For small and medium enterprises, the question of upstream supply chain vs. downstream supply chain management does not arise. The factory is in direct contact with the company’s customers, and the supply chain team handles the end-to-end planning process: sales forecasts, order taking, production planning, procurement, inventory management and distribution.
In large, multi-site groups, things get more complicated — especially if part of the flows are B2C! Very often, companies create an “Upstream Supply Chain” organization and a “Downstream Supply Chain” one, with two teams, two departments. Sometimes, these two groups report to the same N+1, like the head of operations. But not always.
In this type of organization, the downstream supply chain is often in the spotlight. It’s the team that’s in direct contact with the sales and marketing organizations, that faces the national sales teams, and that takes responsibility for product availability, inventory deployment, and demand management.
The upstream supply chain is more in the back office, with the teams of factory stokers and the network of suppliers. In many companies, it’s the team that is seen when the trains don’t arrive on time.
This type of organizational dichotomy — typical in FMCG companies — comes with side effects that make end-to-end supply chain planning very difficult.
To Order or From Stock?
Each plant is responsible for responding to requests from the distribution network but has only a very partial view and understanding of what is happening downstream. You get a signal from a DRP, and you try to respond to it in an “as ordered” mode.
Often, in these companies, when factory teams are questioned, they explain that they manufacture to order (MTO). But they supply a distribution stock, and therefore the company, as a whole, serves its markets from stock (MTS).
Yes, but… the factory receives orders from the distribution network (from the downstream supply chain, in other words) and must execute them. That is the contract. So, we’re in MTO mode, right?
How to Smooth the Load
Industrial resources, however agile they may be, need stability and level loading. If we manufacture to order, the load smoothing can only be done via the lead time. In other words, I have to keep a margin in the planned industrial lead times, so as to be able to respond on time “to order.”
So if I process the replenishment of my distribution network on a purchase order basis, I have to lengthen the replenishment lead times to allow for load smoothing. By doing this (“we have a fixed lead time of X weeks / days”), I incidentally increase the need for stock in the distribution network.
In other cases, we see companies that establish a stock at the end of the upstream supply chain, to be able to absorb the variations of demand of the downstream supply chain…
Paradoxical, right? We often have high inventory levels in the distribution network, but for liability, and possibly process and system reasons, we do not use that inventory cushion to smooth out the manufacturing load!
Matching Supply to Demand
We all agree. The ideal is to pace our supply and production flows to the actual consumption rate of the market.
Yes, but… How can you do this if the market is far from the factories, with multiple intermediate layers?
The only valid information is the “sell out:” the external sales in different markets, along with the relevant forecasts of future events on these markets. In most companies, this information is totally disconnected from the “demand” signal that is seen by the upstream supply chain. The real customers are far away from the factories, replaced by internal customer/supplier relationships or with distributors.
Establishing a real demand signal and propagating it, end-to-end, through the supply chain is THE challenge to being demand driven.
What’s more, when a supply chain organization is structured around two departments, one upstream and one downstream, power struggles are never far away. Add to that national or regional sales organizations that defend their turf, and the ideal of an optimized flow from one end of the supply chain to the other, paced by real demand, is going to get even farther away.
Building an End-to-End View
To truly align operations with demand and build an end-to-end supply chain view, you will need to consider several prerequisites:
- Ensure a common understanding of the fundamental principles by all teams from one end of the chain to the other. For this, the Demand Driven Institute’s support materials are a valuable aid. Of course, the staircase is swept downwards, so you need to get the management committee on board as soon as possible.
- Design the market response model by taking into account the entire flow, without stopping at a perimeter of responsibility (e.g. a factory). This is often a much simpler step than you think — when you zoom out to get the big picture, many seemingly complex things become simple!
- Establish an information system that propagates the right signals from one end of the chain to the other. A cloud platform that federates the company’s various systems, gives each one the right set of priorities, and enables demand-driven flows to be managed, from the long term to shopfloor management. Mmmhh. We can help with that.
- Orchestrate process governance through effective, demand driven S&OP.
With a demand driven model and solutions, a determined team can drive an end-to-end supply chain transformation in a remarkably short timeframe — for example, in the range of 18 months to three years on a network that involves multiple plants and distribution channels — delivering rapid ROI and establishing strong competitive advantages in supply chain responsiveness.