July 2010 | Commentary | In Perspective

Demanding Response

Tags: Inventory Management, Logistics I.T., Supply Chain Management, Demand Planning

Inexpensive transportation and sophisticated IT tools allowed us to operate  extended supply chains. But that tide may be turning.

One finding of this year’s State of Logistics report is that U.S. businesses ran up inventories because their extended supply chains didn’t respond quickly enough to the drop in demand. Once they got in synch, however, inventories began to run very close to demand. Is this lesson sustainable? Are we going back to build-to-order versus build-to-stock?

Japanese automakers taught us we could build very responsive supply chains that were in synch with demand. They also found that the long supply chain between Japan and North America had its problems.

For one, a buyer might be able to fill an order faster through a domestic supplier. Japanese manufacturers could do little to change that because, no matter how fast their supply chain and production line responded, the ships couldn’t sail any faster.

The solution was to get a good handle on what the customer wanted, then stock the dealer network. Fill a ship and send it on its way so Detroit didn’t have the home-field advantage on delivery time. The total order-to-deliver cycle was faster in the United States because what Detroit manufacturers lost in production time, they gained in transport time.

So, two or three weeks being equal, if you can put the right inventory where the demand is, a foreign manufacturer could be competitive.

I remember buying a Toyota in the 1980s. The dealer had three of the model on his lot— one each in red, white, and blue. One was loaded. One was stripped. And one had the middle package (radio, but no tape deck). It wasn’t build-to-order, but it probably satisfied 80 percent of customer needs 90 percent of the time.

online Retailers know it all

That was good market research for the time. Today, online retailers know everything I have searched, not just what I order. If 90 percent of people shopping for a Toyota Camry click to see how it looks in green, you can bet green will be the most popular color choice this year. So, make more green cars.

The Japanese realized they could not build to order, but they did a good job of anticipating market trends in their build-to-stock approach. American manufacturers could flood dealers with inventory, so there has to be a green car on the lot, with most of the options you want. And if it has more options, we’ll discount so you close the deal today.

Where distance is not an issue, the responsive Japanese supply chain held the advantage. In their home market, drivers were generating demand when they bought a car. But in North America, they told the dealer network what it was getting (based on market research). They satisfied 100 percent of the demand as they defined it, and the production process was the most efficient in the world.

The problem was, the supply chain doesn’t stop at the end of the production line. You need real demand to pull production. The model works if you forecast demand accurately.

It becomes a problem when the demand trigger falls out of synch with the supply chain response. Two weeks of pipeline inventory isn’t a problem if you’re overstocked in $20 coffeemakers. It’s financially devastating if you’re overstocked in $20,000 cars.

One solution is to get a better handle on supply chain demand and pull. Another is to reconfigure your supply chain to make it shorter and more responsive. Smart companies will be spending some capital now to do both so they preserve more substantial capital assets into the future and not have them tied up in costly inventory that will depreciate rapidly.

Supply chains can still be a strategic asset.