From "pull" to "push" in a volatile supply chain environment

Responding to demand means making the most of uncertain supplies

Today’s supply chains are designed to respond to demand. But rising market volatility and materials shortages mean it’s time to learn how to make the most of uncertain supplies.

Until recently, most supply chain experts focused on how to respond to shifts in customer demand. But the supply-chain snags, shortages, and price volatility of the past two years is forcing production planners to look at the supply side—what are the products and components they can get and how does that change their plans for what they can sell? For many companies this is alien territory. Here’s how to get started.

Supply-driven planning is a five-step process.

1. Identify your constraints. What factors and forces are preventing the firm from producing all its forecasted and actual demand over a given time period?

2. Find workarounds where you can. This can be done by expediting supplies, finding alternative sources of supply (including in-house production), making products earlier (pre-building) or later, increasing production capacity by adding machinery or labor or extending the running time of the equipment (ramping up production from five to seven days a week, for example).

3. Triage your customers. If those production shifts don’t eliminate the constraint, the next step is to decide how to make the best use of the resources you do have. Do you prioritize production for certain customers or segments based on total revenue, margin of individual products, overall margin for products, or the need for complementary products? You can’t get everything you want but you can make choices that limit the damage.

4. Watch for collateral damage. Shortages always have consequences. It’s important to understand what those consequences will be. You can only do that by asking a lot of questions: Will our most important customers receive their fair share? Are we apportioning our safety stock in a way that is fair to each location or customer? Do we have a clear idea of what products to make, which warehouses to ship to, and which customers to pursue, and have we thought about how these priorities could affect our Days Sales of Inventory?

5. Reinvent your procurement system. It’s difficult to repair a boat while you’re bailing water, but you should not wait until the current supply-chain challenges go away to consider permanent changes that will make your ship more resilient in the next storm. How difficult is it for planners to run scenario analytics to determine the best sourcing approach, or support the Sales and Operations and Integrated Business Planning processes? Should we reduce the number of SKUs we produce? A failure to take these factors into account can lead to sub-optimized supply chain performance and deteriorating customer service.

One company we know that followed these rules has successfully reengineered its supply chain in a way that better suits these volatile times.

This firm decided it needed to revamp its supply chain after delays in key materials and other shipments began to be a problem. Initially, the company’s procurement team reached out to their direct materials suppliers. After installing more robust supply modeling tools and capabilities, the team began collaborating more closely with their suppliers. Using their new analytics, they took control of their Tier 2 supply chain and made recommendations that increased their suppliers’ manufacturing flexibility.

In the end, this deeper collaboration in planning paid off for everybody. Suppliers found the company easier to work with, customers appreciated having more accurate commitment dates, and overall, the firm’s supply chain suffered fewer disruptions. Beyond those systemic advantages, there were also immediate cost savings: the procurement team’s greater scrutiny of their supply chain reduced the need for premium freight charges and limited the degree of purchase price variance.

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Toyota, Dell, and Walmart are some of the biggest companies that have used supply chain for competitive advantage. Going forward, this will almost certainly continue to be the case. But tomorrow’s supply-chain advantage will be an advantage with a difference. In a world with greater geopolitical stress and more extreme weather, the advantage will no longer be to those with the greatest speed and the lowest cost, but the most adaptable and resilient supply chains. Speed and cost will always be important, but as we have observed in the past three years, they don’t outweigh consistent delivery.

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Jeffry Coble

Jeffry Coble

Director, Advisory, C&O Commercial, KPMG US

+1 678-772-2190