Supply Chain Strategy for Industrial Manufacturers: The Handbook for Becoming Demand Driven

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Summary

The recession was a wake-up call for Industrial manufacturers. The leaders now emerging from the downturn have redesigned their supply chains to ensure sustainable performance. But will they be the demand-driven leaders of the future?

Overview

The recession was a wake-up call for industrial manufacturers, with no more double-digit growth to hide the sins of complexity, long cycle times or high inventories. Throughout 2009, industrial manufacturers focused on freeing up cash. The leaders now emerging from the downturn have redesigned their supply chains to ensure sustainable performance. But will they be the demand-driven leaders of the future?

Key Findings

  • The 2009 recession shifted the primary focus from "customer is king" to "cash is king." Industrial supply chain leaders made good use of the crisis to implement changes not easily done in a stronger economy.

  • Industrial leaders that excelled balanced technological innovation and operational excellence. The best in class addressed diverse markets, which required best-practice performance management and supplier management, including providing longer-term, unconstrained demand signals to their supply networks.

  • Achieving demand-driven excellence requires a fundamental shift in mind-set and a commitment to overcome the challenges of change to achieve success.

  • Prolonged high unemployment along with government intervention, stimulus and budget issues affected traditional demand patterns, which resulted in industrials adjusting capacity, inventory and internal cost organizational structures.

  • The concept of demand management is murky. Combining multiple, complex demand signals into a visible demand landscape is challenging.

Recommendations

  • Identify the portfolio of key initiatives that will help transform your traditional supply chain into a demand-driven value network (DDVN).

  • Recognize that becoming demand driven is a change management journey, not a project. It requires clarity of vision and goals as well as a definition of what represents "good": transitioning from constrained, short time horizon demand signals to unconstrained, longer time horizon demand signals conveyed to all supply network stakeholders.

  • Build capabilities for nimble translation of demand into a profitable supply response based on customer commitments, supply constraints (e.g., parts shortages and extended lead times) and conscious best-value trade-offs.

  • Orchestrate the demand-driven response by designing differentiated supply chains based on segmentation of the demand, supply and product cycles.

  • Invest in collaboration with key partners to create joint value. Enable processes that engage OEM product innovation and supplier innovation teams, resulting in products aligned with demand.

Analysis

Gartner published "Supply Chain Strategy for Manufacturing Leaders: The Handbook for Becoming Demand Driven" as a guide for manufacturers across industries, providing frameworks, strategies and tactics to help supply chain leaders transition from a traditional, siloed, supply-centric organization to a demand-driven one. Although there are many similarities across industries, we've identified specific considerations and factors for different industries and business models. This handbook is unique to the industrial and commercial machinery, equipment and components sectors, including automotive and aerospace and defense (A&D).

Being demand driven matters to industrial companies. When done right , it increases customer responsiveness and revenue. It can also reduce complexity while minimizing adverse global and local operational impacts, such as delays in demand visibility, scrap or excess and obsolete inventory. In fact, it takes nine days on average to sense channel demand, according to our research. But this doesn't include the time it takes for the demand to be communicated upstream. Becoming market driven is key to corporate agility.

Although these industrial sectors are diverse in markets served and product portfolios, they have many similar characteristics:

  • There are multiple demand signals, including macroeconomic indicators; large-deal pipeline orders; order backlog; order, design or engineering changes; statistical forecast; pull replenishment signals; aftermarket services and spares forecast. These signals differ between various demand and fulfillment channels.

  • They sell through direct and indirect channels in a global economy, with most growth coming from emerging economies.

  • Sales and manufacturing processes range from make to stock to design to order. Many are still vertically integrated businesses.

  • Material cost makes up a large percentage of final product cost, making sourcing and procurement and supplier management critical functions.

  • Technological innovation and new products, features and services drive organic growth.

  • These sectors exhibit decentralized business models — some business units are the result of recent merger and acquisition (M&A) activities — with a shift toward a center-led organization model. This model is emerging as a best practice when companies consolidate common functions, leverage economies of scale and standardize for greater efficiency and cost savings, while retaining their agility and ability to stay close to the market.

  • Their business environments are subject to increased regulation and compliance requirements.

Gartner recognizes that the industrial sectors are diverse. If any of these attributes apply to your business, however, this research will be both relevant and useful.

1.0 Defining the Demand Landscape

So, what do we really mean when we say "demand"? For starters, grasping what it means to be demand driven begins with clarity of demand sources. But this can be tough in industrial sectors, where demand sources are multiple and complex, with many crossing the strategic, tactical and operational planning horizons. In Figure 1, we illustrate the demand landscape typical to manufacturers in the industrial machinery and components, commercial and electronic equipment, automotive and A&D sectors.

Figure 1. Multiple Sources of Demand
Research image courtesy of Gartner, Inc.

Source: Gartner (September 2010)

When thinking about long-term, midterm and short-term demand indicators, consider the following:

  • Macro indicators — These are longer-term data points, such as shifts in demographics, vehicle volumes, unemployment rates, housing starts and government stimulus plans.

  • Customer/channel forecast — This may be at the stock-keeping-unit (SKU), configured solution, program and/or project level, coming from a direct sales force or channel partner. It could start in a sales pipeline in a CRM system based on a financial value before being translated to a unit- or platform-based forecast. It could also start as a customer or government solicitation that results in a proposal with a probability of winning the deal. This translation, however, requires in-depth analysis to ensure optimum forecast accuracy.

  • Customer/channel order fulfillment — Managing orders and the backlog of orders, order changes, lead times, project schedules and complex configurations makes order fulfillment and lead-time management important components of demand management.

  • Design changes — This initiates engineering change orders (ECOs) or engineering change notifications (ECNs) for product introductions, particularly for highly configured, unique products. Driven by quality issues on the supplier side or the field, corrective action requests (CARs) cause disruptions, add variability and can lead to design or process changes or rework.

  • Dependent or intersite demand — Internal customers create and change demand, particularly in more vertically integrated organizations.

  • Services — Managing life cycle demand is an initiative coming into focus as companies work to integrate product and service/aftermarket supply chains, including performance-based logistics (PBL). Signals from equipment monitoring devices, mean time between failure (MTBF) inputs, autonomic logistics and integration to customer or dealer systems can help reduce demand signal latency. Services typically include service-level agreements (SLAs) that drive demand and inventory requirements.

  • Aftermarket spares — Spare parts demand can be highly erratic and unpredictable, behaving differently to product demand. Spares availability changes depending on the product's life cycle stage (i.e., in or out of production) and, for this reason, it needs to be managed differently. Network and inventory optimization techniques as well as dealer-managed inventory and planning systems help with forecasting and replenishment.

In industrial organizations, demand management means sensing not only demand volume but the details that affect product and information flow or timing. Consider a design that requires responsive engineering or a schedule change that impacts product and service delivery. To deal with challenges like these, a manufacturer of process instrumentation must put project pursuit managers in place just to coordinate construction project schedules and manage the impact of ECOs on production, the supply chain and costs.

The reality is that many of these different demand streams are managed by different groups that use separate systems. Combined with a lack of demand visibility, this plunges many procurement and manufacturing teams into crisis mode. They fight fires and expedite materials and goods.

Poor visibility into these multiple demand signals coupled with engineering changes results in high excess and obsolete inventory (E&O), scrap, rework and expediting costs, which directly affect the bottom line and are contrary to most industrial companies' process and cost-efficiency objectives.

Why is this demand picture important? Where there are any shared resources across the value chain, a consolidated view of demand, from all its sources, provides internal and external visibility and reduces the latency of the aggregate demand signal. Improving demand management and visibility is the most effective way to improve performance across key metrics, such as service levels, cash and costs. Having a consolidated view of demand is a fundamental requirement for planning processes, such as sales and operations planning (S&OP).

Unfortunately, Gartner doesn't see many companies in the industrial sectors excelling at being demand driven, or even realizing the benefits of broad and deep consolidated demand visibility through S&OP. Furthermore, off-the-shelf demand management software, without an integrated demand-driven business process, struggles to support the complexities of the aggregate demand landscape for these environments.

We did, however, find pockets of excellence in our research. We'll share some of these next.

2.0 Case Studies to Demonstrate Excellence in Demand-Driven Strategies

Gartner defined the following four core strategies for becoming demand driven, which are described in more detail in "Supply Chain Strategy for Manufacturing Leaders: The Handbook for Becoming Demand Driven" (see Figure 2):

  • Become market driven

  • Drive innovation into products and services

  • Orchestrate the demand-driven response

  • Build value into supply networks

Figure 2. The Four Strategies for Becoming Demand Driven
Research image courtesy of Gartner, Inc.

Source: Gartner (September 2010)

We found that the best companies focus on all four areas, with excellence in some. They identify a champion to drive and sustain the overall cross-functional, cross-divisional integrated strategy. Even though isolated projects may emerge as very visible pockets of excellence, unless they're embedded in a broader, end-to-end value network strategy, they don't bring sustainable improvements. Many survive only as long as the strong leader that implemented them remains a champion.

2.1 Become Market Driven

"We want to be our customers' best partner. Their needs drive our actions." — Hilti

Results from a 2009 study indicate industrial manufacturers take nine days, on average, to sense channel demand. This doesn't, however, include the time it takes for the demand to be communicated upstream to manufacturing, supply chain, and suppliers and subtier suppliers, which typically takes four weeks or longer. To improve the ability to quickly sense and translate demand, leaders are market focused and reorganizing. They're redesigning value networks and building capabilities to align marketing, sales and channel partners to R&D, operations and supply chain. Getting closer to the end customer and channel partners as well as understanding what drives the moments of truth are the foundations of designing the supply chain response.

Market-driven, leading companies are organized to make it easy for customers to do business with them. The voice of the customer is constantly gathered, whether it's directly from customers, sales teams and channel partners or through surveys. This information is used to improve customer service or for design purposes, and it forms the basis of customer scorecards. Channel management is important, especially since industrial companies often don't have direct contact with the end customer. Deere & Company, for example, has dealer development programs to ensure its dealers have the technical knowledge and business acumen to best serve the customer.

Customer service remains an issue. Perfect order performance — that is, an order that's shipped on time, is accurate, with perfect quality, and is exactly what the customer asked for — is, on average, under 70% for industrial companies. But even where perfect order performance is much higher, achieving high levels of customer satisfaction must be considered and measured in a broader sense as well as analyzed to ensure the cost to serve doesn't outstrip profit. Analysis of total cost to serve is rarely seen. Even getting to the cost to deliver is on the wish lists of most. Understanding total cost rollup is necessary for demand orchestration, where conscious decisions on how to serve the customer must be made. Cost-to-serve analysis also helps multichannel strategies service different customer segments, with some deserving high touch, but others low or no-touch models.

Our research shows order management processes vary considerably and can be improved. Only 13% are fully automated B2B. Another 46% go through vendor-managed inventory (VMI), portal or Internet options. Technologies and processes to streamline and integrate transactions in the quote-to-cash cycle for configure-to-order and engineer-to-order products have advanced considerably with impressive benefits, particularly by reducing quote and cycle time, increasing profitability and improving life cycle management.

Companies realize the value of customer collaboration. Collaborative relationships to share forecast information or to establish VMI programs with customers and channel partners are cited as top priorities in managing demand variability, but both represent the biggest gaps in capabilities. Continuous improvement efforts in supply chain processes to improve customer service are rampant.

However, they work best when the definition of supply chain starts with sell and it's not confined by plan, source, make and deliver. Customer experience must be defined based on understanding what the customer values, then using network design, cost to serve and segmentation tactics to deliver the right experience .

2.1.1 Ingersoll Rand's Connected Home Solution

The downturn has forced manufacturers to think differently about their solutions and the meaning of value. How do you justify premium price and ensure value beyond quality and reliability in a commoditized consumer market such as security systems and heating, ventilation and air conditioning (HVAC)?

Ingersoll Rand recently combined its residential portfolios into a new business, separated from its commercial businesses, that's focused on delivering innovative solutions to home builders and owners. To drive recurring revenue, residential solutions are sold through direct, dealer and retail channels, with innovative services for energy management and HVAC system monitoring. Standard and configurable packages and services support keyless door locks, cameras, lighting, HVAC and other home fixtures, as well as the ability to interact with them through Web or phone applications.

To ensure it stays close to its customers and any opportunities, Ingersoll Rand focuses on the following market-driven initiatives:

  • Opportunity sensing — The company identifies and creates a market by bundling a portfolio of products and services for the home. It also understands what's important to the contractor or end customer in the store, such as packaging and presentation in the aisles. Web-based, lead management programs can handle high volumes, with 70% closure rates, including quick responses to prospects. These programs are specifically designed to drive closure rates and improve mix and dealer loyalty.

  • The voice of the customer — Ingersoll Rand collects insights from regular surveys, in-store visits and sessions with customers and dealers. Today in the connected home, people interact through the Web or a phone application and use remote monitoring and diagnostics. The ability to "touch" a customer has increased, from just once when a purchase is made to daily interaction through monitoring, e-mail and texting. This immediate voice-of-the-customer feedback and data enables the company to more quickly sense market opportunities.

  • Market intelligence — Longer-term data comes from traditional sources on macroeconomics, consumer confidence and mortgage information. Analysis of sell-through data, ordering cycles and lead times helps tactical planning. For aftermarket demand, Ingersoll Rand looks at attachment rate based on replacement and maintenance cycles, warranty agreements and climate. Use of analytics provides fairly accurate spares forecasts by product line and region.

  • Market strategies — Dealers are supported through marketing focused on ongoing innovation for the homeowner and advanced lead generation programs. Dealer selection is based on the exclusivity and efficiency of operations. Ingersoll Rand looks for a disciplined and methodical marketing strategy, tools and processes, growth opportunities in the dealer's market, additional services provided and the ability to manage the packages offered.

  • Margin management — Product margin is viewed from a plant and channel perspective, working closely with finance. The company recently started looking at profit in a number of ways: in the sales, inventory and operations planning (SIOP) process, by hardware, by services and then blended to understand the effect of a connected home solution. Forecasting is a priority in order to predict the inventory implications of promotions and other demand-shaping activities.

Ingersoll Rand's market-driven approach is reaping benefits. Building a strong pipeline (1.5 times the target) based on innovative products and coupled with high sales closure rates has resulted in sales growth of 24%. In addition, focusing on the connected home, rather than strictly a product focus, increases annual productivity, including cost efficiencies, at 4%.

2.1.2 Heavy Truck Manufacturer Senses the Aftermarket Dealer Channels

Competition is fierce in the aftermarket for heavy trucks. Most truck components are common, and there's little brand loyalty for service. This manufacturer recognized the need to sense demand not only from dealers, but also truck drivers and fleet owners. More importantly, it realized shaping demand was essential.

As a result, the manufacturer implemented a multipronged approach:

  • It communicated directly through its account teams to large fleet owners and established competitive aftermarket programs across brands to drive loyalty to its trucks.

  • The manufacturer produced loyalty cards with incentives for truck drivers, which encouraged sales of specific brands and gathered market intelligence on driver location, needs and preferences. These insights helped align marketing programs and literature.

  • The company provided collaborative forecasting and replenishment systems for dealers, with recommended parts ordering patterns that were configurable by the dealer. This improved dealer inventory availability and control. Incentives on the return policy and stocking reduced the dealers' risk and encouraged use of the tools.

  • Inputs to the forecast included location, season, market trends, planned promotions or coupons and inventory in the manufacturer's own network. Parts were classified based on type of repair or product life cycle, and different forecasting techniques were used, such as attribute-based forecasting for similar parts of different brands.

2.1.3 Related Research

"The AMR Supply Chain Top 25 for 2010"

"Toolkit: How Demand Capable Are You?"

"Evolving to a Demand-Driven Value Chain: Not Easy But Required"

"Key Issues for Industrial and High-Tech Supply Chain Leaders, 2010"

"Hype Cycle for Supply Chain Management, 2010"

"Customer Value Analysis Improves Margin for High-Tech Manufacturer"

"Predicting Total Business Impact To Achieve Maximum Product Life Cycle Value"

"Service Supply Chains: The Path Toward Total Life Cycle Value"

"High-Tech Networks Evolving To Deliver Cash"

"What Is Demand Sensing?"

"Rethinking Demand Management"

"Industrial Manufacturers Wake Up"

2.2 Drive Innovation Into Products and Services

"We have become stronger at translating the channel needs into interesting and innovative solutions, and this has driven market share." — HVAC manufacturer

Orchestrating the demand-driven response increases in complexity as new, innovative offerings emerge to differentiate and retain market share and as services and service and extended warranty programs are created to extend product life cycles. This complexity further hampers the ability to accurately forecast. Leaders, however, are working both ends: improving demand sensing and forecasting as well as becoming more agile and shortening cycle times.

In most industrial solutions, agility starts with product and service innovation that maximizes platforms, modular design and component reuse. "Design anywhere, manufacture anywhere" strategies are becoming more important to mitigate complexity — thus the emergence of the term "design for x," or DFX. DFX strategies support platform design that allows for maximum reuse and postponement strategies when configuring products to meet customers' unique requirements. Leaders use simulation technology to optimize design for supply, but also to design for manufacturing flexibility, global scale, reliability and extended service, and sustainability.

Portfolio management is also a priority. It's expanding to include life cycle management, from collaborative design phase gates, to perfect product launch, to disposal and phase out. This applies to both products and services. There's a need to balance cost versus differentiation of product and service complexity, while recognizing that new products drive demand but can affect cost, residual product management and supply agility. Tightly coupled to the portfolio is intellectual property (IP) management and other supply chain risks.

To illustrate the complexity, consider this: According to a 2009 custom study, industrial companies, on average, have 15,000 items, 16 manufacturing locations and ship 110,000 orders per year. The research also showed it takes about five days to ship an order. This supply chain response is more costly, with even worse asset utilization, than in other manufacturing sectors. Inventory write-offs are high at 6.8%. Although complexity might be inherent in the business model, we can't ignore the fact that much of it is driven by an engineering culture or a sales-driven, SKU proliferation, with no comprehension of whether or not this complexity truly offers value. Figuring this out is a core facet of being demand driven and key to balancing this strategy with the other three demand-driven ones.

Another major challenge is that product and service innovation is done separately. Since design must support product functionality and how it integrates into the total value proposition to the customer, companies must view services as an integral part of the product. Consider the case of NCR, where equipment installation and ongoing service is critical to the customer experience. To improve internal alignment and better serve its customers, NCR recently moved its services organization under global operations. Gartner expects to see more companies integrate services into operations as a best practice.

New product development (NPD) must also incorporate the product life cycle and related services that reflect the voice of the customer, including the recent trends of green and sustainable products. For example, a heavy equipment manufacturer now puts more metal on an engine block because it allows for the remanufacture of engines, thus reducing landfill. The initial engine cost may be higher, but the outcome is much more sustainable.

Design anywhere, manufacture anywhere strategies allow for flexibility, but companies must understand a global segmentation strategy and design and build accordingly. For example, a manufacturer of electrical transformers designed a base that was common globally, but allowed local engineering teams to adapt it to specific regional needs — thus, the base is a platform designed with global differentiation in mind. Furthermore, designing to use the manufacturing capital investments of key global or regional suppliers can help improve costs and logistics in those markets. Besides simply designing for compatibility with supplier manufacturing technologies, industrial companies can do more to use suppliers' technical abilities and drive product and service innovation.

As demand for innovation increases, suppliers and design partners increasingly become an integral part of the picture. Gartner sees open innovation strategies and collaborative design networks on the rise.

2.2.1 Reverse Innovation for GE Healthcare

Pushing global products into emerging markets achieves 10% to 20% growth for manufacturers. GE Healthcare, however, saw an opportunity for three to four times this number in India by looking at the market and customer needs and innovating products specifically for the region.

For example, the typical electrocardiogram (ECG) device isn't suited to India's vast rural areas, where hospitals and even electricity are scarce — not to mention cash. The company needed an ECG device that was portable, battery-operated and very low cost. The one it created was just that, costing about $1,000. And not only did it drive growth in India, but it also opened up new opportunities in the massive developed markets of the United States and Europe. Just think of an accident site where a machine can be taken to a person sooner than a person can get to a hospital, or consider a space-constrained medical facility. GE Healthcare experienced similar success with imaging equipment designed for China, which also fueled growth elsewhere.

This concept is a radical change for "corporate America," with its desire to push global products, sometimes with fewer features to reduce costs, into the large Brazil, Russia, India and China (BRIC) economies. What GE Healthcare did was design a low-cost device specifically for India, then scaled it up for global deployment. The company calls this "reverse innovation and market-back planning."

So what's the take-away from this medical equipment success story? There are many examples of companies growing revenue and market share by designing for emerging markets. In this case, however, GE Healthcare brought innovation to developed regions to shape demand and created a new market in result.

2.2.2 Herman Miller's Market-Driven Innovation

"We will achieve best-in-class financial performance by serving our customers with a comprehensive offering of innovative products, knowledge and services, all delivered with bulletproof reliability." — Herman Miller's VP of supply chain

Over the past five years, innovation at Herman Miller has moved from an R&D push model to being market responsive. There's now great collaboration between marketing and R&D to blend the needs of customers while bringing new ideas to market. Category leads are out in the field, listening to customers, dealers, architecture and design firms and working with focus groups. The company continuously assesses its current portfolio and identifies gaps and opportunities, working with the design and development team to ensure the right mix.

Consider the following:

  • New design projects go through a stringent review process. They must include a business plan based on added economic value. This iterative design process includes prototyping and prebuilds, looking at ease of manufacture, costs and cycle time as well as supplier integration. It can take longer than desired, but it's a trade-off Herman Miller is willing to make — its reputation and brand image for quality and delivery reliability of 99.5% cannot be compromised. Approved projects kick off an NPD life cycle, with a project manager in place. Accountability for dates and delivery, however, span a cross-functional team, including representatives from engineering, purchasing, finance, marketing and select suppliers.

  • Herman Miller's Vivo product is a good example of responding to market demand. The company's dealers and customers were constantly asking for a lower-cost desk system with a crisp, aesthetic look. The demand was driven back from the product marketing team into R&D, and the Vivo product was launched. Since then, Vivo has become Herman Miller's fastest-growing systems product.

  • Designing products for a global market is a challenge not only for Herman Miller, but for the entire office furniture industry. The cubicle mentality of U.S. offices doesn't translate well in Europe where employees work in open areas. Asia has other idiosyncrasies, such as the height of the chair's back denoting status and seniority. This impacts the ability to standardize designs. However, reuse of components such as a chair-tilt mechanism is increasing. To manage complexity, designers must shed the idea that being innovative doesn't always mean being new.

  • Another challenge for the company and its industry is meeting delivery schedules. This means designers must take scheduling and project management as well as supplier lead times or other constraints into consideration when designing products.

  • Open innovation is inherent in the Herman Miller culture not only from the supply base, but also with external designers. Because internal engineers are generalists, external innovation and specific expertise is sought.

  • Herman Miller also has vertical integration in metal and wood, but it relies heavily on suppliers for innovation and production capabilities in other areas. After getting lean, the company adopted the Toyota Production System (TPS) many years ago, starting in manufacturing and then expanding into supply chain. Coupled with TPS, this lean approach transformed its purchasing team from tactical administrators to lean experts with a deep knowledge of supplier products, processes and costs. Team members spent their time at supplier locations, not in the office. This added another layer of reliability and flexibility to Herman Miller's bulletproof operations.

2.2.3 Related Research

"SKUs Are Driving Complexity Into Your Supply Chain and Profitability Out of Your Bottom Line"

"Leading Manufacturers and Retailers Rely on Value Chain Service Providers"

"Develop and Manufacture Anywhere To Reach Global Markets and Optimize Product Supply Networks"

"Embedding Innovation Into the Value Network Requires New Approaches"

"ATK Mission Systems Executes Projects To Make Affordable Innovation a Reality"

"Product Innovation and Operations Excellence: Who Has the Discipline To Be the Best?"

"Sony Ericsson on the Right Path to Design-for-Supply Excellence"

"Deploying Product Launch Dashboards: Lessons From Leaders"

"Integrating Innovation and Operations Excellence at Toyota"

2.3 Build Value Into Supply Networks

"I believe that in many companies today, the capability of the supply base affects their competitiveness more than any other single factor." Dave Nelson, ex-CPO of Honda of America Manufacturing, Deere & Company and Delphi

It's true that manufacturing agility starts at home. But considering that about 70% of a manufactured product is sourced nowadays, the supply network must be agile, too. Even though companies have moved away from heavy vertical integration, many still focus their lean, Six Sigma and innovation efforts only on the 30% they manufacture. Leaders, on the other hand, build supplier relationships and development capabilities that focus on the 70% they don't.

The automotive debacle of 2009, for instance, highlighted the leaders that valued supplier relationships and, in turn, saw fewer of their suppliers go bankrupt. The difference between the traditional focus on transactional processes and leaders that built effective relationships is significant. Picture the traditional, all-powerful buyer sitting in an office driving efficiency and "favorable" purchase-price variances with adversarial supplier relationships. Then picture integrated teams where the buyer spends most of his time at the supplier location and has deep knowledge of the technologies he purchases as well as the supplier's capabilities. In the case of the latter, agreements come down to a handshake and a simple memorandum instead of a 40-page contract. Open-book costing and joint kaizen events for mutual profit are the norm.

This journey isn't trivial — after all, the supply base is the primary source of risk, innovation, cost reduction and quality, and, in many cases, superior customer service. It must start by building a strategic sourcing and procurement team with knowledge and experience far beyond current administrative capabilities.

Unfortunately when we talk about supplier collaboration, the conversation quickly turns to collaborative practices and technologies to support connectivity. So, the question to ask is, Is your company building collaborative practices or developing collaborative relationships? Collaborative practices such as portals, electronic data interchange (EDI) and supplier-managed inventory (SMI) are important, but robust supplier development programs, like ones developed at Honda of America Manufacturing, help the automaker reduce the cost of each new model, while maintaining quality and increasing the features included in the vehicle.

2.3.1 Equipment Manufacturer Adopts Supplier "Keiretsu"

Ever heard of supplier "keiretsu?" It's the Japanese word for networks of suppliers that learn, improve and prosper in sync with their parent companies. This is the Honda and Toyota way, but it's also been adopted by non-Japanese companies, one being a U.S. heavy equipment manufacturer.

For this company, the keiretsu process was arduous. It needed to completely redefine its strategic and tactical relationships. After all, the traditional American procurement mentality is "reign of terror": Many companies demand cost reductions without collaboration and quickly jump ship to a cheaper source, especially since the Internet made it easier to compare costs. The manufacturer replaced this mind-set with loyal partnering for joint value and total cost reduction, joint kaizen events to reduce costs and improve quality, and ensuring the financial health of suppliers, with a belief in healthy competition during new product introduction.

This manufacturer's supplier management program is the result of a multiyear transformation:

  • It established a continuous improvement approach. Suppliers must share their world-class vision and commitment to mutual benefits and shared goals, which includes executive commitment and an open-book approach to costs.

  • The company developed its procurement team, which now displays in-depth knowledge of lean techniques, industry-specific trends, the manufacturer's supplier products and production capabilities, and strong negotiation and problem solving skills.

  • The manufacturer gathered supplier performance feedback and used a consistent evaluation process that promotes communication and continuous improvement, using shared resources where necessary.

  • It maximized technological strength, utilizing supplier support, innovation and expertise.

  • The company designed a training program for suppliers, which are recognized and rewarded for performance.

  • Suppliers are classified into four tiers based on performance and the relationship desired by both parties.

The heavy equipment manufacturer wants to be its suppliers' best customer. This ensures total loyalty, with suppliers going the extra mile when needed, which increases quality and flexibility. Has the manufacturer achieved this? We talked to one of its major component suppliers, and the answer was "absolutely, yes. [The manufacturer is] our best customer. [It's] tough but fair. [It helps] us improve, gives us great feedback and is totally trustworthy."

Embarking on a journey like this must be done with the right vision and related investments. It delivers long-term transformational benefits, not just short-term incremental cost savings.

2.3.2 Companies Organize to Manage the Supply Network

When discussing the supply network — internal and external manufacturing plus suppliers — it's important to address the issue of business strategy and organizational models. Because of the diversity of the products and markets served as well as growth through acquisition, most industrial organizations are fairly decentralized. This autonomy facilitates an agile business strategy close to the customer, but it doesn't take advantage of an efficient business strategy enjoyed by more centralized organizations, which have maximized standardization and consistency as well as leveraged synergies and economies of scale.

In the past 18 months, the sun has started to shine again on vertically integrated manufacturing and a business model Gartner calls "center led." In this model, organizations can retain the advantages of some autonomy and agility strategies, while leveraging scale and efficiency strategy where it makes sense. For example, GE's appliances division has shifted from sourcing and relying on suppliers for 70% of the finished goods it sells, to manufacturing some of the goods itself for greater efficiency. To support this transition, GE and other companies have migrated to an organizational model based on centers of excellence (COEs), shared services and governance and process councils.

Moving to a center-led model is particularly difficult in program-driven industrial segments like A&D. Rockwell Collins started its supply chain transformation journey in 1996, far earlier than most, and today it boasts a consolidated, centralized supply chain organization with a broad span of control focused on corporate efficiency . As noted in "Conquering the Seven Deadly Challenges of Sales and Operations Planning" (see Challenges Nos. 4 and 5, specifically), getting the customer-driven demand process aligned with the organization or reorganization model and governance process is critical to optimally support efficient, agile or hybrid value network business strategies.

The concept of center led also applies to the manufacturing elements of the supply network. Like in other supply chain functions (e.g., procurement, planning, warehouse and distribution center management, and transportation and logistics), manufacturing environments must align their organization or reorganization models and governance processes with their corporate supply network strategies. Manufacturing operations must strike the right balance of efficiency and agility when managing across a set of regional or global manufacturing facilities, whether they're owned, co-owned or supplier owned, including compliance with mandatory requirements. Table 1 highlights these trends.

Figure 3. Balancing Global Orchestration and Local Execution in Manufacturing
Research image courtesy of Gartner, Inc.

Source: Gartner (September 2010)

Establishing programs to create and manage the balance of agility and proximity versus efficiency is a lengthy yet fruitful initiative. Consider, for example, Ford Motor Company's One Ford program. One facet is to create standardization across manufacturing facilities to support flexibility in capacity usage. Ford's program assumes that variable demand for certain platform configurations will occur, which makes flexibility and agility a necessity. It has standardized plants to enable efficient response within 24 hours. Supporting this are standards across sites for quality, safety and plant efficiency in all production domains: assembly, power train, transmission and stamping. Ford is starting to see the fruits of its labor, too: In the recent J.D. Power and Associates' Initial Quality Study (IQS), Ford was the highest-ranked U.S. OEM.

As evidenced by Ford's revamp of its production system, many manufacturers are "rediscovering their roots" inside the four walls of their plants. In many cases, it's more than applying business process rigor in the forms of lean or production scheduling principles. It's about information access and availability to support continuous improvement across the products, processes and people organized and aligned to the corporate supply network strategy. For example, a bicycle manufacturer and a fuel rod producer have invested in process monitoring applications. This technology doesn't just monitor critical-to-quality processes at line, it also identifies across sites where capacity is available to support available-to-promise (ATP) and capable-to-promise (CTP) decision making. These capabilities support the desire to balance line efficiency with agile manufacturing execution.

More broadly, investments in manufacturing plants are being made to improve efficiency and compliance by automating the still-present manifold of paper-based and manual processes. When well thought out, they can generate efficiencies through basic automation and enable a flexible manufacturing architecture beyond ERP for multiplant integration. These continuous improvements have the potential to increase automation project ROI through multiplant benefits and increase corporate return on invested capital (ROIC) through improved used of capital equipment.

Although automation processes are critical for efficient operations purposes such as inventory backflushing and order management, it's also imperative to connect these systems further upstream, including integration with product and process design and other product life cycle management (PLM) functions. Upstream connections permit the creation of common data models for engineering and production management systems. Common data models help align manufacturing, including the organization model and related operations processes, with product and process design, engineering, simulation models, industrial and plant engineering machine commissioning, program and product management, and change management.

At the start of its strategic alignment/transformation journey, one automotive supplier restructured its plant IT systems to support the award of a multimillion-dollar contract with an OEM for a new platform. The project is supported by a specific IT center of excellence for MES. With measurable results and ROI, Siemens Industry Automation Services (IAS) is on the other end of this transformational journey. By completely automating its production lines at its Amberg facility , the company now accommodates a higher mix of products, while still having a 99% reliability rate for filling orders worldwide within 24 hours.

2.3.3 Related Research

"Successful Supply Management: It's About How the Relationship Is Defined"

"Six Best Practices for Building World-Class Supplier Strategies: A Unilever Case Study"

"Predictive Supplier Management and Surveillance Is a Strategic Weapon for Lockheed Martin's Missiles and Fire Control Division"

"Reaching Sourcing Excellence, Part 2: Going From Good to Excellent"

"Reaching Sourcing Excellence, Part 5: Sourcing Technology Is a Commodity With Short Time to Value and Immediate ROI"

"Managing Risk: Can You Sense Supplier Failure?"

"Intel: A Case Study in Supplier Risk Management"

"Four Talent Development Milestones Build Better Supply Chains"

"Legal and Regulatory Compliance Only the Tip of the GRC Iceberg"

"Not Every Supplier Collaboration Is Created Equal: Focus on Long-Term Relationships and Avoid Transactional Practices"

2.4 Orchestrate the Demand-Driven Response

"Having an S&OP process with full commitment and joint ownership for forecast accuracy with sales and marketing has improved our forecast accuracy by at least 10 points — 20 or more, in places." — Electronic equipment manufacturer

For industrial manufacturers, demand management must be tied to the business strategy and forecasting capabilities with the end goal in mind. Becoming demand driven requires a focus on sensing and shaping demand and capturing this demand in pipeline and forecasting tools, while working to eliminate bias and error.

Based on the characteristics of your supply chain, consider these options:

  • If the goal is to maximize opportunity in a constrained environment, the demand plan must be tightly coupled to pricing strategies, product innovation cycle time and supply capabilities.

  • If the goal is to be supply driven, focus on supplier forecasting and alignment as well as product design stability when demand is greater than supply, or if there's a superior product with no substitutions.

  • If the goal is to maximize a given contract with short lead times, focus on agility, shorter lead times, ATP for visibility and techniques to improve agility, such as VMI or postponement, with rapid response to high-margin demand.

Conventional forecasting technologies don't handle high mix and product configuration well. Consider modeling attributes, models and platforms against the goal, with organizational structure also aligned to the goal. Use analytics for sensing patterns in buyer behavior to refine forecasts, create recommendation and configuration engines and support design improvements.

According to a recent Gartner study, 46% of industrial companies reported they're increasing their investments in S&OP, with better asset utilization, supply planning and schedule adherence, and better translation of demand to procurement requirements cited as the key benefits. Translating demand into manufacturing and procurement plans, however, is the greatest gap.

In high mix environments, reconciliation of the sales pipeline to the financial plan and supply forecast for pre-builds and pre-buys is complex. While the financial numbers may ultimately be achieved by sales, changes in mix cause headaches for planning and finance. Survey respondents reported they struggle the most with supply-constrained, what-if analysis as well as the ability to measure trade-offs and then measure and communicate the plan. For the industrial sectors, S&OP must be designed for value streams, with an effective decision-making process and tools to define profitable plans based on capacity, resources and material supply. This should tie into and reconcile with the financial plan, and then drive material and factory planning consistent with the collaborative demand-driven plan.

Twenty-nine percent of industrial manufacturers also reported they have no formal S&OP process, stating limited resources as the main reason why. To make matters worse, only 27% have common, end-to-end supply chain metrics in place, and 50% of people are rewarded through the annual appraisal process united with key business results metrics. Industrial organizations steeped in legacy processes and a traditional procurement-based supply chain culture continue to operate in crisis management and expediting modes. However, those that recognize the value of multifunctional and integrated planning processes that enable conscious choices emerge as the winners.

S&OP is a key process in a journey toward achieving Stage 4 — orchestration. The term orchestration, though, is seldom understood in the context of supply chain. When we talk about orchestration of the demand-driven response, we're referring to the following:

  • Clearly understanding customer and product profitability to support decision making and supply chain design

  • Having the ability to redefine the overall customer experience, which means going beyond delivery performance and striving for excellence and differentiation in supply chain response and service

  • Improving demand-shaping opportunities and inventory optimization through new business platforms and innovation

  • Implementing cross-channel and e-commerce strategies as an enabler to customer value

  • Translating demand to supply supported by what-if analysis and advanced analytics

  • Adopting a few, easily understood "true north" metrics to achieve internal alignment on a common goal

  • Having the capabilities to support product, service, information and financial flows, both internally and with partners in real time

The ability to accept or decline orders based on profitability and to consistently align to business strategies is difficult to cultivate, but it's a characteristic of mature, Stage 4 demand-driven leaders.

Orchestration requires the ability to translate complex go-to-market strategies, new offerings and supply networks into plans to meet business goals most profitably. Like cogs in a transmission, the demand, supply and product functions within an organization must be aligned and synchronized for this to happen. Each function must forecast and plan based on its own strategy, while the cross-functional S&OP or a similar process brings them together to orchestrate the demand-driven response.

Figure 4 illustrates some of the factors affecting the synchronization of planning.

Figure 4. Orchestration Requires Demand Translation
Research image courtesy of Gartner, Inc.

Source: Gartner (September 2010)

2.4.1 Emerson Cracks the Planning Code for Complex Products

The Rosemount business of Emerson's Process division has moved from being a reactive supply chain to a demand-driven orchestrator in short time. Rosemount provides pressure, temperature, flow and level measurement products to global customers and projects. Three years ago, there was no S&OP process. Planning was conducted at the plant level, even though multiple plants sold to the same global construction projects. At that time, Emerson measured too many metrics that weren't actionable, and its product lines were differentiated based on high CTO complexity. Today, however, this $2 billion division is in a very different place. It's considered a leader in S&OP and planning capabilities within the Emerson group.

Here's a synopsis of the its progress:

  • S&OP — Sales and marketing was involved in the S&OP process, with healthy debates happening during meetings. Finance was also connected and used the consensus plan as input to its planning process. The division had a rough idea of the cost to serve premium and economy products. It used this estimate to sense and shape demand based on profitability.

  • Metrics — Metrics were connected across plants. The division moved from focusing on inventory to measuring market share. It also redefined service levels (required versus promise date) and figured out the products that needed to be forecast and the ones that didn't. Order management focused on product lead-time accuracy, and sales was measured on aggregate forecast accuracy based on promise date in each order during fiscal periods.

  • Organization — Centralized planning was implemented across factories, with success measured on meeting the plan and planners responsible for metrics across plants. The role of the buyer developed into a true supply planner, with leverage needed to get the materials into the plant. Rosemount also put project pursuit managers in place, since projects make up 30% to 40% of the business and the division works on an eight-week moving average backlog based on promise date. This improves control and visibility of the project schedule's demands on factories, and they provide key input to the S&OP process.

  • Supply chain segmentation — The product marketing strategy was connected to three distinct supply chains. To weather the downturn, Rosemount created a catalog of "on-demand" products: high-volume, standard items that can be purchased with lead times of a day or two. Simplifying the portfolio allowed sales to shape demand for them. To support these on-demand products, the first supply chain was designed with parts segregated on ABCD guidelines. Safety-stock calculations were based on delivery requirements and demand variation. Suppliers were connected through kanban signals for quick response. The second supply chain was for build-to-order products. Here, lead times were reduced by moving to a more regional supply chain and supply base. For the third supply chain, which includes ETO products, no stock was kept. Customers accepted defined lead times and paid a premium.

  • Forecasting — The software was implemented to support demand planning and forecasting. This wasn't a stand-alone Rosemount project — a corporate team supports the Emerson businesses with a three-day assessment of the business model and complexity. A proof of concept is run for three monthly cycles in a lab using the business unit data, and only then is an implementation plan developed. Rosemount was an early adopter of CTO and ETO products and customized the application to handle these complexities. It can now forecast one level down in the bill of materials — the model number — and link to the relevant options that gives it a parts list.

  • Benefits — In the past year, the division has seen a 35% reduction in inventory and improved material stock by 45%. Sale of the on-demand products now makes up 40% of revenue, with this percentage growing.

  • Hurdles — An initial hiccup was alignment of sales and marketing into the S&OP group. Both were given incentives in a different way. It took the right people to be engaged and "sell" the process top down and bottom up. Additionally, forecasting used to be the responsibility of sales and marketing. Now, it's a joint responsibility between sales, marketing and the planning group, without any finger pointing.

2.4.2 Lockheed Martin Proves A&D Can Be Demand Driven

Like many in A&D, Lockheed Martin operates from a multiperiod backlog of business from the government. However, this significant backlog doesn't imply stable demand. Most deliverable products are individually configured, meaning every aircraft ends up with design changes, with many unique to the aircraft. For this reason, the company's customer value delivery system must accommodate change within short cycle times. The onus is on Lockheed Martin to reduce cycle times by knowing each product's critical path, and then working to eliminate constrained operations.

Before a company can become truly demand driven, the team at Lockheed Martin believes it must simplify operational processes by applying lean principles. Lockheed Martin is different than many other A&D prime contractors and major suppliers in that it focuses on end-to-end lean from supplier to customer, including synchronizing demand pull to minimize inventory buffers. Other contractors and suppliers have one-piece flows similar to Lockheed Martin, but others haven't yet extended lean outside their four walls. This extension requires effective collaborative supplier relationships, particularly with suppliers of constrained materials. For example, on the F-22 Raptor production line, there's a one-piece flow line to build an entire aircraft. This is different than the F-16 Fighting Falcon production line, which has many build stations. It requires discipline to get a single-piece flow line in place, but once it's mastered, it brings clarity and reduced supply chain complexity. At Lockheed Martin, inventory can be held at the point of consumption, which reduces the need for warehouses as aggregation points.

Long-term services are critical and support the company's business growth and products. Services use the same supply chain principles developed in manufacturing. Lockheed Martin currently has 23 PBL programs in place, five of which are system level, with the others at a major assembly or component level. As a PBL leader, it recognizes PBL is more than a contract. Achieving the deliverables, which are outcome driven and based on Department of Defense (DoD), customer-defined performance, requires the design of an end-to-end supply chain integrated with the customer's logistics community and assured delivery and availability. Trade-offs must be made, such as product design decisions that improve serviceability or long-term reliability.

Lockheed Martin finds value in PBL programs because they drive a five-year view of demand. Much of the impetus for PBL came from the foreign Ministries of Defense (for example, the aggressive, longer-term contracts that focused on mission outcome for the search-and-rescue helicopter program in the United Kingdom).

So, what does successful PBL at Lockheed Martin entail? Here are some of the key aspects:

  • Life cycle view — A life cycle view for highly complex products starts with an integrated organization. At Lockheed Martin, technology, engineering and the logistics and sustainment groups report into the same senior vice president. And since the word "aftermarket" makes most people in an engineering-centric environment yawn, it called its PBL group "logistics and sustainment." The life cycle view also integrates key demand pulls from each PBL customer. For example, the international market wanted to buy flight hours, not helicopters. With this came the emphasis on platform performance and service outcomes, as well as the recognition that broader industrial integration was required.

  • Demand visibility — A PBL program has to be 100% demand driven to work. Demand visibility makes or breaks service delivery. It also determines whether or not the company gets financial rewards or penalties. This creates an incentive to actively monitor and manage the demand signal, which very often comes from instrumentation and sensors that help predict failure or from real-time insight into military ordering systems. Since the DoD only has 30% forecast accuracy, Lockheed Martin needs demand insights at the point of origin. This is stated in every PBL contract.

  • Partner integration — PBL requires tight integration with customer systems and industrial partners, but corresponding PBL relationships are slow to be adopted upstream, since smaller suppliers still prefer to operate on a transactional basis. The key metric has moved across the network from supply availability to perfect order.

The F-35 Joint Strike Fighter (JSF), which is currently in production, will take this design-for-service experience to a whole new level based on the extensive autonomic logistics incorporated in the aircraft. The logistics systems monitor the total health of the aircraft. A foundational element for the F-35 JSF is design for service for each customer community. Lockheed Martin designed a platform with three variants to satisfy domestic and international community performance-based service requirements.

2.4.3 Related Research

"2010 AMR Supply Chain Top 25: Chemical"

"2010 AMR Supply Chain Top 25: Retail"

"Sales and Operations Planning: Transformation From Tradition"

"Conquering the Seven Deadly Challenges of Sales and Operations Planning"

"Embraco Transforms Its Value Chain Through Integration of S&OP and Order Fulfillment"

"As the Recession Dipped the Market, Cisco Rose Above It"

"Harris Corporation Wins the AMR Research Supply Chain Excellence Award for Small to Midsize Businesses"

"The Hierarchy of Supply Chain Metrics: Diagnosing Your Supply Chain Health"

"Network Design: SanDisk Uses Smart Postponement to Slash Costs 60%"

"Debunking the Myth of Base Forecasts"

"A Four-Step Program for Supply Chain Agility"

"Of Configurators and Configuration: Lessons From Leaders"

"Make Money: Inventory Strategies That Matter"

© 2010 Gartner, Inc. and/or its Affiliates. All Rights Reserved. Reproduction and distribution of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Although Gartners research may discuss legal issues related to the information technology business, Gartner does not provide legal advice or services and its research should not be construed or used as such. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The opinions expressed herein are subject to change without notice.

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