Supply Chain Leader - Issue 5

As consumers, we have realized enormous benefits from supply chain globalization, which has made a new world of options available to us. Suddenly, we can choose a laptop or cell phone in our favorite color, with customized features that meet our own specific needs.While we used to wait for August to look at next year’s car models, today we can walk into a dealership at any time of the year to find brand-new vehicles waiting for us, or order one to be delivered in a few weeks’ time. And our local department store, which used to change its assortments only a few times a year, seems completely reinvented each time we visit.

While we enjoy this amazing abundance—and, often, the lower prices that have resulted from global competition— today’s international marketplace has created seemingly insurmountable challenges for supply chain managers. Spread around the world, driven by fickle fashion trends, supported by ever-changing selling seasons, and dispersed across a seemingly infinite number of product categories, consumer demand has never been harder to predict or manage.

There is no doubt that suppliers have done their best to rise to this enormous challenge, especially in expanding the capacity of their operations. But, while global supply chain capacity has risen to answer the new level of demand, suppliers still face natural and inevitable limitations in such areas as raw materials and physical infrastructure, which have made it hard to keep pace. Additionally, they must manage their capacity investment: they cannot assume infinite demand. Their success really depends on one central competency: ensuring that the right amount of the right material is available at the right time, at the right place, and at the right cost to meet promises and sustain profitability.

How can supply chain managers hope to balance this combination of business needs and imperatives? Today’s new demand uncertainty cannot be managed unless both manufacturers and suppliers are willing to shift to an entirely new mindset—one that encourages a truly global view, and that eliminates the traditional barriers that separate trading partners. By taking a more global and collaborative view of their shared supply chain, manufacturers and suppliers can work together to manage and even leverage the demand uncertainty that characterizes the worldwide marketplace.

There is yet another mindset shift required of supply chain managers who want to successfully manage fluctuating consumer demand—and it involves redefining their historic relationships with suppliers in order to make them true partners.

We all know that serving consumer markets means operating with a given amount of uncertainty every day. No matter how talented a manufacturer’s employees, how well-honed its processes and how advanced its technologies, meeting the changing preferences of an international population will never be an exact science.

But the traditional manufacturer-supplier relationship has been based on the notion that end-user demand is predictable; that a certain amount of product or material is absolutely required on a given day. In many respects, the historic manufacturer-supplier relationship has been characterized by a sort of unfounded optimism.

While manufacturers know that their materialsrequirement forecasts will always be somewhat inaccurate, they have asked suppliers to commit to these estimates anyway—and then adjust upward or downward as the true demand level reveals itself. Recognizing that manufacturers’ initial forecasts are usually overly optimistic, suppliers have responded by making delivery promises that they could never realistically fulfill. A true desire to partner has too often degenerated into a series of gaming and hedging exercises—with neither party emerging as the winner.

Today’s new international marketplace demands that suppliers and manufacturers create a more open and honest relationship—one that acknowledges demand variations, and shares risks and rewards among both businesses. For example, manufacturers can assign a tiered cost structure to capacity usage at supplier facilities, negotiate specific cost terms for the use or non-use of this capacity, and pay in advance to reserve capacity. In return, suppliers can provide additional upside volumes without the usual price premium, or agree to incur penalties if they fail to deliver the promised volumes.

This kind of manufacturer-supplier model requires an improved level of trust, which is enhanced by sharing and calibrating uncertainty. Instead of engaging in gamesmanship and overestimating, manufacturers can make their demand uncertainty more explicit, just as suppliers can make their actual assignable capacity more explicit. Manufacturers can restructure their demand forecasting in order to make it more collaborative, as well as basing it on a “range” of uncertainty that is more realistic and informative than a definitive forecast.