Why DDSN Matters: Supply Chain Professionals Set the Course

for Profitable Growth

Wednesday, June 02, 2004
Kevin O'Marah

The Issue: Demand-Driven Supply Networks (DDSNs) are overwhelming traditional supply chain
strategies. Supply chain professionals are on the hot seat to navigate, and explain, this transition.

DDSN defined: A supply chain driven by the voice of the customer

DDSN is a shorthand term for the next-generation supply chain that has been taking shape for some time. It simply
means building all supply chain processes, infrastructure, and information flows to serve the downstream source of
demand--whether a consumer in the supermarket or the Department of Defense--rather than the upstream supply
constraints of factories and distribution systems. Pioneers have been doing it this way for a decade or more and, in
the process, redefining what is possible in 21st Century supply chain practice.

DDSN matters to your company’s growth, profitability, and valuation

Early adopters are already saving 5% of top-line revenue compared to laggards, according to our detailed
benchmarking research. The savings can be seen in more granular metrics as well, like getting paid by customers 70
days sooner, holding half the inventory, and delivering 92% perfect orders versus the laggards’ average of 81%.

Our recent analysis of AMR Benchmark Analytix data also identifies powerful and significant correlations between
perfect order performance and return on assets, earnings per share, and profit margins. The Takeaway: Higher
levels of supply chain service (on-time delivery, order accuracy, and in-stock performance) correspond with lower
levels of supply chain cost (inventory, transportation, and materials handling) for the best performers. This
counterintuitive finding is reminiscent of lessons learned about quality in the 1980s.

DDSN gives leading companies cost, time, and efficiency advantages that boost profits. It also positions winners to
grow with dramatically faster response to business opportunities--at the level of lower stockouts for current products
and as much as 70% faster time to market for new products. More innovation with a better perfect product launch
performance means more new business opportunities seized as customer or market demand evolves.

DDSN matters to the decisions you make about technology

Is Radio Frequency Identification (RFID) just a costly tax dropped on manufacturers by their mega-
customers, or is it a unique opportunity to extend visibility into consumer demand?
Is Enterprise Resource Planning (ERP) consolidation and upgrade an expensive IT project with little clear
benefit, or is it a business backbone vital to supporting future growth?
Is Product Lifecycle Management (PLM) an engineering boondoggle, or is it the critical infrastructure for
accelerating product innovation?

Tackling such sweeping IT challenges without some guiding strategic principle is playing professional Russian
roulette. Simple-minded truisms like “business needs determine IT priorities” don’t help at all. Supply chain
professionals better have a far more decisive basis for prioritizing the to-do list.

The right basis combines strategic direction, best practices, and technology:

Strategic direction--What is the long-term basis of competition for your business? Where will new growth
come from, rather than just lower costs?
Best practices--What role do Lean or demand pull management principles play? What role does supply
chain collaboration play, including Collaborative Planning, Forecasting, and Replenishment (CPFR) or Sales
and Operational Planning (S&OP)? What about product platform strategies or stage gate product
development?
Technology--What existing Supply Chain Execution (SCE) systems run in the warehouses, distribution
 centers, and field service operation that can be the nervous system for the demand-driven future? What
information don’t they provide?

Approaching technology choices with answers to these three sets of questions in hand will make the business case
and rollout plan a lot easier.

DDSN matters to the global economy and the employment base in your hometown

The critical measure of the supply chain’s importance to business and the economy overall is productivity--not
simply labor productivity, but multifactor productivity. This number, as reported by the Bureau of Labor Statistics,
averaged 4.2% per year from 1995 to 2000 for durable manufacturing. Through boom and bust, war and peace, and
every other upheaval we’ve seen the past 10 years, this trend still looks robust.

The essential fact is that output per unit input of labor and capital is growing three times faster than population and at
least twice as fast as it did through the entire 20th Century. The steady march of supply chain efficiency from Henry
Ford’s River Rouge mega-factory to today’s network of contract manufacturers, third-party logistics services, and
outsourced expertise is at an inflection point. Those that don’t keep the pace will be acquired or closed; those that do
will consolidate their industries and build great corporate legacies.

For most of us this translates into more and better stuff with minimal or no inflation and high paying jobs. These will
not be factory jobs, nor will they be rote white collar back-office functions, all of which can be outsourced or
automated with capital. These jobs are about translating customer needs into supply chain execution. Designers,
marketers, coordinators, problem solvers: these are the kinds of jobs behind the curtain of the new demand-driven
supply network.

DDSN matters because Dell, Wal-Mart, and Procter & Gamble are doing it now

Back in 2001, at Stanford’s Supply Chain Forum, Dell reported the following numbers:

0.6% decline in material costs per week

8 part number transitions per day
92% of product shipped within five days
45 day average lead time from suppliers
0.05% of material purchases written off as excess and obsolete

Under the most impossible supply chain conditions imaginable--super-short product lifecycles (consumer PCs) and
super-long lead-time components (semiconductors, including processors)--Dell managed to build the first true
demand-driven supply network.

This network embraces demand variability (35% of home and small business customers cancel in the first 24 hours)
like no push supply chain ever conceived. And it keeps getting better. Last fall, Dell reported the following at an
Agile Software user conference:

20 million products shipped per quarter

Three days of inventory
Component costs still declining 0.5% to 1.0% per week
Warranty cost per box down 70% since 2000
Engineering change cycles 50% faster and with 80% fewer errors since 2000

As for P&G and Wal-Mart, a quick scan of the past 12 months of Fortune should provide plenty of fodder for
discussion. Suffice it to say that P&G’s “moments of truth” and Wal-Mart’s “everyday low prices” provide powerful
strategic principles around which to set a course for long-term supply chain excellence. Their financial performance
shows that it works.

Recommendations

Start with demand and work backwards to define supply chain strategy. Constraints are more fluid than ever,
provided the visibility on demand is clear enough to quote accurate requirements backward into the network. The
notion of a “moment of truth” helps many companies to define exactly what matters at the instant where supply
meets demand.
While looking to capitalize on existing supply chain applications in order management, warehouse management, and
the like, prepare positions on the four emerging cornerstones of technology that support DDSN:

Unit-level demand visibility--RFID, POS, B2C e-commerce: buzzwords, yes, but all represent demand at its
most granular and therefore most precise. For some, this may be no different than bar codes. For others, it
could be the critical ingredient to maximizing fleeting spikes in demand.
Demand management--Forecasting, price and revenue optimization, promotions management: tools
supporting these processes deepen your ability to manage the supply/demand balance by tapping into demand
variability as a resource. Such tools are also essential to weather the storm of data from unit-level demand.
Product lifecycle management--Design for X means defining the product and its supply and service
network for speed, reuse, and compliance. 80% of supply chain costs are set during early design phase of
new product development; PLM focuses on getting this right.
Executive dashboards--Benchmarking and balanced performance measurement is the ultimate expression of
business judgment driving supply chain decisions. What data populates the dashboard and how it differs by
role is a deceptively thorny, and potentially political, issue.

Recognize that, as supply chain professionals, you are renewing economic growth for yourself, your organization,
and the wider world. It’s not just a job, it’s an adventure.

Copyright © 2004 AMR Research, Inc.