- Demand-driven supply chains are far more promoted than the almost unheard of supply-driven supply chains.
- To understand supply driven supply chains one must understand locked in production.
- Supply-driven supply chains mean understanding managing contracts and understanding co-products.
Introduction to Supply Sided Supply Chains
A demand driven supply chain is considered the right approach to supply chain management. It seems so obvious. The demand driven supply chain starts at demand and everything works backward from there. Therefore the question now becomes how can a supply chain become more demand driven.
However, what is the opposite of a demand-driven supply chain? Why would anyone want this? Analyzing this question provides a better understanding of what a demand driven supply chain and what a supply driven supply chain is. And why one would want to set up a supply chain to work one way or another.
Demand Driven Supply Chain Versus Supply Driven Supply Chains
I wanted to bring up some analysis provided by this paper. This is the analysis which is often forgotten in all the talk of demand-driven supply chains.
“Little has been written about supply driven chains — so little in fact that they seem to be almost forgotten and yet, as will be shown, there are a significant number of them and their behavioral characteristics and operational techniques differ from those of demand driven chains.”
A good example of a supply driven supply chain is oil production. Oil is often, in the short term at least, pulled from the ground at a constant rate. Demand does fluctuate, and much of the supply and demand matching is performed through changes in the price.
Demand side supply chains are very much focused on the benefits of supplier collaboration. However, this may not always be the case with supply side supply chains.
“For demand driven supply chains, sharing information among the partners of the chain dampens the bullwhip effect. However, for supply driven chains, secrecy is often necessary. If a supplier is having difficulty selling his entire quantity, customers can use this information to extract further price concessions.”
Examples of supply side supply chains are the following products:
- “Alaskan Crude Oil
- Fresh Cut Flowers
- Fishing Industry
- Natural Gas
- Airline Seats
- Trucking Backhauls”
What these examples have in common is that the investments into production are fixed for some time. This means that production capacity has been set up in response to a long-term demand forecast. And changes would occur to capacity after a long-term change to the forecast. In this environment, one cannot simply become a demand driven supply chain. The supply is not simply a spigot that can be turned on and turned off.
These are examples of “locked in production,” some of them adding a perishable quality to them. These examples are not exhaustive. They do not include the examples that I have discussed which are explained in the previous article that relates to the ability to shape demand and to substitute demand.
Locked in Supply Chain Production
If we take the examples of “locked in production,” while the production is most often considered to be due to the company owning the production assets, in fact, it can also apply to businesses that outsource production — but which are contractually obligated to purchase a certain quantity of output.
The paper explains the following scenario on organic farming from Horizon Organic (now owned by White Wave Foods).
“Unlike bananas, many other supply driven supply chains do not have vertical structures. Horizon Organic produces certified organic eggs, juice and dairy products, and sells to grocery stores. Horizon is contractually obligated to buy the full production of several 100 organic farms, giving the supply chain a supply driven nature. Horizon operates a “virtual” supply chain where the growing, processing, packaging, and shipping activities are all contracted.”
That is, locked in production occurs in companies that are both vertically integrated and those that are outsourced. Many of those that follow the Lean or flexible approach to supply planning may not like this. They may propose that companies should not sign these contracts.
That is a simple way to out of dealing with the realities of the supply chain. First, the price paid would be different without signing contracts. If we take an example from the dairy industry, a larger company — like White Wave Foods, is in a much better position to accept the variability of demand than the smaller farms. Signing these long-term contracts adds value to a process. It enables higher production by providing the farms with a guaranteed buyer. The article describes other examples of such contracts:
“Take or pay contracts are common in the electronic contract manufacturing, petroleum, and natural gas industries. If the minimum volume stipulated in the contract is significant, it can become a supply driver for the entire supply chain.”
Another example of locked in production is co-products. Co-products are associated with process industry manufacturing. They are the necessary output of a manufacturing process which has the original purpose of producing a primary product.
The higher margins of the primary product drive the production of the co-product. The production of the coproduct is a dependent production. The following are all co-products of certain manufacturing processes.
- Sulfuric acid
- Whey protein (one pound of cheese creates 9 pounds to whey protein — once considered a co-product, whey protein has since grown into a primary product itself)
- Carbon dioxide
- Animal feed
However, co-products are extremely common in the process industries.
Commodities or Differentiated Products
Interestingly, this paper proposes that supply driven products are the commodity-like in that they are sold on price. However, my consulting clients show that this is not always the case. Supply-driven products can also be differentiated products.
- This has explained some of the observations of one of the few published works on the topic of supply-driven supply chains.
- These environments do not fit within the traditionally established view of supply chains. Therefore, they are minimized in the literature, and in fact, substantially overlooked.
Brightwork MRP & S&OP Explorer
I cover concepts like this in the following book.
Replenishment Triggers Book
Getting the Terminology Right
The terms make to order and make to stock roll quickly off of people’s tongues regardless of their knowledge of other supply chain conditions. Many executives speak about “moving to make to order environment.” For most companies, this simply is not realistic. And many businesses that say they do make to order/configure to order/engineer to order are doing assemble to order planning.
The Universality of The Manufacturing Environment Type
These terms are specific types of manufacturing environments. They are embedded in almost all supply planning applications ranging from the most basic ERP to the most sophisticated advanced planning system. However, each manufacturing environment leads to some implications, implications that are most often not completely understood.
Getting Clear on Requirements Strategies
Requirements strategies are what control what drives the replenishment of supply in systems. In most cases, the need strategies control whether the forecast or the sales order triggers replenishment.
This book cuts down the amount of time that is required for people in companies to understand the relationship between manufacturing environments (the business) and requirements strategies (the technology setting in the supply planning application).
By reading this book you will learn:
- What are the major manufacturing environments and what determines which manufacturing environment a company follows?
- How do the different manufacturing environments impact how inventory is carried?
- How are the various production environments configured in software?
- What is mass customization, and how accurate is useful is this concept in real life?
- What is the interaction between variant configuration and the manufacturing environment and the bill of materials?
Chapter 2: The Different Manufacturing Environments
Chapter 3: Triggering Replenishment
Chapter 4: Requirements Strategies
Chapter 5: The Make to Order Illusion
Chapter 6: The Limitations to the Concept of Mass Customization
Chapter 7: Forecast Consumption
Chapter 8: Variant Configuration in SAP ERP
Chapter 9: Conclusion