Every executive in my business talks about the increasing pace of product introductions and market shifts. At Orangecratz, a global provider of digital audio/visual networking systems and components, we once could count on a product sustaining a market share for a year to two years; we're now watchful of movement after a few months. And even that window is closing.
In a market fueled by internet technologies and the emergence of wideband networks, Orangecratz has always had to introduce products at an accelerated clip. But within this new hyper environment we're running into problems that directly impact operating results (bottom-line performance) and customer satisfaction (top-line performance). Facing increased demand volatility and ever-shorter product lifecycles, Orangecratz needs to:
- Better coordinate our outsource network and suppliers — It's not enough that we can respond to changing customer demands, but every partner and supplier upstream of us must as well, and many are falling short.
- Accurately identify (and influence, if possible) customer demand — One slipup and we could lose an entire selling cycle and end up with warehouses of obsolete inventory.
- Level all the demand signals coming back to Orangecratz — From chaotic customer-demand signals, we need to develop production and logistics schedules that don't unnecessarily overburden our plants and capacity and that of our suppliers (i.e., we need to be able to make it and deliver it).
- Continue to focus on providing the customer with higher levels of value — Anything less than continuous customer satisfaction means we're out looking for new customers (i.e., our customer retention rates have been falling).
Orangecratz gradually has been transitioning toward a demand-driven model in recent years, but it's a complex process and we have repeatedly hit roadblocks and reverted back to our old “build and sell” ways. Now current economic and market conditions have placed urgency on capturing every customer sale possible while carefully managing our resources and investments. How can we jumpstart our customer-driven supply chain?
* The Challenge incorporates hypothetical persons, companies, and products and does not portray the actions of any actual persons, companies, or products.
By Randy Littleson
To combat the simultaneous pressures associated with increasing demand volatility, shortening product lifecycles, and the inherent complexities of an increasingly outsourced and global supply chain, many brand owners are shifting their business models to become more demand- or customer-driven.
For years brand owners practiced a push-centric model where the premium was on supply management, planning capacity and production, and manufacturing products that were put on the shelf to be consumed by future demand. Today's market pressures require a re-engineering of this model to be more pull-centric, where the emphasis is no longer on what takes place within the four walls, but instead shifts to the customer.
One of the first challenges that companies like Orangecratz face as they seek to become more demand-driven, however, is the reality that you can't plan the customer. This fundamentally changes the dynamics and puts a greater emphasis on collaborating with customers on demand, on demand-management practices (matching supply and demand), and on the sales and operations planning (S&OP) process and execution. It's not enough to just say “yes” to the customer all the time, you have to be able to do so in a profitable way with actions that are continuously aligned with Orangecratz' corporate objectives.
Collaborating with customers on demand is at the heart of any demand-driven transformation. Without an accurate and timely understanding of true demand, you have no hope of meeting the increasing expectations of the market. Given the increasing demand volatility in your business, statistical forecasting based on historical data will be of increasingly limited use (it's a data point for sure, but its accuracy at predicting future demand will be limited). Instead, you need to tap into point-of-sale (POS) data to gain immediate insight into what is happening and collaborate directly with your biggest customers on a more regular basis to understand their demand requirements.
With a more accurate view of true demand, your next challenge is to facilitate rapid demand/supply balancing and alignment activities. Once you understand a demand change, you need to be able to quickly assess its impact and develop a plan to satisfy it given the current supply situation. The key to success here is empowering your front-line staff with the information and tools they need for risk tradeoff as they respond to increasingly frequent unplanned events. Rapid and profitable responses to these situations are the key to increasing customer satisfaction and operating performance.
Increasing volatility also means you need to invest more time and energy to ensure that all aspects of the business are aligned — continuously. The S&OP process is where this comes together and where the other improvements can further be leveraged to ensure the entire operation is moving in the same direction. But while enhancements to the planning process itself are important, volatility means that what happens outside of the planning meeting determines whether or not you're able to deliver to the plan.
The reason is because as soon as you walk out of that meeting with the plan in hand, all of the assumptions that went into its creation are going to be challenged. To ensure the objectives and metrics agreed to in the S&OP meeting are met, your employees need to be able to react quickly and decisively to deal with all of the unplanned events that happen, and they need tools to ensure that the actions they take are always aligned with the S&OP objectives.
There may be an inclination to view the market pressures on your company as a huge risk. But there's equal or even greater opportunity if proactively managed. These market forces are being felt equally by all of your competitors as well. The company that can deliver the most profitable response to the market on a consistent basis will be in a leadership position. There's an excellent opportunity to leverage the responsiveness of your supply chain as a strategic differentiator in the marketplace to distance yourself from the competition. Taking steps to become more demand-driven is essential to capitalizing on this opportunity.
Randy Littleson is vice president of marketing with Kinaxis (www.kinaxis.com), the leader in Response Management for operations performance. Randy can be reached at rlittleson@kinaxis.com.
By George Taninecz
Many manufacturers, not just those in the electronics industries, increasingly have been moving toward demand-driven business models. And so Orangecratz and others must figure out ways to give customers what they want when they want it. To get there, you must determine why efforts to install demand-driven processes failed in the past (and might fail again in the future). Only by accurately identifying the problem(s) can you hope to implement sound solutions. Examine your relationships with customers and suppliers as well as your internal capabilities.
Does Orangecratz have the kind of relationships with customers that allows it to accurately identify what customers want before they want it or a relationship with the supply base that allows it to move as one in satisfying customers? Many manufacturers do not. For example, just 23% of manufacturers report that they have extensively integrated their operations with customers, and only 17% report extensive integration with suppliers, according to data from the IndustryWeek/Manufacturing Performance Institute (MPI) 2007 Census of Manufacturers. Orangecratz probably has similar supply-chain disconnects that you'll need to uncover. Begin by asking questions, including:
- Will our customers work with us to more accurately and quickly identify their needs/wants?
- Do we have the processes and supporting information systems in place that allow us to collaborate in real-time with our customers to turn ideas into real product plans and production schedules?
- Will our suppliers join us in collaborating with Orangecratz customers?
- Do we have the leverage with suppliers to pull them into our demand-driven model?
Internally, the issues are more tangible but no less complex. MPI data shows that only about one-third of manufacturers utilize a high-volume, high-mix operation. Those that do often develop a stable of basic products with customization options and add-ons, rather than customizing every product from the ground up. Yet even this level of customer-driven production requires certain internal capabilities, without which past efforts at Orangecratz could easily have been derailed. Ask questions to identify past internal failures, including:
- Can our product development group innovate at a pace to meet customers' changing needs?
- Are production capabilities (equipment, capacity, facility configuration) able to shift quickly from one product to the next?
- Is our workforce, from sales staff through production associates, trained to operate in such a fluid business environment?
- Can we efficiently manage more complex inventories and cash flows that go along with demand-driven models?
You should find that by asking these and other questions problems are exposed, and then you need to find out why they exist, digging down to root causes. Orangecratz can only fix what has stopped progress in the past by knowing precisely what to fix. You eventually may be able to address issues by growing and improving existing capabilities; you may look outside the company for expertise you can't develop.
To succeed with your transition to a demand-driven business model, you must ask the questions that expose your problems. The solutions will follow.
George Taninecz is Vice President of Research with the Manufacturing Performance Institute (www.mpi-group.net) a Cleveland, Ohio-based company specializing in research, business analysis, thought-leadership, and knowledge development and communication. George can be reached at gtaninecz@mpi-group.net