The End-to-End, Data-Driven Demand Chain
Managers in business-to-business (B2B) enterprises typically respond to these kinds of questions by referencing a host of familiar business practice models articulated and implemented over the last 20-30 years. According to these practices “demand” involves everything that takes place between you and the customers who buy things from you, while “supply” refers in turn to the mechanics of everything you procure from upstream vendors. Demand is the world of sales & marketing, of pricing and running promotional campaigns and figuring out what products to bundle with others to win a bigger share of the customer’s total market basket. Supply is operations and logistics, inventory cost management and procurement processes. The concept of a “supply chain” has taken firm root over the last decade or so, while demand is seen less as a sequential chain than as a loose collection of activities organized around a point of contact between the enterprise and the collective needs and preferences of the customers who directly buy its products and services. The “art of the sale” is thought to be a less quantifiable notion than the “science of logistics”, with a greater X-factor that does not easily lend itself to data-driven analysis. This is the traditional view – but managers today are faced with a new set of realities that require a different way of looking at the enterprise’s demand environment.
One Person’s Supply is Another’s Demand
Increasingly a B2B company’s demand environment is impacted by, not only what its own customers are demanding, but what their customers are demanding, all the way down to the patron who visits a retail outlet or sits at a restaurant table. On the other side, one business’s supplier is another business’s customer, and so on all the way up to the cornfields and copper mines that supply basic ingredients and raw materials to the production and distribution process. Information flows more freely throughout this ecosystem, and is more transparent and widely available from multiple sources, including some that didn’t even exist a decade ago. At the same time, businesses are under constant pressure to deliver profit and margin performance in an era of modest prospects for top-line growth. This requires managers to find new ways to make their operational processes just a bit better – to eliminate waste wherever possible. This in turn requires decision makers to extend their view of demand the beyond the traditional boundaries of their immediate customers to incorporate an end to end chain.
Here are three examples of waste that occur at different points along the demand chain. By adopting the end-to-end demand chain view it is possible to see these as three variations of a common problem rather than three separate problems, and to solve them via common, collaborative, data-driven solutions.
#1: Manufacturers Waste Millions in Trade Spend
For manufacturers in many industries two of the most profit-draining words in the English language are “trade spend”. Increasingly trade spend has become a pay-to-play proposition, and involves cutting a check to one’s distribution partners with little if any knowledge of how effectively (if at all) that money is being applied to increase sales of the manufacturer’s products. More importantly, these trade spend dollars provide no useful insights into customer purchasing habits – who is buying which of your products, where, when and in what quantities. Practices are notoriously non-automated and vulnerable to human error. Manufacturers experience waste because they do not have adequate visibility into what is happening downstream, and lack the tools to turn trade spend into trade investment.
#2: Distributors Waste Millions in Sales & Marketing Guesswork
For distributors, whose core business proposition is selling, the oft-repeated mantra sounds simple enough: the right product (or assortment of products) to the right customer at the right time for the right price. That “right” price is the highest price obtainable by the seller that will at the same time be seen as fair and retain the customer’s loyalty. More often than not, though, this decision is made on the basis of guesswork more than on the basis of empirical evidence. Large distributors have hundreds of thousands of customers and products, which implies tens of billions of customer-product combinations. Each of these combinations potentially is driven by unique factors that influence what the optimal terms of offer should be. Distributors experience waste when they lack the ability to put these factors into perspective that lead to the right price, promotion, assortment and timing decisions.
#3: Retailers Waste Millions in Suboptimal Ordering Mechanisms
The “bullwhip effect”, also known as demand whiplash, is well known in industry ecosystems. As retailers incorporate changing demand patterns into their forecasts and transmit these new data signals upstream, their upstream partners successively adjust their own forecasts. The result, like a game of telephone tag, is that information at the end of the chain has deviated wildly from what it was at the beginning. By the time orders make their way back downstream the retailer operator’s environment will have changed again, resulting in either costly inventory build-up or even more costly out-of-stock situations. Retailers experience waste when they lack effective and responsive ordering mechanisms with their distribution and manufacturing partners.
Collaboration: Solving Different Sides of the Same Problem
The problems manufacturers, distributors and retail operators experience in demand chain waste lend themselves to finding common solutions through collaboration. By understanding how problems at different flashpoints upstream and downstream impact each business regardless of their location, demand chain partners can contribute their respective areas of insight and expertise to reduce waste across the chain to benefit all parties. For example, much of the guesswork distributors deal with comes from a lack of detailed knowledge about the product attributes that resonate with specific target customers. Manufacturers can contribute their deep product knowledge to overlay and enhance what the distributors already know about their customers’ buying habits, giving them an additional edge in knowing what categories and products to target to what audiences for optimal effect. In turn distributors can pass these insights directly downstream, targeting customers with attractive offers and supporting collateral for the products they are most likely to be in need of at specific times in the calendar year and making them available via efficient ordering systems that minimize sales channel waste.
In a demand chain world the fortunes of upstream, midstream and downstream players are much more interdependent than they used to be. In this environment demand does not stop at the point of contact between a business and its immediate customer. A collaborative approach to improving efficiency and reducing waste can help improve the financial performance of all parties.