Demand-Driven Logistics: Adjusting Focus
Picture this: 80 percent of your traditional business disappears within five years. For Eastman Kodak, positioning a demand-driven supply chain model to fit this redefined market required vision, an eye for detail, and precise timing. Here's what developed.
A picture can speak a thousand words and for Eastman Kodak Company, digital pictures say twice as much as traditional photographic film. By 2003, digital photography had significantly reduced the use of traditional film—particularly with Western consumers—and with it, much of Kodak's business.
"Eighty percent of Kodak's traditional business disappeared during the last five years," says John Bermudez, senior director of product strategy at Oracle, a technology products and services company in Redwood, Calif. "Kodak is now the North American digital camera volume leader, but it is a new world for the company."
Such massive market changes spurred Kodak to dramatically change its business model—and its supply chain. The Rochester, N.Y.-based company, which posted 2005 sales of $14.3 billion, provides imaging products and services in four segments: consumer digital imaging, film and photofinishing systems, health care imaging, and graphic communications.
In 2003, Kodak launched a comprehensive business overhaul, focusing on moving the business from traditional print to digital. At the same time, the company revamped its supply chain, moving from a traditional to a demand-driven logistics model.
These actions are now beginning to click.
"By 2008, we expect all of Kodak's businesses to be leaders in their industry segments," says Antonio Perez, Kodak chairman and CEO, in the company's 2005 annual report. For the first time in the company's history, more than half of its revenue last year came from digital products and services.
"We now have in place the core product portfolio, organizational structure, and leadership team that will take us through the second half of our transformation," Perez adds.
One key element of that transformation is Kodak's new supply chain strategy. As part of the company's plan to free up cash, Kodak decided to move to a demand-driven model, says Michael Cattalani, Kodak's manager of suppliers, logistics operations.
"Demand-driven doesn't only refer to logistics; it is a corporate goal for Kodak," he says.
Commercializing the Supply Chain
What exactly is a demand-driven supply chain? "Matching supply and demand over time," is how Larry Lapide, research director, MIT Center for Transportation and Logistics, defines it. His definition encompasses not only real-time demand management, but also managing future supply and demand during planning cycles.
In short, demand-driven best practices "commercialize the supply chain, making it generate and shape revenue," says Lapide. "To do this, the customer-facing and supply-facing parts of an organization must conduct joint decision-making to match supply with demand."
In the past, companies focused on reducing costs in the supply chain. "Now it's about revenue and profit enhancement over the short, medium, and long term," explains Lapide.
Companies should think about what they sell, for example shaping demand to sales and linking that to their supply chain, "so when demand comes in, they are prepared for it," he says. Companies can plan by the month or week—uniting the marketing, sales, customer service, and supply chain teams for a robust outlook.
In the long term, companies should link customer service policies and customer segmentation to their supply chain needs, says Lapide.
"Companies need to set customer expectations and live by them," he says. Instead, many firms rely on their sales and marketing team to make demand decisions, which may not be the most profitable.
"Demand forecasting is not demand management or planning," explains Lapide. "Demand-driven logistics is both push and pull. Sometimes you want to promote products, and marketing is responsible for pushing them by shaping and creating demand.
"Companies should use their supply chain to fight the battles of sales and marketing to win business," he adds.
The Right Formula
For Kodak, winning business meant developing the right formula for a demand-driven supply chain. The company looked to Toyota as a model for best practices, starting the demand-driven approach with its manufacturing operations, then moving the process to logistics, says Cattalani.
The goal was to reduce inventory and costs while increasing cycle times. Kodak met these goals, and others, including more effective dock door management and a more reliable, routine logistics structure.
The first leg of Kodak's demand-driven journey was developing a cross-functional team supported by executive management.
"As we started the process, it became clear that we needed key representatives from every division—including manufacturing, purchasing, logistics, and supply chain—on the strategy team," says Ray Garbach, manager, materials management for Kodak.
One advantage was that senior managers "were willing to stick their necks out to improve Kodak's processes," says Garbach. "They also pressed us to establish a backup plan, which is mandatory in this environment. Kodak produces materials in a nearly just-in-time fashion, so we were able to remove risk and fear from the supply chain, while also working with senior managers to develop contingency plans."
The process, however, was far from easy. "We saw a lot of ills in the supply chain when we started," says Garbach.
The Consolidation Cure
As part of its transition to a demand-driven supply chain, Kodak completely disassembled its less-than-truckload transportation with suppliers. Before, each supplier shipped its own goods to Kodak plants.
Under the new, demand-driven plan, Kodak consolidates supplier shipments by geography, making more frequent deliveries to the plants, and uses trucks containing material from multiple suppliers. In addition, it has standardized supply chain processes across the organization and across suppliers, allowing it to instantly spot abnormalities.
The company also implemented new crossdocking techniques. Instead of storing material not immediately needed on the floor, it is now crossdocked, and shipments to docks are scheduled.
The crossdock is the middle step between suppliers and the factory.
"While we bring goods in from suppliers to the crossdock once or twice a day, we spin out to the factory floor as many as five to seven times per day. This one additional step counteracts substantial steps—including unnecessary storage and retrieval processes—on the other side," says Garbach.
Kodak has seen dramatic improvements from its supply chain overhaul. The company has reduced cycle times by 70 percent in some areas, and has "taken floors' worth of inventory out of the system," says Garbach.
With standard processes and communication, Kodak can now resolve problems before they occur. Today, it knows of materials shortages at least one day in advance. Under the old system, Kodak wasn't aware of problems until material arrived on the plant floor, explains Garbach.
Scheduled docking enables Kodak to "take on more work and spread it out," he says.
Demand-driven logistics also helps Kodak significantly reduce safety stock and material damage rates. Relationships among the different groups at Kodak have improved as well, notes Cattalani.
"The new system allows us to expand our supply chain thinking.
Before, as long as material came in and was shipped out, we washed our hands of the process," says Garbach. "But in reality, if the customer or product area can't get the material, that is a major problem."
Tools to Use
Kodak's challenge and resolution illustrate the company's success in adopting some of today's leading demand-driven best practices, including changing with the market.
"How well a company incorporates what the market needs now and may need in the future is the difference between winning and losing the supply chain game," says Steve Hockman, director of supply chain research, AMR Research, a consulting firm based in Boston.
Companies today are shrinking product lifecycles and increasing product mix as well as increasing their global footprint. To meet these challenges, they need to take an explicit approach to managing their supply chain and make it more holistic, advises Hockman. One approach is to implement supply chain metrics and link them to company profitability, he says.
Another effective demand-driven strategy includes tracking costs at the transaction or order-shipment level, notes Beth Enslow, senior vice president, enterprise research for Boston-based consultancy Aberdeen Group.
Supply chain costing is a major concern for companies today, says Enslow, pointing to a recent Aberdeen study that shows costing is the third-highest area of logistics concern for companies. Supply chain visibility and collaboration are first and second.
"Costing now shows up on the radar screen. Because of international transportation, a lot of companies do not have a clear understanding of their costs," she explains.
Visibility is another important tool for demand-driven supply chains. Visibility first became a mainstream idea about five years ago, according to Jim Preuninger, CEO of East Rutherford, N.J.-based Management Dynamics, a global trade management technology and services firm.
"By itself, visibility is a big 'so what?' What is key is the application of tools to help manage inventory, suppliers, transportation, and logistics," Preuninger says.
"Visibility is fundamental to any business sourcing globally," he adds. "You can't change your distribution model from four-day to 40-day or 100-day lead times and be in any business with variability or volatility without having visibility. Companies must take control of inventory."
Visibility Comes First
Yet many businesses still don't have the visibility they need to succeed. Many companies aggregate demand to such an extent that it becomes difficult to distinguish geographic and customer differences, says Oracle's Bermudez.
"Improving demand visibility and applying it at a granular level should be first and foremost for companies," he notes. "To date, few manufacturers know what inventory was sold at any individual store. There is a lot of room for improving systems."
In addition, companies should check demand information against their distribution center capabilities to give suppliers a clear view of what they are expected to deliver, and in what quantity, Bermudez advises.
Becoming demand-driven is still a work in progress for most companies.
"It is hard enough to mobilize your own organization. To truly create a demand-driven supply chain, you also have to mobilize suppliers, customers, freight forwarders, and other partners to foster a collaborative process. It is hard work," says Enslow.
"The good news," she adds, "is technology such as on-demand software and service-oriented architecture are lowering the service barriers to creating demand-driven supply chains."
Demand-Driven Top Five
While every company has a different approach to achieving a demand-driven supply chain, some common strategies exist. These five are crucial:
- Achieve visibility throughout the supply chain.
- Ensure accurate forecasting and demand planning.
- Collaborate across the enterprise, and with partners and customers.
- Link the supply chain across multiple departments and eliminate silo thinking.
- Implement technology-enabled processes.
Forecasting Demand: Hot Today,Cool Tomorrow
When it's hot and your air conditioner is broken, you do not want to wait weeks to get it fixed because the part you need isn't available.
That's the customer challenge New York-based Rheem Manufacturing, a global manufacturer of central heating and cooling products, is solving with a demand-driven supply chain focused on planning and forecasting.
"We strive to be demand-driven and forecast accurately. We can't tell when an item will break down, but we use a history of service and failure rates to determine what parts we will need to order," says Craig Hagler, materials manager for Rheem's service parts division, located in Atlanta.
Rheem partnered with Atlanta-based logistics software provider Logility to create its demand-driven supply chain. It uses a demand planning, inventory planning, and replenishment system to manage the materials management process. The technology has helped reduce the number of parts Hagler's team needs to review each week.
"Reviewing historic item data from vendors manually might take one month. Our goal is to get through all vendors in one week," Hagler says.
Rheem uses predictive analysis and sales history to determine failure rates for parts. "The life expectancy of an air conditioner is about 15 years," says Hagler. "We hold the major components of all functional items, and we use our systems to forecast and respond to changes in customer demand."
Such tactics are improved by recognizing that not all companies' products are created equal. Many companies today make the mistake of managing all inventory the same way, says Karin Bursa, Logility's vice president of marketing.
"These companies consistently hold the same level of inventory for fast-moving and slow-moving products. That leads to shortages for fast-moving products, and product obsolescence for slow movers," she says.
Plus, inventory levels should fluctuate according to seasonality, she explains. "Consumer goods companies selling their products at retail stores may do 70 percent of their business between October and January. They need to plan for a higher service level during this period," she says. Regional preferences and demands by top customers should also be taken into account.
While Rheem's desire to move to a demand-driven supply chain was spurred by factors including metal shortages and an interest in reducing inventories, many factors drive companies to change their supply chain strategies. Global sourcing, rising fuel costs, and globalized markets all affect supply chains today, Bursa explains.
Though Rheem faces more pressure to reduce inventory levels today, its forecasting practices have changed little in the past five years, says Hagler. In the future, the company may implement additional technology systems to improve the process and strengthen relationships with customers.
"We have good relationships with our customers. We've taken some inventory off their hands, and with our 94-percent fill rate, they can order weekly rather than monthly," he says.
Rheem supplies parts to distribution centers, which in turn service the end customer. The service parts division gathers parts from around the country and the globe, and ships items direct to customers. These strategies need application support to be effective, says Bursa.
"The challenge is obtaining good, clean data to populate historical forecasts. Companies need to spend time and effort cleansing data so they can look at past performance and leverage that as a demand indicator," she says.