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Manufacturers dream of a finely tuned supply chain, with finished goods landing softly on distributor and retailer loading
docks at exactly the right time in precisely the right quantity. That can't be done, of course, without accurate demand forecasting
-- which still tends to be based on intuition, last year's sales numbers, and spreadsheet war games between sales and marketing
groups. For most, the dream remains distant.
But manufacturers finally have a shot at turning that fantasy into reality. The key is integrating POS (point-of-sale) data
with modern demand-planning tools, which are just now coming together for the enterprise. Wal-Mart has led the way, providing
its suppliers POS data per store, updated several times a day, allowing suppliers to adjust their distribution, manufacturing,
and marketing efforts based on what's actually selling and where.
"Wal-Mart is setting the gauge for this supply-chain railroad," says Don DePalma, supply-chain analyst at Common Sense Advisory.
Other major retailers, such as Best Buy, Home Depot, Kmart, Lowe's, Rite-Aid, and Target, are following suit.
Armed with that POS data, both retailers and manufacturers can build demand models that account for seasonality, regional
variations, pricing and promotions, and distribution and manufacturing constraints. For example, analyzing POS data for promotions
may tell you that 70 percent of an item is typically sold on the first Saturday of the promotion, letting you arrange your
distribution accordingly. Retailers and product makers can also compare their forecasts to uncover differences in assumptions
and then adjust them to create a "forecast of record."
Demand-driven systems also help companies adjust to inventory inefficiencies required by the increased use of overseas outsourcing.
As companies have increased the use of overseas suppliers, many have had to keep more local inventory, raising costs and countering
earlier just-in-time efforts.
A demand-driven system helps companies better manage the flow of these strategic inventory reserves through distribution as
demand shifts, as well as provide earlier signals of demand changes so remote suppliers have better notice of when to adjust
their output.
The use of near-real-time POS data should not take the place of planning, analysts advise. Instead, POS data should be used
in demand-planning tools to refine those forecasts in a continual-improvement process, says Yankee Group Analyst Mike Dominy.
"Forecasting is critical to demand-driven systems," notes Noman Waheed, a partner at the consultancy Accenture. Otherwise,
you're just automating the status quo, not avoiding problems and identifying opportunities.
For example, dressings and sauce maker Litehouse Foods uses Ross Systems' demand-planning software to compare POS data from
Wal-Mart against its forecasts, says IT director John Shaw. This allows Litehouse to adjust what it sends to Wal-Mart's distribution
centers to avoid overstock of fresh supplies that would spoil. It has also significantly reduced divergence between sales
and forecasts, which had been as high as 60 percent, Shaw says.
Building on Existing Infrastructure
Midsize and large enterprises typically have operational systems -- ERP, MRP (manufacturing resource planning), and SCM --
for distribution, manufacturing, and inventory efforts, as well as BI and data-warehousing systems to manage the underlying
data and business rules. Implementing a demand-driven system typically means augmenting these existing enterprise systems
rather than building new ones, and it can be done in stages as each incremental effort pays off, notes Kevin O'Marah, an analyst
at AMR Research.
Enterprises are also likely working on SOA (service-oriented architecture) and Web-based services, which provide the tools
needed to run demand-driven processes among supply-chain partners. "SOA is vital because it lets you overlay all this siloed
[demand and supply] information, to look at it in real time," says Mike Grandinetti, senior vice president at Yantra, a supply-execution
software provider.
When implementing a demand-driven system, "the IT solution is only 5 percent of the supply-chain effort," says John Paterson,
chief procurement officer of IBM. Analysts and consultants agree: The vast majority of the effort belongs to the business
managers, who must determine the right processes and business rules, as well as the meaning of the data they get. "Then you
figure out what information you will make available in the supply chain and what information you can get," Common Sense's
DePalma says.
Starting With Demand Data
To be demand-driven, both retailers and product makers first need to have sufficient history -- at least two years -- on which
to build their initial demand models. But most companies have only a history of what they shipped or received, not what they
sold. At best, most companies are looking at weekly sales data, says Doug Percy, CEO of Blue Agave, which helps CPG manufacturers
use sales data to more accurately match supply with demand. Wal-Mart provides such data several times a day.
The few retailers that now provide POS data largely limit access to their immediate suppliers, notes Jim Culliton, manager
of supply-chain services at Hitachi Consulting, but if POS data were made available to suppliers further down the supply chain,
those suppliers could more easily anticipate demand changes. Analysts cite two reasons for this limited sharing: One is that
retailers are limiting initial deployment efforts to their larger suppliers; the other is that a retailer might not have a
business relationship with companies further down the supply chain. In the latter case, suppliers that do get access to POS
data should consider making it available to their own suppliers and manufacturers, Culliton says.
Even when POS data isn't available from the retailer, product makers gain a better sense of demand by using delivery information
from distributors. This information is typically available in EDI format, notes analyst Dominy, and provides some insight
into store sales by tracking their replenishment patterns. As RFID systems get implemented, Dominy says, such systems will
have more data on inventory location, providing better insight into what's staying in stockrooms unsold.
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