Analysts and supply chain practitioners have been discussing the concepts of a demand-driven supply chain (DDSC) for a decade. We have been working with our customers across many different industries, to help them realize these concepts. What is fascinating and revealing is how the core concepts are manifested in different ways depending on industry characteristics.

 

A Basic Definition

First, let’s get to a common definition of DDSC. The original impetus for DDSC was to understand the impact of latency and aggregation as information propagates up the supply chain from the source of demand to the suppliers, i.e., the bullwhip effect. Given typical supply lead times, suppliers generally produce enough to meet the demand forecast, which is only marginally accurate at the granular level at which inventory decisions (SKU/week) are made. However, as soon as it is known that the actual demand differs from the forecast, the supply levels need to be adjusted accordingly at each step of the supply chain. But due to the lag time between when the demand changes and when it is detected at various points along the supply chain, its effect is often amplified, leading to inventory shortages or excesses.

Companies tend to overcompensate by slowing down or speeding up production, which can cause inventory levels to fluctuate. This whipsaw effect is costly and inefficient for all participants.

Several important supply chain concepts have emerged in order to mitigate the bullwhip effect. These concepts are collectively referred to as “demand driven supply chain” and can be organized in terms of “demand side” and supply side” initiatives.

Demand-side initiatives focus on better ways to capture the demand signal closer to the source, analyze the demand to sense the latest and most accurate demand signal, and shape the demand by executing and tracking promotional and pricing strategies to steer demand in line with business objectives.

Supply-side initiatives generally have to do with lessening reliance on the forecast, by becoming more agile with faster response, when actual demand is known.

All of these strategies are aspects of being demand-driven, but it is rare to see a company pursue all of them. In fact, we have come to understand that, depending on the characteristics of the market and industry, companies will emphasize different elements. In this article we will look at the consumer packaged goods (CPG) and high-technology industries to illustrate this point.