I’ve spent much of my career working with automotive supply chains. During this time there has been a lot of talk about “demand-driven”, and yet, as I discussed in my last post, there hasn’t been a lot of progress. I’ve already discussed why this is the case, and so today I want to offer 7 recommendations to those within the automotive supply chain who are seeking to become more demand-driven, particularly OEMs.
1. Multi-tier Visibility, Planning and Execution: For the automotive market to shift towards the demand-driven model, the value network, from the dealer to assembly plant to supplier, must be viewed as a multi-party, multi-echelon network of interdependent entities that includes components suppliers for service and aftermarket, vehicle assembly, carriers, dealers, and end consumers. Gartner supports this view in recent research stating multi-tier visibility is required by 68% of brand owners to significantly improve on-time performance. Furthermore, better forecasts are at the top of benefits to the multiple tiers of suppliers that replenishment the OEM’s and Tier ones.
All transactions, such as demand and supply signals, on-hand inventory positions, in-transit inbound and outbound logistics movements, and financial data, are the life-blood flowing between these entities. The analogy can be made that demand signal propagation from the dealer to vehicle assembly and distribution centers determines the effectiveness of the network in the same way the nervous system response determines the adaptability and survival of the human organism in its environment. The continuous propagation of data on changes of demand and supply to increase the supply chain responsiveness determines the agility of the network as a whole.
It is equally important to ensure effective coordination and management of multi-party, multi-echelon business processes. That is, the significance of accurate, real-time information is reduced should one partner fail to take appropriate action on that information. Thus, orchestrated process management and compliance is an essential element of the effectiveness of the network.
2. Demand-Driven S&OP
Sales and Operations Planning (S&OP) is a key component of an effective integrated business planning process. S&OP should be the guiding business process for an automotive OEM. The S&OP process for the mid- to long-term planning horizon delivers the financial forecasts (or unit forecasts) and drives product mixes, inventory deployments, production plans, capacity requirements, distribution and transportation plans, and procurement. For near-term planning, the measurement of the actual performance against the S&OP plan indicates how well the execution is tracking to the plan. When the execution diverges from the plan, actions are taken and adjustments can be made.
A new generation of Demand Driven S&OP (DDS&OP) incorporates sales forecasts from multiple sources to create cohesive planned orders (instead of guesses). These orders are netted against real-time inventory positions and vehicle production plans across the multi-tier supply network of yards, in-transits and dealers to meet consumer demand. Coupled with multi-party process management and compliance, the entire value network is driven by a comprehensive, integrated S&OP plan. The dealer and wholesale channels managers now have the information to plan and deploy their inventory. Vehicle assembly plants have the demand signal for their capacity and production planning needs. If the network is extended to the supply side of the vehicle assembly plants, suppliers have downstream visibility of the planned orders. Providing all parties with a single version of the truth to forecast, sales data, and plans creates the right alignment for the entire supply chain to improve the performance.
Effective Build-to-Demand strategy depends on the readiness and availability of capacity and component materials. When the vehicle assembly plants and suppliers commit their capacity or supply plans in DDS&OP, BTO offers advanced visibility for allocation of constrained capacity or key components, which in turn translates to enhanced capable-to-promise (CTP) and available-to-promise (ATP) demand fulfillment capabilities. Flexibly structured ATP/CTP and order fulfillment policies ensure that orders can be timely and properly fulfilled according to the service level agreements.
3. Demand Sensing & Shaping with Dealer Point of Sale (POS) Data
Demand sensing and shaping are necessary for building a demand-driven network. Actual dealer POS data offers rich information, identifying what consumers want and the trends of consumer behaviors. POS data also reveals geographic locations, demographics, and which factory and dealer installed options were bought with what vehicle model.
Properly analyzing POS data to detect current consumer patterns and project them into future trends will enable Automotive OEM’s to sense shifts in demand as it happens. Armed with additional information from this process, OEM’s can gain in-depth demand insights. While multiple channels enhance sales, they also increase the complexity of gathering and analyzing POS data in detecting the cannibalization of the demands resulting from competition among channels. However, if done right, POS data provides the insights about how channels affect each other and this information can be useful for future demand shaping opportunities.
If POS analysis shows historically that certain dealers are usually successful at generating high traffic for incentive campaigns, it is worthwhile deploying additional vehicles to the dealer to further increase the visibility to prop up sales. New vehicle introduction represents another critical event where POS analysis is critical. If the take rate of a specific model or configuration is not as expected, it may be time for a micro-incentive campaign or a promotion to increase product awareness. If the POS data reveals that dealer channels have been selling the previous model year or high-end configurations, the OEMs can use this information to devise a strategy to work with the dealers to switch to new vehicles in anticipation of consumer take rates. If the POS data consistently shows one predominant model or option configuration over all others, it could suggest to the managed market to stock that vehicle configuration.
Mass customization requires companies to produce a variety of vehicles with different option configurations. Finished goods inventory for OEMs is not the most desirable fulfillment source if the final configurations cannot be known until orders have been received. For Automotive OEMs to produce products with specific order configurations or factory-installed options, it is preferable that product differentiation is deferred until the customer’s or dealer’s orders are received (a strategy known as postponement).
Postponement strategy results in the effect of moving inventories from downstream finished goods locations at the end of a network to upstream raw material and component (or module) inventories in locations across the network. A successful build-to-demand strategy relies on the availability of the right components and materials at the right place and right time across at the assembly plant or dealership. When components and materials are available at multiple locations at different costs, the coordination of various supply chain activities such as production, distribution, logistics, etc. is a prerequisite for a successful build-to-demand strategy. Additionally, it also calls for a mechanism to optimize the total landed costs to fulfill customer orders.
5. Multi-tier Inventory Management and Visibility
Postponement strategy switches the inventory from downstream locations to the upstream stages. Gartner pointed out in a study that the best-in-class companies increase their overall customer service levels while simultaneously reducing their total inventory carrying costs. They carefully analyze their inventory network and policies to add inventory to win additional market shares and reducing inventory where it is not needed
Multi-Tier inventory management and visibility ensures targeted high customer service levels while re-deploying and reducing the overall inventory held across the network. Under this approach, some dealers in the network may see their inventory levels decrease, while some may see their inventory levels increase in the multi-party value network. There are cost trade-offs between flexibility and efficiency for every party in the value network. However, losing customers for lack of product selections is ultimately the highest cost to any company. The end goal is maximizing the total sales to the end customer with the lowest possible investments, which means that all parties increase sales and profits.
Accurate available-to-promise (ATP) for vehicles in stock at a dealer or that have been sequenced at the assembly plant items, and capable-to-promise (CTP) for sales orders, are keys for on-time order fulfillment and customer satisfaction. In order to timely fulfill customer orders, an order fulfillment system needs to have the capability to source ordered products with ATP/CTP globally, and then fulfill orders using methods that minimize the total landed costs and thus profitability.
An extended capability from the traditional CTP/ATP feature is the ability to issue proper procurement requisitions or production requests subject to inventory policies in the multi-party, multi-echelon value network. After orders have been promised with a delivery date, accompanying shipment plans should be generated and coordinated to ensure delivery as promised. Shipments originated from a location can be optimized as full trailers or cargo ships for increased efficiency in terms of both manufacturing and logistics.
7. Supply Chain Risk Mitigation
The supply network has extended and expanded globally, and the risk inherent in the network has increased accordingly. Network services should provide insight on how to effectively set up a supply network, taking into account alternative sources of supply and fulfillment. The 2011 earthquake in Japan and the tsunami that followed demonstrate the importance of supply chain risk management and the need for solutions and strategies to address this issue.
Networks with multi-tier network visibility can enable trading partners to immediately evaluate the impact of these disruptions when and wherever they happen. The possibilities related to sourcing alternative supply and logistics can be explored and evaluated to reduce the risk of supply disruption and ensure supply continuity.
Similarly, disaster regions can place different demands on goods and services. For instance, demand for water and batteries dramatically increase in a disaster zone. Therefore demand signals should immediately change accordingly and supply plans should be matched to this increase in demand.
Through effective “Business Continuity Services”, organizations can immediately re-route shipments destined for the disaster zone, activate alternative sources of supply and change delivery plans to customers while notifying all parties involved.
And there they are. My top seven recommendations. If you’d like to go in greater detail, I suggest reading “Build-to-demand” white paper. What do you think?
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