Demand-Driven Supply Chains Benefits

In the era of data and accuracy, the quest for agility and responsiveness has led to the emergence of demand-driven supply chains. What is a demand-driven supply chain? It is a customer-centric, responsive supply chain. There are many supply chain management styles, each of which has its own benefits. There is a rabbit hole of supply chain methods and strategies to choose from depending on which industry you are in. Most strategies have changed and advanced in the last five years due to technology and innovation. If you are in the supply-chain world, you are likely familiar with a handful of the most common methods. Demand-driven supply chains are now one of those need-to-know methodologies.  

Leveraging Demand-Driven Supply Chain, Alok Nayak 

In this article, we will break down the concept of the demand-driven supply chain, look at the benefits of this method, and identify a few things to look out for if you should choose to transition to this supply chain management style. This method is full of savings and cost efficiency, so read with an open mind and be ready to see the possibility for you and your business. 

The Basics of the Demand-Driven Supply Chain  

The demand-driven supply chain is an approach to managing the flow of goods and materials based on customer demand. It contrasts with relying solely on forecasts and projections. Businesses use real-time data and insights to adjust production in a demand-driven supply chain dynamically. Businesses can also use this method to manage inventory levels and distribution to match the current demand patterns.  

Implementing this method allows businesses to reduce excess inventory, minimize waste, improve responsiveness, and enhance the experience for the customer. Following the same methodology of waiting for the customer to demand the product, many companies also adopt an inventory postponement policy, sometimes referred to as a late-stage differentiation. This means that the customization or assembly of products is postponed or delayed until closer to the point of sale. This, in turn, allows the business to better match the product configurations with customer demands and reduce excess inventory levels.  

Demand-Driven Example 

Utilizing the demand-driven supply chain is a common practice for more significant purchases. For example, when a municipality wants to purchase a commercial bus for public transportation. It takes months to create a customized commercial bus for a city route. You could imagine trying to hold that many tiny and more significant bus parts for such a massive machine year-round. Your best bet is to wait for the order to come in first and then buy the inventory to assemble the machine. 

Synchrono: Demand-Driven Manufacturing 

A Step Further: The Demand-Sensing Approach 

The demand-sensing approach is even more comprehensive than a demand-driven approach. It takes the demand-driven thought process and adds some historical data to predict an increase in demand based on seasonality and any other industry-specific factors. Think of demand-sensing as a component of the base strategy of a demand-driven supply chain. It uses real-time data and advanced analytics to give a more comprehensive look at the demand.  

Operating based on demand rather than stockpiling is essential, but if historical data is present, you will marry the two. Doing this can reduce stockouts and excess inventory, minimize lead times, and increase agility and responsiveness to demand spikes.  

Demand-Sensing Example 

Let’s look at an example. Suppose a smartphone manufacturer uses a traditional supply chain method with fixed production schedules. If unexpectedly high demand arises for a specific model, the manufacturer will likely face delays in adjusting to the product plans. It will result in potential stockouts and missed opportunities. In contrast, with a demand-driven supply chain, the same smartphone manufacturer would be equipped with real-time demand-sensing capabilities. This allows the manufacturer to quickly identify the surge in demand through various data sources and adjust accordingly. This agility allows them to ramp up production of the model when they need it. The shelves are even stocked with the desired products faster, minimizing the risk of stockouts.  

The Risks of Demand-Driven Methodology  

As evidenced above, the demand-driven or demand-sensing approaches are excellent supply chain management methods. They allow business owners to accurately sense demand and align supply chain activities for maximum profit or cash flow. Now we must examine the difficulties or risks of switching over to this methodology. None of them are seriously detrimental if you are a skilled leader, but knowing the task ahead is half the battle.  

The three main potential pitfalls to be aware of are data integration, cultural adoption, and demand variability. Implementing a demand-driven supply chain requires access to real-time data from various sources. It could include customers, suppliers, and internal systems. Harmonizing this data can be complex and may require a serious technological investment.  

There will also need to be time spent adopting the technology with the staff members. This is where cultural adoption comes into play. Your staff and your suppliers must be on board for this system to work. If you are getting pushback from suppliers, it may be time to switch suppliers or invest in their adoption process. Internally, the cultural shift towards greater collaboration, agility, and responsiveness may pose a challenge, particularly in companies with a history of rigid processes.  

Lastly, there is the challenge of demand variability, or the accuracy of the demand forecasting. The whole system you are adopting is based on sensing the demand. As you adjust, there will be a delay or sometimes mismatches in data as the system is rolled out, which can cause some performance issues. You must look at data critically to avoid the Bullwhip Effect. Having a skilled transition team can make this less of a risk but be aware that the system is based on demand, and if you cannot sense the demand, the process will not work correctly. 

Making the Transition 

Considering these potential challenges, you should research and see if this method is best for you to adopt. Talk to a professional supply chain transitioning service or a Cogent Analytics business advisor to accurately assess whether a demand-driven supply chain is a good option for your company or not. If you decide to adopt this method, talk with your anticipated suppliers and see if they have the technological capabilities to utilize this method. You’re sure to notice a positive difference once you’ve successfully transitioned to this strategy.