Understanding Demand Signals In The Supply Chain

Aug. 20, 2006
Manufacturers are using electronic signals to communicate production requirements throughout the supply chain.

When data storage giant EMC Corp. revealed in mid-July that the company's revenues and profits would be lower than expected, the Hopkinton, Mass., manufacturer put the blame on poor demand planning.

You could almost hear the collective groan at manufacturers from Maine to California. Any manufacturer that's introduced a new product over the last decade will admit you'd have better luck reading the lotus blossoms floating down the Li River in central China than figuring out how many of the latest handheld and set-top devices, soft drinks, or downsized SUVs are going to sell.

"We've been pretty wrong on forecasting -- in both directions -- for our suppliers and for our customers," the former CEO of a multibillion-dollar high-tech manufacturer admitted recently. "In fact, we've been wrong pretty massively. With sales forecasting, it's sort of, 'Why bother?' The people who do the forecast don't know because the customers don't know."

EMC, engaged in a battle for the storage market with IBM and Hewlett-Packard Co., has been fighting for market share by launching more sophisticated products. But the company overestimated orders for its earlier generation data storage machine, the Symmetrix DMX-2, while underestimating demand for the newer DMX-3, which supercedes the DMX-2. EMC "did not have the right inventory mix to fulfill demand as we closed the quarter," says Joe Tucci, the company's CEO. Translation: We lost sales, and we still have a lot of stuff that we couldn't move.

Getting sales data that once were difficult to obtain are now available and accessible to suppliers from those downstream in the supply chain, usually at no charge. Unfortunately, it doesn't always get put to use in a timely fashion. In the consumer packaged goods (CPG) industry, for instance, 56% of companies take more than two weeks to sense demand, according to analyst firm AMR Research. And while 70% of CPG companies gather downstream sales data, less than 3% are able to use this information to not only sense demand, but to react to it.

AMR reports that in a recent global survey of 120 CPG manufacturers, the average planned spending on improving demand response through the use of downstream data is $1.4 million in 2006. Already some of these manufacturers are showing results. One CPG manufacturer with total sales of $1.3 billion was able to increase its sales of products at retail giant Wal-Mart by analyzing point-of-sale data for its top 50 items. By reducing stock-outs and operating with leaner inventory, the company projects a first-year return of $15 million.

A continuing problem for manufacturers seeking to lean out their supply chain is a relative lack of demand visibility. Vendor-managed inventory (VMI) and Web portals can help. GM Brazil, for instance, uses a VMI system with its dealers, resulting in an initial forecast accuracy of more than 90%.

AMR recommends that manufacturers develop a demand signal repository (DSR). This database would be used to gather and integrate point-of-sale information and demand insight data, putting the data into a meaningful format for business users in sales, marketing, finance, supply-chain planning and R&D. Some vendors that offer data models and services to get companies up and running with a DSR include Teradata, VeriSign, Vendor Managed Technologies and Vision Chain.

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