What Is the Demand Driven Supply Chain?
Demand Driven Supply Chain (DDC) is a system of technology and processes that sense and respond to true demand across an array of suppliers, customers, and workers, this is has been greatly enabled by the rise in demand for services and products over the past years and decades. There are many benefits of a DDC: it allows a company to achieve economies of scale because of the reduction in the number of physical locations and distribution terminals required for delivering the goods and materials to the final consumers. Another key benefit is flexibility: a flexible DDC allows a company to respond to changing market conditions more quickly than its competitors, which ultimately leads to increased market share. It also results in improved customer relationships. And all these advantages translate into significant increases in productivity and profitability.
DDC has the ability to respond to changing market conditions by altering the supply chain to take advantage of the opportunity rather than having to wait for information flow to dictate their course. If the information flow is interrupted for any reason, DDC allows for the instantaneous removal of the product from inventory to ensure that no part of the inventory remains in short supply. If demand for a particular good or material is increasing rapidly, a company should be able to easily satisfy that demand by simply adding more of that good to its existing inventory and thus increasing its capacity to satisfy future demand.
However, if demand is declining, then a company must be careful not to add too much of anything to its inventory levels, or else suffer a double whammy. For this reason, adjustments to inventory levels are very important to a demand-driven supply chain. Typically, a company’s largest suppliers have prices above wholesale or below fair market value to retailers. As a result, when demand for a good increases, a retailer may be unable to charge the price that would see them break even or profit from sales. In a perfect supply chain, a retailer would only buy raw materials from suppliers whose prices are at or below wholesale value.
However, most supply chain models will introduce some margin, which the manufacturer can take advantage of in order to increase its profit margin. The manufacturer can then pass on any increase in price to its retailers in order to increase its profits. A demand driven supply chain therefore makes sense only for companies whose primary business is to make goods available to retailers at prices that are both fair and profitable. By nature, it tends to put a lot of emphasis on profitability rather than on the amount of raw materials that enter into a supply chain.
Because of this flaw, a demand-driven supply chain is inherently inefficient. It tends to use too much of a company’s capital and resources for the production of marginal items. Although it might seem theoretically possible for such a chain to work, in practice it rarely does. The reason for this is that a large portion of any profits that accrue from such a process are given to the manufacturer who in turn pays a significantly higher price for that particular raw material. With the trend toward decreased factory overhead over the past few decades, manufacturers have also been less likely to make use of their valuable inventories of material.
There are two ways in which manufacturers can overcome these shortcomings of a demand-driven supply chain. One way is to either invest more heavily in the r&d to develop new or improved products or, if the existing products are still profitable, to reduce the amount of inputs required by producing them. Alternatively, a company can reduce costs by using existing factories efficiently. These methods are not mutually exclusive and depending on the nature of the business can often mean that there is room for both approaches.
A second approach that many supply chains take is to focus on the rate at which raw materials are sold rather than their quality. While it may seem to be a simple concept, if demand volatility is a significant issue in a given area of the supply chain, investing in raw materials that cost more than the actual value of the product will only compound the problem. A supply chain should instead focus on the actual demand for the particular item or group of items. If demand fluctuates but the price of the item is relatively constant, then the supply chain will have successfully avoided producing products whose quality is actually lower than market demand.
Some supply chain participants may argue that supply chain management is overly complex and cumbersome as a result. However, there is one important tool that they often overlook: the Bullwhip Effect. Simply stated, the bullwhip effect is the tendency by which prices of any good tend to keep rising in tandem with demand. If demand goes up, prices tend to go up as well. By coordinating production with demand though, manufacturers can avoid situations where they invest more production money for something than they actually need or want.
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