In today’s just-in-time, customer-driven world, success is all about responding to consumer demand as quickly and efficiently as possible. From a supply chain perspective, that means building products to meet actual, not forecasted demand.
If you’re looking to do just that – without massive inventory carrying costs – you’ll need to score the supply chain trifecta: a demand-driven supply chain, localization, and product completion centers that allow you to complete/assemble and package products closer to customers.
Here’s the rub. Like many manufacturing companies, you may have moved some or all of your production to Asia or another low-wage destination. Offshoring made great economic sense 10 or 20 years ago. However, the business case that made offshoring a smart play a decade ago no longer makes economic sense, for a few key reasons:
- Wages are rising in developing countries like China (up 350% over the last 11 years)
- The cost of cargo ship fuel is high and getting higher
- The shortage of freight capacity continues to grow
- Launching an offshore operation can incur significant upfront expenses
- Lengthier supply chains often cause delays in shipping and time to market
- Product/vendor quality in Asia can be inconsistent and difficult to monitor
Given issues like these, manufacturers are moving away from least-cost countries and locating production operations in “best-cost” countries. This means looking beyond low labor costs to consider a host of other factors: transportation costs, currency fluctuations, proximity to customers, product quality, energy, skilled labor, tax incentives, and supply chain complexity.
Responding to volatile consumer demand, shorter product lifecycles, and multiple sales channels means transitioning from a traditional supply chain to a more nimble, demand-driven one that can handle mercurial consumer demand, supply chain disruptions and fierce competition. In short, it means re-engineering supply chains in three key ways.
The supply chain trifecta for responding to actual vs. forecasted demand:
1. Demand-driven supply chain (DDSC): transforming the traditional supply chain into an integrated, multi-tier supply network, the DDSC aligns sales planning, supply chain planning, procurement, production and inventory replenishment with actual demand.
With access to real-time information about demand and inventory levels and visibility across partner tiers, stakeholders across the network can react immediately to spikes or dips in demand. In fact, everyone in the supply chain works with the same information, processes and metrics. Based on purchase data, inventory is built based on what consumers buy and store shelves are replenished on a just-in-time basis.
DDSC takes a more transparent, integrated and connected approach that synchronizes stakeholders across the network, eliminating worries about out-of-stocks, lost sales, inventory pileups, poor capacity utilization and declining service levels.
In fact, demand-driven supply chains typically generate important benefits: early identification of demand and supply issues before they impact production, faster lead times, higher revenues (due to better fill rates and fewer out-of-stocks), lower inventory costs (typical reductions of 20 to 30%), fewer disruptions (thanks to real-time visibility into the complete demand/supply picture), and improved overall supply chain efficiency.
2. Localization through on-shoring, re-shoring and near-shoring: one of the keys to a supply chain that responds to actual demand is localization. This could mean any number of things: localizing supply and production completely or localizing finished goods, packaging or aftermarket parts.
For example, a company might produce nearly finished products or components overseas, then complete/assemble them at home. Or they’ll near-shore manufacturing in Mexico, then do assembling and packaging at home. Locating operations closer to where products are sold can make a big difference when it comes to improving customer service and responsiveness without increasing inventory carrying costs.
3. Postponement and product completion centers: inventory postponement is a key component of effective demand-driven supply chains – especially because federal incentives aren’t where they could be when it comes to bringing manufacturing processes home entirely.
With a postponement strategy, products are designed (or redesigned) with common modules and components so that inventory stock can be configured to order. Components might be produced overseas then customized, assembled and packaged at product completion centers closer to home (see #2 on-shoring and near-shoring, above).
Again, postponing customization until just before products hit retail shelves requires visibility into inbound materials, in-process materials, finished goods and in-transit materials. When it all comes together, the payoff can be significant: shorter lead times, lower inventory levels, lower overall costs and bigger profit margins.
In summary, in today’s volatile retail environment, competing effectively mandates a more flexible, optimized supply chain. The traditional, push-driven, four-wall approach is giving way to a demand-driven supply chain that yields significant benefits. So how do you make the transition? To learn more about how why manufacturers are being back to the US, read this article by the Wall Street Journal title “More Manufacturers Moving Operations Back to U.S.”
Written by Steve Sensing, VP & GM, Hi-Tech & Electronics, Ryder Supply Chain Solutions
Steve Sensing is Vice President and General Manager for Ryder System, Inc., a Fortune 500 global transportation and supply chain management solutions company. He is responsible for Ryder Supply Chain Solution’s Hi-Tech and Electronics Vertical global business unit, which serves Commercial and Consumer: Electronic, Telecommunication, Medical, Technology, & Appliance Clients. Most recently, Mr. Sensing was Group Director of Operations, for Hi-Tech and Electronic clients in the US. This included responsibility for tactical execution of integrated supply chains for multiple clients, business owner in sales expansion and new pursuits and integration of complex information systems into the daily operations. Mr. Sensing joined Ryder in 1992 and has served with distinction in a number of capacities within Ryder, including Group Manager Dedicated Contract Carriage, Director of Customer Logistics Distribution Management and Director Operations for Integrated Supply Chain Solutions.