START WITH DEMAND
Demand-driven manufacturing is radically altering how some businesses serve customers.
By John Goff

A holiday weekend was fast approaching, and in the state of Ohio in the US, managers at the Procter & Gamble factory were shutting things down early. The move seemed to make sense. Analysis of purchase orders and historical sales trends indicated that the factory had already cranked out enough cases of Liquid Tide to meet the demand of holiday launderers. Rather than keep idle workers on the clock, managers shut down the facility ahead of schedule, giving employees some extra time off.

But during the weekend before the holiday, P&G executives were greeted by a surprise. One of the company’s largest retail customers had placed a sizable – and unforeseen – order for detergent. P&G immediately reopened the Lima plant, but had to pay workers overtime and schedule emergency shipments to meet the retailer’s request. The cost of responding to “the event”, according to P&G global product supply officer Keith Harrison, ran into the seven figures.

P&G is not the only business that gets whipsawed by events. Far from it. When managers rely on sales forecasts – and lack real-time point-of-sales and supplier data – they routinely find themselves in a bind. As one company executive grants: “We sell from stock, and the amount of that stock is based on historical trends. Not surprisingly, we’re often sitting on too much or too little inventory.”

The answer? For some, trying to improve forecasting. Certainly, accurate forecasts are crucial when mapping out large manufacturing runs and new product designs. But by definition, sales forecasts are guesses – guesses often shaped by the desire of executives to set audacious goals and hit out-of-the-box numbers. Even managers at businesses with sophisticated forecasting systems have run up against the crystal-ball wall. Says Mitch Myers, vice president of operations at FW Murphy, an instrument maker in Tulsa: “We want to be fast and flexible. We don’t want to be dependent on predictions about what’s going to happen, like some psychic on a 1-900 number.”

A different approach

Instead, managers at FW Murphy, along with executives at growing numbers of other companies, have adopted a different philosophy: shift the focus from forecasting to reacting. This is no small task. Unlike just-in-time manufacturing – a waste-reduction effort that typically foists inventory risk onto suppliers – demand-driven manufacturing requires a tricky integration of complex computer systems all along the cash-conversion cycle. Point-of-sale data must be funneled into purchase-order systems, which then trigger procurement programs, which eventually push data into supplier portals. In a sense, products become bytes of data. Notes Andy Carlson, vice president of product marketing at business-software maker PeopleSoft: “Companies are replacing inventory with information from customers and vendors.”

And connecting the two. While supply-chain reengineering is crucial to reacting to unforeseen consumer requests, demand-driven manufacturers go one step further, passing customer data along to suppliers. Dell, long a leader in inventory and supply-chain management, now sends real-time sales data to suppliers every two hours. The PC maker has also moved its vendors into shared logistics centers close to the company’s factories – “our buffer between forecasts and reality,” notes Stephen Cook, Dell’s director of manufacturing at the company’s national fulfillment campus. P&G is filling retailers’ requests for products from Pringles to Ivory Soap in less than 72 hours. Ultimately, the consumer-goods giant wants to create a real-time, store-shelf-to-supplier system driven by individual consumer purchases. “We want to make what’s actually selling,” says Harrison, “not what we forecast will be selling.”

Green bear, red bear

For most companies, attaining such a goal will take years. While technology is making it easier for companies to streamline their supply chains, the real world keeps getting in the way. Increased outsourcing has placed a strain on global logistics providers, reportedly delaying shipments for some businesses. Tighter security checks at airports and ports have also slowed deliveries. To cope with these problems, a few companies have hired local parts producers to serve as backups in case of emergencies. Others, like Dell, have attempted to move their suppliers closer to manufacturing facilities. As one industry observer notes: “When you extend your supply chain, you’ve exposed your throat.”

Nonetheless, companies that have embraced demand-driven production are already seeing the fruits of their new approach to labor. According to US consultancy AMR Research, corporations that have adopted demand-driven supply chains are outperforming their competitors – and by a wide margin.

Businesses with demand-driven supply networks get paid 70 days sooner and bring new products to market 70 percent faster than their less-enlightened rivals, says AMR. The consultancy (which advises customers on creating such networks) also found that companies with a demand-driven approach to production have a 92 percent perfect-order rate, versus 81 percent for their competitors. Overall, companies with a demand-centric – as opposed to factory-centric – bent are adding 5 percent to their top lines. To some, the message is clear. Declares Carol Ptak, vice president at PeopleSoft: “Companies that don’t make the change to demand-driven manufacturing and demand-driven supply chains will die.”

Executives at Russ Berrie would no doubt concur. The US specialty gifts supplier used to manufacture its stuffed animals and scented candles based on historical trends. Says Michael Saunders, the company’s chief information officer and vice president of business processes: “We’d guess that a major retailer would need 1,000 green bears and 2,000 red bears. Then we’d make them and ship them.”

But the nature of the business began to change. Suddenly, some of the company’s 50,000 retailers wanted faster turnaround on orders. One major grocery chain requested that Russ Berrie start delivering to stores rather than to the customer’s distribution centers. What’s more, the customer also wanted Russ Berrie to quickly respond to changing buying habits in each store.

To cope with this new order for orders, Russ Berrie management decided in 2002 to overhaul the company’s legacy-information systems. The initiative included consolidating seven enterprise resource planning (ERP) programs into one. Managers now receive weekly replenishment information based on point-of-sale information from the grocery-store operator. Russ Berrie also deployed a model-stocking method at the individual-store level, and the data from that funnels back into the company’s demand-planning systems. Eventually, purchase orders from individual stores will tie into systems in suppliers’ factories.

Out of joint

Viewing real-time purchase orders can be a huge change for some managers. National Instruments, a US$500 million maker of high-end measuring devices, has cobbled together a product-delivery system based on Oracle 11 I . Real-time sales information, says CFO Alec Davern, is pulled from the Oracle ERP program into a data warehouse, built by Cognos. Nearly all of National Instruments’s suppliers are connected to the company’s global ERP program. “We know instantly when we take an order in China that the order will get booked and will create a purchase order with suppliers,” says Davern.

The arrangement seems to be working. In October, 99.5 percent of the company’s shipments reached customers on time – impressive, considering that no account makes up more than 1 percent of National Instruments’s sales. To make sure supplies dovetail with buying patterns, Davern continually monitors a host of inbound-demand indicators on a dashboard on his PC – a setup that would be impossible without the unified data platform and data cube. Every day, the finance chief also looks at a web-based report detailing order backlogs by country. That allows him to see inbound demand all the way to order entry, purchasing, and planning.

This kind of transparency is hard to attain with disconnected transactional systems. At Russ Berrie, consolidating the ERP systems has made it much easier for managers to see what orders are coming in, and how those orders match up to what’s being produced by outsourcers. That, in turn, is enabling the company to reroute its stuffed bears and scented candles while the goods are still in transit. “We still have to put something on a boat and wait 30 days,” concedes Saunders. “But at least now we know what’s on the boat, and which customer will be getting it when it comes off the boat.”

Of course, some customers can’t wait 30 days. Smith & Nephew Orthopaedics in the US, which began digitizing its product-replenishment process two years ago, has dramatically improved its ability to respond to customer demands. The company reduced the turnaround time on one set of medical-implants instruments from six months to two days. Part of that, says vice president of finance Mike O’Connor, has come from better use of technology. Sales personnel scan product information into a handheld device as soon as a surgical procedure is completed. The data is then uploaded to the company’s purchase-order system. While speed is important in the medical-implants business, so too is accuracy, says O’Connor. “A doctor can’t open one of our tool kits and go, ‘Oops, we’ve got the wrong hip replacement. Come back tomorrow.’”

Safe, not sorry

To avoid hijinks in the operating room, Smith & Nephew continues to carry some safety stock. Running out of stock, line managers often point out, is a whole lot worse than having too much stock on hand. Getting these executives to focus on throughput rather than inventory will take some doing. Currently, senior management at P&G is working with ERP vendor SAP to flow sales data all the way through to suppliers. But Harrison believes it’s going to require more than improved software to reduce response times to customer requests. “How do you take 50,000 people in an organization and switch them over from the mind-set of maximizing machine runs and carrying lots of inventory?” he asks. “[Reduced inventory and faster turnaround times] are things we used to think of as inconveniences.”

Experts also note that the switch to demand-driven manufacturing can be both expensive – one survey puts the average total cost of ownership of an ERP installation at US$15 million – and time-consuming. At National Instruments, CFO Davern says the company’s transformation to a demand-driven, customer-focused operation began in 1993, back when it first invested in the Oracle applications. Davern reckons the whole system finally gelled in 2001.

Even after businesses manage to unify their front-end systems, supply chains must be tended to. FW Murphy, for instance, has reduced assembly times on one product line from five days to 1.5 minutes. But Myers points out that slashing production times at a factory doesn’t help much if supply-chain lead times stretch on for months. “This is an exercise in serious constraints,” he says. “You’re constantly trying to keep multiple gophers down at the same time.”

Time, money – a connection?

The mallet-wielding is worth it. A manager at one manufacturer estimates that reengineering the company’s supplier network could add US$1 billion to the business’s top line. At the very least, better systems integration helps speed inventory turns – and cuts response times to unexpected requests.

The ongoing supply-chain makeover at Dell, started in 2000, has helped the PC maker lower inventory to four days’ worth of sales. Eager to enlist all employees in its quest to shorten customer response times, the company has altered some of the metrics its managers look at. Among other things, says Cook, the PC maker measures “deliver to target”, a ratio that gauges how quickly Dell gets products to its customers. Adds Cook: “The whole company is bonused on this metric.”

Demand-driven companies in other sectors are also adopting metrics that reward responding to customers – rather than piling up inventory. P&G recently began measuring both the shelf quality of its products and shelf out-of-stocks. Harrison says that in the past, managers were more absorbed with turning out quality goods than turning over inventory. While manufacturing winning products remains crucial, he says management now zealously tracks things like supply-chain times and order-response rates. “We’re learning that time really is money,” he notes. “Speed? Speed is the new metric.”

John Goff is technology editor at CFO in the US.