January 20, 2011

Supply chain organizations wage a constant battle against volatile demand, and for good reason. An unexpected spike in orders, for example, has expensive consequences in labor and distribution costs. Similarly, inaccurate sales forecasts can lead to stock-outs, lost sales, or excess inventory that must be sold at a discount. Sales and supply chain groups therefore devote significant energy to creating sophisticated planning and forecasting processes in an attempt to predict demand volatility—and blame each other when things go awry.

When these groups work together more closely, they can move beyond the traditional planning-cycle blame game, discover the root causes of volatility, and ultimately begin to influence it. This approach brings tangible business benefits—often quickly. Crucially, over the longer term, the experience that groups gain from flexing their collaborative muscles heightens the ability to react quickly, and in a concerted way, to unforeseen events. That skill will be even more necessary given the increasing uncertainty in the supply chain environment. Here are two examples that illustrate the potential.

The first involves an automotive supplier whose sales teams often scrambled to meet quarterly targets that would guarantee them better performance bonuses. Customers recognized this behavior and, in some cases, were gaming the system by withholding orders until the end of the quarter to secure deeper discounts—creating supply chain headaches and hurting the company’s bottom line. The vice president of sales and the supply chain head collaborated to fix this problem and make demand more predictable. One key step: substantially trimming end-of-quarter discounts and instead using a price and discount structure based on sales volumes, product loyalty, and participation in promotional efforts. The company also created new incentives to encourage sales teams to spread sales more evenly across the quarter.

Our second example involves a global manufacturer of consumer packaged goods. This company discovered that promotional activity in just five customer accounts drove most of its demand volatility. Although it carefully planned the promotions to maximize revenues, its marketers hadn’t thought about the impact on the supply chain. By staggering the promotions over several months and aligning them carefully with baseline demand patterns, the company reduced the overall volatility of demand by 25 percent.

When the company rolled out the new promotions plan, its managers identified another problem: many customers lacked the resources to manage their order levels efficiently and therefore sporadically placed unnecessarily large orders. The company responded by bringing together its sales and supply chain personnel and working with these customers to create better ordering processes for them. In this way, it smoothed the flow of orders—a move that benefitted both parties.

Problems like these are endemic in many supply chains. By tackling these problems, companies often enjoy immediate benefits while building collaborative capabilities that will be crucial over the long term in the more complex and uncertain supply chain environment of the future.

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