Companies respond to customer needs with demand-driven manufacturing
Demand-driven manufacturing can help companies react to rapid market changes -- and save money in the process.
Demand-driven manufacturing -- and the technology behind it -- have become increasingly important to manufacturers who want to reduce costs while responding to customers in an ever more volatile market, analysts and experts in the field say.
"Customers want what they want, when they want it, at a price they want to pay; and if you can't provide it, they'll just go someplace else," said Carol Ptak, a partner at the Demand Driven Institute (DDI) based in Rochester, Wash., near Seattle. The dilemma is that we no longer know what our customers want, she said.
This is where the technology behind demand-driven manufacturing comes in to play.
"A demand-driven company is a company that has the ability to listen to its customers," said Matthew Davis, director for supply chain research at Gartner Inc., the Stamford, Conn.-based technology research firm. A demand-driven manufacturing organization can listen to internal customers, like sales, product, and marketing divisions, as well as to external customers, like distributors, retailers and consumers themselves, Davis said.
Demand-driven manufacturing taps into clearer supply chains
Technology is helping companies "listen" as they never have before. Traditionally, manufacturers planned operations according to a forecast based on a previous sales history. The goal was to be able to predict seasonal patterns and produce only what could be sold. The thinking was that with a more precise forecast, companies could serve their customers better and be more profitable, Ptak explained. "Look at how much money has been spent on forecasting -- and we haven't gotten any better," she said.
Now, with technology that allows for a more visible supply chain -- from the supplier's supplier to the customer's customer -- manufacturers are able to respond to actual customer orders rather than to forecasts.
Particularly with consumer products or in retail environments, companies are beginning to use demand-sensing technology, like point-of-sale data and predictive analytics, Gartner's Davis said. When manufacturers can access real-time downstream data, they not only will be better at demand fulfillment but also will be able to begin to change the way they schedule, because they'll be more predictive, he said.
Food processing company gets demand-driven model
Oregon Freeze Dry, a food processing and packaging company based in Albany, Ore., was demand-driven before demand-driven was invented, according to Craig Jolly, the systems projects manager there.
Before the company adopted a demand-driven model 15 years ago, operations could get chaotic, Jolly said. "Our on-time rate was in the mid-80s. We had way too much inventory for the things we didn't need, and sometimes not enough inventory for the things we did need," he said.
Among other products, Oregon Freeze Dry makes about 100 finished food items, which are created using some 500 raw materials -- from spices, meats and vegetables to packaging and labels. Given the company's level of complexity -- along with it having six plants in three countries and being the largest diversified food freeze-dryer in the world -- it clearly needed technology with a fairly high level of sophistication to remain demand-driven.
Using Replenishment Plus, created by the Constraints Managements Group, Jolly can set up individual inventory profiles for each of his products, based on how fast that item sells, what its lead time is and how much volatility it has. The application, which sits on top of the company's current ERP system, allows Oregon Freeze Dry to "put more of an inventory push on something that sells fast and jumps around a lot, as opposed to something that is very flat, smooth and easy to predict,” he explained. The company no longer orders anything based on forecasting, according to Jolly. "The technology allows us to monitor all of the items using the same data dump every day and [to] come up with what we need to order, based on what's happening downstream," he said.
The company began seeing results within months. Inventory dropped dramatically and performance went from the mid-80s to nearly 100%, according to Jolly.
Demand-driven manufacturing sets users apart from pack
Gartner's Davis refers to applications like the one Oregon Freeze Dry uses as "systems of differentiation." And this, he said, is where companies who want to be demand-driven are making investments. "Smart companies develop their systems of record to achieve a very clean, integrated supply chain with one version of the truth from a data perspective. And then they start thinking about the cool, whiz-bang stuff," he added. The "whiz-bang stuff" comes from companies like Kinaxis and E2Open, whose applications allow for better collaboration among all members of the supply chain, he said.
Larger ERP providers like JDA, Oracle and SAP provide a modular approach to companies looking for this kind of technology. Along with their systems-of-record capabilities, these providers have modules available that can add demand-sensing applications like point-of-sale data, according to Davis.
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But access to real-time data alone is insufficient to enable a company to become demand-driven, DDI's Ptak warned. "Having real-time data helps only when the company knows what to do with it and asks the right questions," she said.
A key question to ask, according to Ptak, is this: "What's your objective and what's limiting you from achieving the objective?" Technology can provide a return on investment if and only if it addresses a limitation that a company is facing in achieving its objective, she said.
Oregon Freeze Dry's Jolly agrees. "It's more changing the way people think rather than putting any one technology in place," he said. "Using what you have the right way, that's where the leverage is." As Jolly’s real-world experience shows, there are real-world benefits for companies that can implement a demand-driven model and harness the underlying technology in effective ways.
"The companies that are implementing demand-driven manufacturing are not just marginally better than companies that aren't -- they are several orders of magnitude better," Ptak said.
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