Demand-Driven Excavators
The Wall Street Journal recently published an interview with Jim Owens, Chairman and CEO of Caterpillar Inc. (See Global Trade Galvanizes Caterpillar - you may need a subscription.)
The following exchange caught my eye:
WSJ: You've also said you want to get away from the automotive model of stuffing dealers' inventories with products.
Mr. Owens: We want to keep some dealer inventory out there so they can see it and buy it and try it, but we want to get away from having them carry significant amounts of inventory. If you look back ... dealer-inventory swings have in every case aggravated the business cycle for Caterpillar. We work overtime to build inventory in the up cycles, and then [in down cycles] help them get it moved by price discounting or other bad practices. We've got to convince them that they don't need to hold the inventory. This is a huge cultural change.
This is a nice summary of the idea behind Demand-Driven Channels (Chapter 2). As I note on page 31 of Lead the Way in the Supply Chain:
"The term demand-driven refers to the idea that products are pulled down the supply chain to the market based on actual customer demand data. It also represents a contrast from the more traditional notion of products in a marketing channel being pushed by manufacturers toward the customer. Both manufacturers and distributors will be able to manage their respective inventories better when demand-based information is shared."
Clearly, CAT is building on its strong dealer relationships to bring this innovation to the construction equipment industry. In a classic Harvard Business Review article from 10 years ago, the then-CEO of CAT famously stated: "We'd sooner cut off our right arm than sell directly to customers and bypass our dealers."
My challenge questions to you:
- How and where could you get the benefits of having a more demand-driven relationship with key suppliers?
- Which of your suppliers are trustworthy enough to share data with?
2 comments:
Hi Adam
I would like to answer the first question. I feel that having a more demand driven relationship with upstream supply chain partners will result in streamlined demand planning and inventory management practices across the supply chain. However the benefits of collaboration to create demand driven relationships may vary with respect to the nature of product and demand volatility of the product category. In case of products with stable demand, collaboration efforts with suppliers may focus more on inventory efficiency. However for products with greater demand volatility (like fashion clothing) supplier responsiveness and revenue expansion may get prioritized. Also significant benefits can be achieved if sharing of demand data can help in postponing customization and maintaining inventory at component levels. This can be true in the case of technology product distributors who have near real time access to their reseller’s sales data. Also the benefits of collaboration and information sharing can help the supplier in new product development initiatives as distributor’s sales people are often closer to end users.
As far as the “how” part of the question is concerned I feel the first step is to start providing demand visibility for suppliers by sharing consumption data in a timely manner. The timeliness of this data sharing may depend on the nature of product and responsiveness expected from the supply chain. High level executive support and planner to planner involvement in all collaboration efforts are essential. Also the efficacy of the collaboration efforts should be monitored with respect to metrics like order fill rates, average inventory reduction, reduction in price protection guarantees etc. I am indeed curious to know how distributors or for that any matter any supply chain partner will judge the trust worthiness of their suppliers to share crucial data. Any real time examples in this regard????
Thanks a ton Adam for establishing this forum!
Anantha, CSCP
Wholesale Distribution Practice
Wipro Technologies, India.
Glad you like the blog, Anantha!
You are correct -- data-sharing is the usual sticking point. A big chunk of chapter 2 is devoted to exploring why/how suppliers will get visibility into wholesaler-distributors' product movement data. As I point out on page 38, EDI transaction sets (such as 852s and 867s) will enable this change.
I'm not sure if you have the book yet. When you get it, check out the examples on page 45 and on pages 54-56. The latter one is directly relevant to your question because I describe how demand-driven channels (trend 2) can enable new profit models (trend 3).
Adam
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