We all know supply chains have experienced massive disruption in 2020. How many of us have faced empty shelves when trying to buy the ever-elusive paper towels and toilet paper? Supply chains have been strained to, and beyond, the breaking point during this time of unprecedented uncertainty, complexity, and ambiguity. In fact, according to an Accenture study, 94% of Fortune 1000 companies are seeing supply chain disruptions from COVID-19. Indeed, few supply chains have emerged unscathed from the past months of extreme unpredictability and volatility.
In my conversations with executives, I inevitably hear a common question: How can we drive profitable growth in the new reality of global disruptions? The simple answer is supply chain resiliency. Now is the perfect time for companies to begin to shift away from the traditional Material Requirements Planning (MRP) supply chain model and in favor of an alternative one, Demand Driven Material Requirements Planning (DDMRP), that results in more resilient modern supply chains.
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Why can't the traditional MRP model keep up with today's challenges?
Existing MRP-based models traditionally have focused on cost expediency to reduce the cost per unit, enabling a company to provide better pricing to the market. To optimize costs, supply chains rely on a combination of large batches and long lead times—think a 30-day voyage across the Pacific Ocean—which means supply chains can’t rapidly respond to events or even changes in daily demand.
These traditional methods dependent on forecasts and cost optimization work well in stable environments. But they can often fail when faced with challenges posed by increased customer expectations, unpredictable market volatility, globalization and digitization.
Companies have tried to fix problems with better forecasting and demand sensing/shaping. However, to paraphrase an old saying, that’s just like putting wallpaper over cracks. Even before COVID-19, companies found that it’s impossible to accurately predict demand in an increasingly unpredictable world—one in which volatility and variability wreak havoc as supply chains can’t react in time or volume.
What do we need to infuse greater resilience into our supply chains?
COVID-19 has shone a bright light on the glaring need for far more resilient supply chains. That means the ability to respond to a disturbance while maintaining and/or restoring equilibrium. In supply chain terms, resilience is how well a system can return to stability when it experiences random or even self-imposed disruption. Consider the example of those 30-day travel times: No math magic or forecast algorithm can overcome such a long lead time when demand is high, and the longer the lead time, the less resilient the supply chain.
How do we get resilient? By embracing a DDMRP model that bases the supply chain around flow, where the rate of supply is aligned to the rate of demand through the end-to-end supply chain. Flow optimization closely synchronizes assets to the market. Companies that focus on flow experience a major improvement in inventory and service levels across their supply chain. The faster material flows through a supply chain, the less inventory is needed to maintain service levels. Reaction time decreases and supply chains adjust more quickly to changes in demand or supply. Optimized flow has the right “shock absorber” at strategic positions in the supply chain.
Key technology tools—in particular, ERP systems—are making a shift to DDMRP easier. For example, SAP has embedded DDMRP capabilities into both its Integrated Business Planning (IBP) product and SAP S/4HANA®. This means companies can now embrace a demand-driven approach to their supply chains within the core of their ERP without having to rely on Excel, interfaces, or other shadow IT.
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What are the proven real-world benefits for resilience and flow optimization?
Supply chain resilience and flow optimization are not simply academic supply chain concepts—their impact can be measured. By orienting continuous improvement events around flow enablers like lead times and inventory buffers, companies can significantly reduce lead times and, in turn, reduce the inventory needed to support actual demand.
When things are flowing well, service is consistent and reliable, quality issues are minimized, inventories are right-sized, expenses decrease, revenue and cash flow increase, and costs are under control.
What, exactly, is potentially attainable? Consider the experiences of several companies Accenture has worked with on DDMRP initiatives, which clearly illustrate the gains companies have made by implementing a DDMRP-based model:
- Aerospace company: inventory reduced by as much as 40% and missing parts by 90%
- Retail company: lead time cut by 45% to 60% and raw materials by 45%
- Consumer packaged goods company: service level maintained at close to 100%, inventory slashed nearly in half, and lead times cut by 30%
- Automotive Tier 1 company: logistics spend optimized by 18% and inventory by 15%, with up to 40% overtime reduction
Effects like these show that when flow is promoted and protected, a company’s assets are closely synchronized with the market. This means the business is not only responsive to the market today, but is in a better position to adapt or pivot to rapid changes in the market—which directly leads to greater shareholder equity now and in the future.
The bottom line
Optimizing throughput was key for all companies during the COVID-19 crisis. This crisis showed that global disruptions like COVID-19 have the power to completely break supply chains. It proved the importance of the flow concept as the fundamental principle of supply chain resiliency. And it made a compelling argument for a new supply chain program: one that shifts the focus from cost, efficiency, and utilization to a new paradigm based on speed of material flow and real-time relevant information visibility.
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Are you ready to focus on building a robust, responsive, and resilient supply chain?
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Resiliency is the remedy for the “new normal” of ongoing global supply chain disruption. As we emerge from our near-global lockdowns, have you asked yourself: Am I ready to focus on building a robust, responsive, and resilient supply chain?
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