The demand driven movement has a rich history, dating back to a light-bulb moment when Chad Smith — then a Regional Director at the Goldratt Institute — was asked to help a client at OFD Foods explore solutions for improving service, not unit cost, in its freeze-dried food business.
A huge amount of change and growth is happening now in supply chains. As Demand Driven Technologies continues to celebrate ten years of supply chain leadership, we decided to reflect on the journey that the demand driven theory has taken over the past few decades, along with the cultural and economic factors that shaped it.
Ready to dive in to the past, present, and future of the Demand Driven Supply Chain Movement? Listen to the latest episode of the Flowcast, where supply chain leader Sarah Barnes Humphrey talks with Demand Driven Technologies CEO Erik Bush.
You can read our lightly edited transcript below.
Let me take you back in time to the decade I grew up in: the eighties. Fashion was bold, colorful, and filled with huge hair. New wave, synth pop, and glam metal were all over the radio, and Hollywood was experiencing a golden age of film, turning out hit after hit. The Berlin wall was torn down, and tech advances were coming in thick and fast, with pocket technology from the Casio watch to the Game Boy defining the decade.
Against this exciting cultural backdrop, what was happening in business, in the economy, and in the supply chain?
Quite an era it was for sure. At the time, I was working for IBM in Detroit, Michigan, and I was helping clients in the automotive industry. I don’t know how directly Reaganomics had an impact on them, but the Big Three were getting their butts kicked by the offshore and import companies—especially in Japan, where Toyota and Honda had really started to make a dent in their business opportunities. They were bringing more affordable cars with much higher quality and revolutionizing the way the automotive industry now operates. There was a concept called the Toyota Production System that Toyota had developed, very much focused around total quality management. They had learned it from a guy named Deming, who had brought those principles over to Japan after World War II era.
And they were making great strides with these techniques. As part of the Toyota Production System, there was a concept called Lean, which is really intended to drive out variation—to get to perfection, if you will—because it was well understood that variation was the enemy of productivity in a supply chain environment. There was another concept called Kanban they developed, which allows you to use simple visual signals to pace the resupply of materials coming like to an automotive assembly line.
So, while DDMRP, as we’ll talk about in a few minutes, hadn’t really been invented yet, the roots of it were sown based in the Toyota production system, way back in that era. And it was striking to see what a difference in the quality of vehicles that the Japanese manufacturers were creating versus the Big Three in the US. And I think that was kind of where this demand-driven concept got its start.
You talked about Reaganomics, right? In the eighties, Ronald Reagan was president. His policies are commonly characterized as supply side economics, which is pretty much the opposite of demand driven. So how and why do you think that demand driven theory just started to come about in the eighties? Was it because the so-called Reaganomics weren’t working?
Well, if you remember, the prime rate back in that era was around 10 or 11. So working capital was quite expensive. It was better than it was at the end of the seventies, but we still hadn’t seen Reaganomics really bear fruit in terms of economic benefits. And because of that, people got seriously interested in looking for better ways to carry their inventory, plan their production, and things like that.
Another thing happening at the time was the introduction of what we called mid-range systems at IBM. There was something called the IBM System/36, then the AS/400. A company called Digital Equipment, or DEC, and Wang had started introducing smaller computers and application software to help mid-range and small and medium business gain the advantages of material requirements planning software and other functionality that was, up until then, really reserved for only the biggest companies.
Talk to me about that. Because you’re talking about a huge tech boom in the eighties. Was there a relationship between supply chain innovation and the demand driven theory and those new tech advancements that you were talking about?
I don’t think it really was hitting the demand theory at the time, because Toyota’s Kanban system wasn’t really computerized yet. But that was one of the great benefits. It was simple and easy to implement. You didn’t need automation. I think it was the start, though. IBM had a solution called MAPICS at the time, which was a mid-range kind of ERP system in the very early days. And clients started adopting that. Up until then, computing was in the accounting and finance functions. It really hadn’t reached into more functional areas like production, scheduling, and inventory management.
There was a concept called material requirements planning, introduced largely with IBM’s help back in the early seventies, that had finally started to get some attention in the market. A lot of companies were buying MAPICS. They’d buy all the modules, which included MRP, but they frankly didn’t implement that yet. They were buying it mostly for the financial backbone that it was providing them in their environment. So you start to see it coming into manufacturing, but I still think it was kind of early days. I think it really started to take root in the next decade.
So let’s move into the nineties. All of that bold, bright “Wolf of Wall Street” greed vanished at the beginning of the decade with a recession that affected most of the Western world. The decade brought an explosion of pop, with Brit pop, teen pop, pop funk making their way onto the scene, along with supermodels, acid-washed jeans, and the girl power revolution. And this was your backdrop while you were creating demand driven, right?
In 1991, I moved back to my hometown, Cleveland, Ohio, to set up IBM’s consulting practice and systems integration practice area. It was when IBM was finally getting off the addiction to hardware sales and realizing that there were other needs in the market around consulting services. At that time, some things began to emerge. ERP was starting to take root in earnest, fueled in part by the fact that legacy software maintenance was really becoming a big burden for a lot of companies. This is the early days of solutions like SAP, which start coming into the market and gaining quite a bit of traction.
Another thing that was really starting to hit was this worry about Y2K at the end of the decade. So now you see an accelerating rate of adoption of ERP, which is going to help companies avoid the legacy software maintenance burden and position them to avoid the Y2K problem.
But the logic in those systems at the time—and still today—was largely the same MRP ideas of the early 1970s. So as computing is progressing into manufacturing, the mania about cost optimization starts to really take root, because now we have computers to measure all this stuff. “Let’s drive the productivity of every work center in our plant, right?”
Well, that sounds like a great idea, but it really was counterproductive. And this is where Dr. Eliyahu Goldratt’s work and the Theory of Constraints really started to get a lot of attention, because, similar to Lean and the Toyota system—which are based on true demand and do not use your forecast to drive production and materials planning—it says, “Let’s use the actual demand, the real consumption in the market.” And it starts to call into question the principles that we should plan to forecast, and that we should manage resource productivity at the unit level.
TOC said, “No, focus on your constraints, because they’re what are going to limit your productivity in your whole environment. Pace your materials to what’s actually being consumed, because you lose the bias of an inaccurate forecast.” It started to gain a lot of traction. So you’re seeing a changeover in the systems landscape and the emergence of ideas that run counter to the conventions of the time—but also the massive spread of ERP, where clients are basically abandoning legacy systems at a rapid pace. By the end of the decade, they were pretty much all but eliminated
All that uncertainty. I was around for Y2K, and I remember everybody thinking that at midnight, when we changed into the year 2000, all the lights were going to go out and we weren’t sure what was going to happen. And in the end, nothing happened.
Well, something big did happen, and that was that the Dot Com bubble burst. There had been so much hype in the industry around ecommerce and web technologies and things like that, and a huge buildup of interest in companies that got valued at ridiculous levels and later went bust.
So, let’s get into the two thousands. One thing that I’ll point out before we do is that I was working for a forwarder at the end of the nineties, and we were still working with fax machines and typewriters. It’s incredible to think about where we were in the early two thousands. What were you seeing in the industry during this time? What changed and what was the impact of that rapid technological growth?
In the period from 2001 to the end of the decade, I was involved as a VP of Operations for IBM’s consulting division, first in North America, then over in Europe for a few years after we bought PricewaterhouseCoopers. Following that, I headed up the development of our offshore software development centers, and the thing that you’re still seeing, the tail end of the ERP migration.
In that role, I saw that a lot of clients were spending a lot of money deploying these systems, but fundamentally the needles weren’t moving at the end. They weren’t getting the better on-time order fill rates that they were expecting. They weren’t seeing improvements in their inventory levels. A lot of them had expected that more modern software would fundamentally change their business, but because the underlying logic was still based in concepts from the seventies, it didn’t really materialize.
During that time, inside of IBM, we were deploying this concept called replenishment for resource management. The idea was to pace how we allocated skillsets across the consulting division based on real demand, not the forecast. And we were getting much better alignment of our skills. Coming out of Y2K, we had too many people with legacy skills. Going into the dot com bubble required us to rapidly transform all of our skills. So, we were really seeing results with this more and agile and responsive way of managing versus “Tell me how many Java developers we will need in three years.” I mean, who cares? You know, we’ll figure it out when we get there. And I started really getting quite hooked on the demand-driven way. And, by the end of the decade, I started realizing that there were some fundamental gaps in way conventional software worked and what the market actually needs.
That’s how all great technologies and businesses grow: by identifying gaps and challenging what people are doing. But another important thing that we need to talk about is consumer habits. How were consumer habits changing alongside these big changes that were happening in the two thousands? And how was that impacting supply chain and wider business?
I’d say the biggest factor was the emergence of the power of the consumer. With ecommerce and companies like eBay and Amazon, there was a fundamental power shift from the producers to the consumers. And that resulted in a lot of product proliferation. We’ve got Coke bottling into all sorts of different packaging. They’re creating new sizes and flavors. The automotive companies are trying to provide more options. Cell phones are emerging, and they’re trying to keep up with the rapid advancement of the technology.
It’s an amazing period to go through, but the challenge is that, if you’re trying to forecast against a continually broadening array of product items, you’re in a losing battle, because you’re not going to be able to keep up the growth of SKUs. And even though companies were coming out with better forecasting algorithms, they were really weren’t cracking the nut in terms of competitive advantage.
If you go back to the seventies and eighties, there were around ten tire sizes that made up 90% of all sales. By the early two thousands, the top ten tire sizes were less than 30% of the market. You’ve got a big, heavy industry producing tires, and you’re trying to adapt this ever-changing range of customer preferences. This was a major shift in the markets, where customers started to have the upper hand and it became much more difficult for the producers to keep up with that.
So, I want to bring up choice. Fast fashion also came out in the two thousands, and consumers had so many more choices, and businesses and supply chains had so many more choices that they were giving to their customers to try to keep up with the competition. I don’t know about you, but I think it was just this sort of rat race that started happening with the emergence of the Internet.
Absolutely. It totally changed the paradigm. Now you’ve got a much more difficult challenge in ensuring that you have the right products for the market, whether it’s in consumer or B2B. There’s still a big impact in terms of the range of alternatives that clients have. They don’t want to wait. If you’re stocked out, they’ll buy somebody else’s product.
So that brings us to the 2010s. The last decade is surely defined by what the Internet has brought, from going viral to influencer culture, all facilitated by social media platforms like Instagram, Facebook, and Twitter. And, of course, by smartphones and constant streaming. Where would we all be without our Netflix binges? We talked about consumer habits changing in the two thousands. Now, we’re talking about people changing not just how they spend but how they interact with brands and with each other. And this is when Demand Driven Technologies was founded. So tell me about how and why it was established and the need it was meeting at the time.
Like any great story, it was founded by accident. I had reached the end of my career with IBM and retired. I was ready to play golf. I started a blues band and life was good. And I kind of stumbled into an opportunity. A colleague who had helped me with our TOC journey at IBM had, in the ensuing 10 years, developed some software, but had gotten to the point where they didn’t want to be in the software business anymore. It’s kind of hard to be both a tech company and a good consulting firm. And we just happen to get reconnected by happenstance, and I thought, this is interesting, because the software was very early days, but it had promise, because it was built around the same Theory of Constraints foundation.
But it was also taking a little different look and it rounded some of the edges off the TOC thinking. And I thought, this would be a pretty interesting business. So I decided to form Demand Driven Technologies with the company that initially developed the software. I knew it was going to be a long slog to get started, because when you talk to manufacturers, you’re talking about the vital organs of their company—their production and their inventory and things like that. They’re not going from MySpace to Facebook over the weekend.
But, at the same time, if you know that it’s going to work because you saw how all of those ERP deployments didn’t move the needle, and you see Bureau of Labor Statistics data showing that, in fact, manufacturing inventory and turnover rates have not changed over the last 20 years in the US—that suggests there’s a big opportunity out there, because companies aren’t getting the value they should be able to achieve.
That was the impetus. MRP was invented years ago, and we can fly to Europe on a plane knowing that the pilot is rarely flying the plane—the system is doing the job. And yet, when we look at how people are planning their inventory, in so many companies, they’re relying heavily on Excel. What’s wrong with that picture? How come we haven’t figured out how to crack this nut? Our motivation is to bring something genuine and valuable and different. If ERPs were long, labor-intensive, and the needle doesn’t move, we have to offer rapid time-to-value, easy implementation, and affordability. And that strategy seems to work pretty well for us.
Let’s go to our current decade. We began this decade with a real challenge. I mean, 2020 brought us a global pandemic that nobody could have predicted. And here we stand in 2021. How is the demand driven supply chain continuing to evolve, and how has COVID directly or maybe indirectly impacted that evolution?
I’ll take it in two parts. First, let’s talk about how the demand driven journey is expanding. We are seeing enterprise clients now who are ready to start roll-out. We’re in a very large implementation, and we’re going to hit 112 plants in about 18 months. We’re beyond the proof point. There’s a visceral commitment at the company level to take advantage of these concepts because they work and they get better value.
At the same time, the pandemic hit, and there’s so much uncertainty, and everybody retrenches heavily. Back in March, when it really started, to six months later, all the industries we’re talking to have seen just an amazing rebound. Because of what’s taken place, people are taking a much more critical look at their supply chains and realizing the need for resilience. Because if you are tied up to long lead times from offshore suppliers, or if the way you’re managing your business is all predicated on forecasts, you just don’t know what’s going to happen. You didn’t know the pandemic was coming. You didn’t know that the rebound was coming the way it did. And now you’re trying to catch up.
So, if I’m a manufacturer, I’m taking a look to see where we can build more resilience, more flexibility into our business, because if we do that well, then we’ll be able to find our way through whatever kind of rough waters we run into. That is a much more modern way of managing, when you think about it, because now I don’t have to forecast at the item level. I don’t have to worry about SKU proliferation as much. I’m going to figure out ways to be adaptable in that and let the market guide where I go into the future.
Finally, let’s talk about your predictions. You know, we’ve gone from the eighties to the nineties, to the two thousands to current day, and you’ve been through it all in demand driven. So how will it continue to evolve? And will we have a completely different picture by 2030?
Absolutely. There will be a different picture. Today, in these kinds of software environments, in this kind of solution set, there is a lot of configurations that the user needs to make. You know, whether it’s safety stock levels or DDMRP buffer settings—those should be done by the system. The system should be smart enough to figure those out for you and not require the user to intervene. And I think that through pattern recognition, artificial intelligence, and machine learning, we’re going to be able to make the system intelligent enough to where a client could deploy the solution with very little outside intervention. And really take a lot of the complexity that’s assumed to be required and just put it away.
In the future, we’re going to get supply chain to feel a lot more like that commercial airline pilot, who’s monitoring, using the radar screen and the other instruments to make adjustments, but isn’t holding the stick the whole time and trying to fly the plane. We should be a lot farther along in terms of building adaptable and cognitive supply chain capabilities that make it a much more reliable, safe journey—one that doesn’t require near the amount of human intervention that we’ve been used to.
Wrapping up, what’s the one key takeaway that the audience should remember from our session today. I mean, we’ve talked about a lot. We’ve gone through what, four decades.
I think I would just ask people not to take something away, but to go back and question things. Why does it have to be this way? Maybe there is a better way out there, because I do think what’s happened over the last 30 years or thereabouts, people kind of just acquiesced that this is as good as it’s going to get. And I don’t believe that’s the case.