Logistics and Supply Chain Management, 4th Edition

MATC H I N G SUP P LY AND DEMAND

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The area below the surface of the iceberg represents the on-going consumption,

demand or usage of the product which is hidden from the view of the supplier. It

is only when an order is issued that any visibility of demand becomes transparent.

There are now signs that buyers and suppliers are recognising the opportunities

for mutual advantage if information on requirements can be shared on a continu-

ing basis. If the supplier can see right to the end of the pipeline then the logistics

system can become much more responsive to actual demand. Thus, whilst the

customer will still require ever swifter delivery, if an on-going feed-forward of infor-

mation on demand or usage can be established there is a greater chance that the

service to the customer will be enhanced and the supplier’s costs reduced.

This twin-pronged approach of simultaneously seeking to reduce the logistics

lead time whilst extending the customer’s order cycle may never completely close

the lead-time gap. However, the experience of a growing number of companies

is that substantial improvements can be made both in responsiveness and in the

early capture of information on demand – the end result of which is better cus-

tomer service at lower cost.

The supply chain fulcrum

As we have previously noted, the purpose of the supply chain is to balance supply

and demand. Traditionally, this has been achieved through forecasting ahead

of demand and creating inventory against that forecast. Alternatively additional

capacity might be maintained to cope if demand turned out to be greater than

forecast. In this context ‘capacity’ refers to the ability to access supply not currently

held as inventory. Either way demand is balanced with supply. Figure 4.6(a) below

illustrates a balance with the box marked ‘D’ representing demand and the boxes

‘I’ and ‘C’ representing inventory and capacity respectively. In other words there

must be enough capacity and/or inventory to meet anticipated demand.

Now imagine that the fulcrum is moved closer to the box marked ‘D’ as in Figure

4.6(b) below. Obviously the same amount of demand can be balanced with less

inventory and/or less capacity.

D

C I

Figure 4.6(b)

D

C I

Figure 4.6(a)

LOGISTIC S & SUPPLY CHAIN MANAGEMENT

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What does the fulcrum represent in a supply chain? The fulcrum is the point at

which we commit to source/produce/ship the product in its final form and where

decisions on volume and mix are made. The idea being that if that point of

commitment can be delayed as long as possible then the closer we are to make-

to-order, with all the benefits that brings.

The problem for many companies is that the fulcrum in their supply chains is

more like that shown in Figure 4.6(c) below.

Here the fulcrum is a long way from demand, i.e. the forecasting horizon is long,

necessitating more inventory and capacity to balance against demand.

How in reality do we move the fulcrum closer to demand? The answer in effect

is to improve the visibility of demand along with enhancing the velocity of the

supply chain. In other words if we can have a clearer view of real demand in the

final marketplace, rather than the distorted picture that more typically is the case,

and if we can respond more rapidly, then a more effective matching of supply and

demand can be achieved.

Thus it can be argued that visibility and velocity are the foundations for a

responsive supply chain.

Figure 4.7 indicates some of the key drivers of velocity and visibility in a supply

chain and these will be discussed in later chapters.

D C I

Figure 4.6(c)

Responsiveness Visibility

Internal

integration

Velocity

Streamlined

processes

Close to

customers

Process

management

Reduce non-

value-adding

time

Simplification

Close to

suppliers

Shared

information

Reduce

in-bound

lead times

Reduce

batch sizes

Postponement

Bottleneck

management

Collaborative

planning

Access to

real demand

Synchronous

supply

Strategic

sourcing

Collaborative

planning

Event

management

Figure 4.7 Velocity and visibility drive responsiveness