While the concept of demand-driven supply chains is relevant to all industries, the methods to get there can be quite different for different industries, with varying degrees of emphasis placed on demand-side and supply-side initiatives. Despite such a variation, there are many commonalities in the core IT and operational capabilities these companies need to develop.
DDSC in High-Tech
While many high-tech companies (especially in consumer electronics) face some of the demand-side challenges described above, there are significant differences in the supply chain of these companies that leads to very different strategies for becoming demand-driven.
Many high-tech companies operate in a context of high market uncertainties due to short product lifecycles. Given these short lifecycles, such companies must be careful in building finished goods inventories, or face massive write-off costs. Often these supply chains strive to keep as much stock as possible as components or in a semi-finished product stage, and postpone final assembly. In many cases, critical components that go into the product are in short supply, requiring allocations.
Most often these components also have long lead time items from offshore suppliers. Furthermore, for many high-tech companies, demand originates from multiple channels, including retail, corporate/industrial and direct consumer. The combination of these issues makes DDSC dynamics different in the high-tech industry:
• Demand-driven strategies in the high-tech industry start with product design, where companies strive to use a common product platform in their engineering designs, so they can maximize the use of standard components and aggregate capacity. This strategy enables them to delay the final SKU configuration until the demand is better established.
• High-tech companies have made great strides in reducing the planning cycles and increasing planning frequencies to become more responsive. Given the demand volatility due to e-commerce models and continuous competitor leapfrogging, it is not uncommon to see weekly tactical (S&OP) planning cycles with daily and even sub-daily updates.
• With different go-to-market channels, demand-driven is not just about finished goods inventory. In many cases, high-tech companies implement build-to-order or configure-to-order strategies, where they forecast at the level of options or subassemblies that they require. This leads to collaborative planning processes, where the forecast is sent to suppliers and contract manufacturers for their commitment, and then a constrained plan is agreed-to and locked in.
• When the plan is constrained, companies are driven to allocate their supply to various demand channels and priorities in order to protect their strategic goals, and their key accounts. As a result, advanced demand prioritization methods are used to plan what demand will be fulfilled, and to enforce these allocation decisions as orders are received and fulfilled. In such scenarios, it is critical that once supply commitments are made, it is possible to re-plan to capture tomorrow’s demand, while still protecting the prior commitments for strategically important accounts. Such rules-based advanced commitment management processes are a central element of a high-tech demand-driven supply chain.
• Even though the supply chain plan is “locked in,” it must respond to demand changes. This is a key challenge in engineering the high-tech segment’s demand-driven supply chain. Hence, companies are implementing collaboration processes to achieve upstream visibility to material and capacity situations, and developing simulation-based what-if replanning scenarios (often called “shadow planning”) to be able to quickly determine if a plan change is feasible and desirable.
• Lastly, we are seeing some companies adopt the ultimate demand-driven supply initiative—consumption-based pull planning. In this scenario, inventory buffers are placed at critical points in the supply chain to decouple processes and minimize lead times, and supply actions (deployment, production and procurement) are triggered by consumption-based replenishment. This affords protection against demand uncertainty by only building to a replenishment signal, not to a forecast.
The chart below offers a summary of how CPG and high-tech companies are adopting demand-side and supply-side strategies for becoming demand-driven.
