Business Review, January 2006, p. 96.

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DDSN will integrate the supply chain within thefour walls of the enterprise and beyond, to suppliersand customers. DDSN will remove natural distor-tions caused by transactions and inconsistencies inthe flow of goods while increasing speed and responsiveness. DDSN will provide enterprise-widevisibility with the manufacturing execution system,and can share that data in the same format withinternal and external stakeholders and trading part-ners. It will provide a systematic way to determine ifone cog in the wheel of the overall operation isunderperforming.

DDSN’s most fundamental capability is the elimina-tion of inefficiencies and constraints across the sup-ply chain. DDSN delivers a smooth product flowthat matches actual demand. And these capabilitiesare actually available now; the big challenge is inimplementing new IT systems and retooling manu-facturing processes. Indeed, adopting new processesis an essential element of the DDSN initiative.Updating IT solutions without retooling processes isa missed opportunity.

With DDSN, trading partners will fully integratesupply chains. State-of-the-art technologies such asRFID can sense demand and outages in real time.Responsiveness can be increased by enhancing tradi-tional practices like vendor-managed inventory(VMI) and establishing event management concepts.Then, agile manufacturing capabilities can adapt

quickly to meet that demand. By meeting truedemand better than ever before, DDSN makes adirect impact on profit margins.

Synchronizing the data exchanged and the process toexchange it enhances efficiencies and detail. By stan-dardizing master data – and how the different enti-ties order, pick and pack, ship, and invoice – the datacan be optimized for the entire network. Throughthe use of sensing technology, planners can accu-rately assess demand and thus forecast more precisely. New tools make this data more timely andactionable.

Once trading partners are synchronized and using aconsistent and accurate forecasting methodology, adynamic S&OP can put that forecast into action.Instituting DDSN delivers a series of enhanced planning, execution, sensing, responsiveness, andadaptation capabilities.

Managers can respond proactively to the deviationscaused by internal and eternal events. Instead ofspending their time gathering information, respond-ing to problems, or preoccupied by ancillary tasks,managers can turn their attention to the most press-ing needs – or new opportunities. The ability to reactmore quickly to alerts can prevent crises and reducethe attendant costs.

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HOW DDSN CHANGES PLANNING

35,000New

ProductsAnnually

62 Daysof Supply(Average)

50%–70%ForecastAccuracy

16% of TradePromotionsTurn a Profit

6%–12%Out of Stock20% DuringPromotions

Figure 1: The Dilemmas of Consumer Products Manufacturing

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ANOTHER SHIFT:MANUFACTURING TO SATISFY DEMAND

Manufacturers strive for simplicity and efficiency.But with DDSN, manufacturing will be agile. Insteadof long production runs, the line may operate withshorter runs and be shifted quickly to another prod-uct to meet actual demand.

Operational planning cycles will need to be reducedto accommodate more flexible response times, andproduction lines may become much smaller andmore adaptable. Instead of using forecasts to create athree- or four-week planning cycle, the more adap-tive manufacturing approach calls for the agility tooperate with a planning cycle of one week or less.The new fulfillment network will be based on avail-able or anticipated supply network and logisticsresource capabilities.

Here is the heart of the argument. While manu-facturers have always believed that long pro-duction runs lead to higher profitability, this isno longer the case. Although it may seem counter-intuitive, production runs that are theoretically lessefficient may actually post a better ROI with DDSNbecause of the ability to shift manufacturing quicklyto the most profitable products.

Managers can look at orders received in the morningand change the production schedule in the after-noon. While this capability will not be required forall products, the agility to respond to what cus-

tomers are buying will be required. While this isindeed adaptive manufacturing, the payoffs are enormous. Such improvements in supply chainmanagement help companies manufacture what thecustomer wants, instead of trying to sell what manufacturing has produced.

Running longer and more efficient production runscreates large inventories of product that is essentially“dumped” to the supply chain. This oversupplyresults in carrying costs, obsolescence, and mark-downs. The new reality is to carry smaller invento-ries and meet current demand with products thatsell at full price. Even small improvements in adap-tive manufacturing can deliver significant improve-ments. Smaller inventories and higher fill ratesimprove margins. The difference is being demand-driven instead of marketing-driven. As soon as cus-tomers have a new desire, manufacturers adapt pro-duction to accommodate.

Returning to the example of the snack food rep, theoptimum solution determines what should beloaded onto the delivery truck before the driverleaves the warehouse and creates the best itinerary sothe sales rep services the right stores with the rightproduct before a stock outage occurs. Taking it onestep further, the sensing triggers the manufacturingprocess to meet the demand.

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To aid operations with a shorter cycle, new modeling andsimulation tools can run a multitude of what-if scenariosto determine the optimal manufacturing configuration,quantities, transportation plans, and sales promotions.When planners determine the best course of action, theycan apply supplies, labor, manufacturing capacity, ship-ping, and other requirements to the tasks. Newer, moreflexible manufacturing equipment may be required toproduce smaller quantities and permit more rapid reconfiguration.

As with any system, breakdowns will happen. The traditional supply chain is full of black holes. Materialmay fail to show up or to meet specifications – or it’sdelivered but fails to reach the right party. Customs maydelay a truck at the border; the customs broker may beaware of the holdup but other key people are not. Adrought may affect a commodity, but the operationsteam doesn’t get the word. DDSN tools such as eventmanagement can mitigate these disconnects, allowingpartners to see what’s coming, where it’s going, and howbest to handle it.

To eliminate surprises and increase response times, simu-lation tools permit analysis of different responses to eachcontingency. Parameters can be changed and all the per-mutations taken to the various conclusions. Using theexample of the snack food rep, planners can simulate dif-ferent load-outs and routes to determine which deliversthe best overall in-stock position. With simulations, plan-ners can pursue the best options and notify partnersahead of time when a problem arises or a promise cannotbe fulfilled.

DDSN eliminates the need to pad projections, squirrelaway raw materials, or store extra inventory for a rainyday. That excess stock occupies storage space, ties up capi-tal, and slows down the ability to respond to demand.Inventory transparency helps find idle stock, which cannow be repurposed more profitably.

With these new tools comes full visibility up and downthe supply chain. Padding can be identified and reduced,if not eliminated. Visibility enables collaboration. Thisconnectivity and cooperation is pervasive, spreadingacross the business network to meet the internal andexternal demand and proactively respond to supply.

Managers can move quickly when something goeswrong. Marketing knows much more about what iscoming from the factory and when it will be available.Manufacturing can monitor what product is selling andbe ready to respond immediately to shifting consumerdemands.

DDSN helps managers respond to the pressing demandsof the moment. It delivers analytics that provide standarddashboards to monitor activities continuously. It alsoprovides business intelligence that allows leaders to lookto the future and steer the business in the right direction.Lessons learned can be incorporated into the company’sbusiness processes to drive continuous improvement.

DDSN spans the entire consumer products supply chainand seamlessly connects all facets of the network. Thefuture demand-driven organization integrates all supplyand demand elements to provide a seamless flow of real-time information to support valid decision making.

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ALERTS AND SIMULATION TOOLS TO DEALWITH CONTINGENCIES

Figure 2

The Demand-Driven SupplyNetwork

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DDSN AND A NEW FORMULA FOR SUCCESS

DDSN capabilities help manufacturers better servechanging consumer and customer needs by consis-tently having the right products on the shelf at themoment the purchaser wants them. DDSN enablesthe delivery of more and higher-margin productswhile reducing inventory and costs. This facilitatesrevenue-generating product and service innovationsthat result in customer service excellence and higherprofits.

DDSN is not one thing or one capability. It is not adestination, but rather a journey. It comprises agroup of capabilities that enable a company toachieve the results possible at each stage of the evolu-tion toward a full demand-driven model.

While most organizations have some DDSN ele-ments in place, no company today has the full net-work up and functioning. To begin the journey, it isimportant to recognize the end state and workmethodically toward that goal as your organization,your trading partners, and the underlying technolo-gy evolves. Consider the following steps.

Stage 1: Harmonization – The first step in becomingdemand-driven is to standardize processes, data, andtechnology within your current environment. Thiswould typically start with establishing performancemanagement and the alignment of master data.

Stage 2: Advanced planning – The second step stillfocuses on the internal organization and requires theintegration of key supply and demand elements.This typically focuses on a robust, dynamic S&OP

that integrates all parties such as logistics, produc-tion, new-product introduction, and trade management. Furthermore, this step includes therefinement of forecasting techniques and the imple-mentation of advanced planning and schedulingprocesses – that is, using optimization algorithms.

Stage 3: Increased responsiveness – The third stepextends the focus beyond the enterprise to the net-work as a whole. On the customer side, this meansdriving forecasting and visibility past the distributioncenter to the source of demand. On the supply side,this means extending past traditional purchaseorders to supplier availability and capability.

Stage 4: Adaptability – The fourth step takes the inte-grated network and refines its capabilities to adapteffectively and quickly to changes. This may requirenew levels of data, new time considerations, andincreased flexibility across the network. By becomingmore adaptive, the network can increase its ability tofulfill demand while removing waste from the entiresupply chain.

By progressing through each of these stages and inte-grating processes such as sales, marketing, R & D,financials, sourcing, analytics, and customer data tocreate a seamless value chain, manufacturers canreduce costs, optimize assets, and increase revenue. Acompany can make the transition from a linearchain to a virtual network, especially when tradingpartners integrate at the same time. This requiresenabling networked infrastructures and a willingnessto share information freely among partners.

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Ultimately, DDSN benefits every player in the supplychain, not just the manufacturer. Suppliers, brokers,retailers, and consumers will benefit as well.

Suppliers, for example, are often bullwhipped bydemand, forcing them to carry significant volumes ofnonproductive inventory. Or, they are slaves to unfore-seen product developments. With DDSN, suppliers canrespond faster and smarter to demand and supplydynamics. They can reduce inventory, balance capacity,and lower total delivered costs. Increased agility enablessuppliers to better respond to customer demands, creat-ing more powerful customer relationships and maximiz-ing their revenue and profit. Linking consistent andenhanced forecasting processes with supply capabilitiesresults in more flexible overall supply operations.Furthermore, the supplier can become a partner in theinnovation process rather than an obstacle.

Meanwhile, brokers can be better in sensing and shapingdemand. They can become more than order takers ormiddlemen, and become key supply network enablers.This will increase their value to both manufacturers andretailers.

Retailers are able to benefit from increased in-stock levelsof full-margin products and meanwhile, carry lower

inventory. They can maximize revenue and cash by pro-viding constant availability of products that their cus-tomers want to buy. Using DDSN allows retailers to offera unique merchandise and service portfolio tailored totheir specific shoppers’ needs. It better responds to con-sumer demand, and that in turn provides business-building product and category innovation – setting theretailer apart from competitors and differentiating thebrand. The result: enhanced shopper loyalty andincreased spending. And finally, the consumer benefitsthrough increased product availability, satisfaction, timesavings, and convenience.

What we are creating is a better supply chain, driven bydemand, and powered by tools that enable a manufac-turer to plan, execute, sense, and respond to a dynamicmarket. The key is the ability to sense shifts in demandrapidly and act on those shifts to deliver what consumerswant at the moment they want it.

The game is changing. There is no middle ground.Companies that fail to adopt DDSN while their competi-tors are doing so will find empty shelves in the store andwarehouses full of the wrong product. Now is the timeto step up to a leadership position.

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ADVANTAGES ACROSS THE SUPPLY CHAIN

As a leader in integrated business solutions, open technology, and enterprise service-oriented architecture, SAPcan help companies lay the foundation for DDSN. Following the step-by-step approach outlined here, SAP® solutions and services provide the following support:� Harmonization – The SAP NetWeaver® platform provides the foundation for harmonizing processes and data. In

particular, SAP NetWeaver can help the company effectively manage master data across the entire supply anddemand network to generate “one version of the truth.”

� Integration and internal collaboration – SAP software provides the right collaboration and analytic tools to sup-port user productivity, along with predefined analysis configurations and rapid integration to other applications.

� External collaboration – A key capability for DDSN is extension of the internal corporate network to suppliersand customers. The network then seamlessly communicates shifts in demand to suppliers who in turn respondwith the materials necessary for manufacturing to meet the demand. The SAP Advanced Planning &Optimization component ties demand planning and supply network optimization to production planning anddetailed scheduling, as well as transportation planning. The SAP Inventory Collaboration Hub component helpsthe company develop responsive replenishment and supplier-managed inventory.

� Adaptability – Adaptability is the key to the long-term viability of DDSN. When DDSN functions most effective-ly, it immediately adapts to changes in demand – all along the supply chain. SAP solutions that foster demandforecasting also help develop an advanced forecasting capability. That leads to load building and eventually toreplenishment with order generation, subdaily planning, and dynamic sourcing.

HELPING LAY THE FOUNDATION FOR DDSN

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© 2006 by SAP AG. All rights reserved. SAP, R/3, mySAP, mySAP.com, xApps, xApp, SAP NetWeaver, and other SAP products and servicesmentioned herein as well as their respective logos are trademarks or registered trademarks of SAP AG in Germany and in several othercountries all over the world. All other product and service names mentioned are the trademarks of their respective companies. Data con-tained in this document serves informational purposes only. National product specifications may vary.

These materials are subject to change without notice. These materials are provided by SAP AG and its affiliated companies (“SAPGroup”) for informational purposes only, without representation or warranty of any kind, and SAP Group shall not be liable for errorsor omissions with respect to the materials. The only warranties for SAP Group products and services are those that are set forth in theexpress warranty statements accompanying such products and services, if any. Nothing herein should be construed as constituting anadditional warranty.

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www.sap.com

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