Start with Demand

Safe, Not Sorry
To avoid hijinks in the operating room, Smith & Nephew continues to carry some safety stock. Such a buffer is not uncommon. Running out of stock, line managers often point out, is a whole lot worse than having too much stock on hand. "This move to a demand-driven focus, rather than an inventory focus, is very new," notes PeopleSoft's Ptak. "A mistake can cost you your job."

Not surprisingly, managers often err on the side of caution. Getting these executives to focus on throughput rather than inventory will take some doing. Currently, senior management at P&G is working with ERP vendor SAP to flow sales data all the way through to suppliers. But Harrison believes it's going to require more than improved software to reduce response times to customer requests. "How do you take 50,000 people in an organization and switch them over from the mind-set of maximizing machine runs and carrying lots of inventory?" he asks. "[Reduced inventory and faster turnaround times] are things we used to think of as inconveniences."

Experts also note that the switch to demand-driven manufacturing can be expensive. For small to midsize companies, upping the speed and accuracy of product deliveries requires sizable outlays on ERP software, which often features customer analytics, purchase-order programs, and fulfillment systems. This is not only costly (one survey puts the average total cost of ownership of an ERP installation at $15 million) but also time-consuming. At National Instruments, CFO Davern says the company's transformation to a demand-driven, customer-focused operation actually began in 1993, back when it first invested in the Oracle applications. Davern reckons the whole system finally gelled in 2001.

Even after businesses manage to unify their front-end systems, supply chains must be tended to. FW Murphy, for instance, has reduced assembly times on one product line from five days to 1.5 minutes. But Myers points out that slashing production times at a factory doesn't help much if supply-chain lead times stretch on for months. "This is an exercise in serious constraints," he adds. "You're constantly trying to keep multiple gophers down at the same time."

Time, Money — a Connection?
The mallet-wielding is worth it, however. A manager at one manufacturer estimates that reengineering the company's supplier network could add $1 billion to the business's top line. At the very least, better systems integration helps speed inventory turns — and cuts response times to unexpected customer requests.

The ongoing supply-chain makeover at Dell, started in 2000, has helped the PC maker lower inventory to four days' worth of sales. Eager to enlist all employees in its quest to shorten customer response times, the company has altered some of the metrics its managers look at. According to Cook, the PC maker measures (among other things) "deliver to target." The ratio essentially gauges how quickly Dell gets products to its customers. Adds Cook: "The whole company is bonused on this metric."

Demand-driven companies in other sectors are also adopting metrics that reward responding to customers — rather than piling up inventory. P&G recently began measuring both the shelf quality of its products and shelf out-of-stocks. Global product supply officer Harrison says that in the past, managers were more absorbed with turning out quality goods than turning over inventory. While manufacturing winning products remains crucial, he says management now zealously tracks things like supply-chain times and order-response rates. "We're learning that time really is money," he notes. "Speed? Speed is the new metric."

John Goff is technology editor at CFO.

---

WIP It Good
Accounting rules treat inventory as assets. But as AMR Research's top 25 supply chains reveal, most demand-driven companies maximize sales while minimizing safety stock. The secret of their success? Replacing inventory with information from customers and suppliers.

Vendor	AMR Opinion (40%)*	ROA (20%)**	Sales/Inv. (20%)***	Trailing 12-mo. Growth	Composite Score****
1. Dell	238	13.7%	126.7	17.1%	20.75
2. Nokia	145	15.0%	25.2	17.5%	13.31
3. Procter & Gamble	188	10.7%	11.9	7.8%	11.70
4. IBM	137	13.5%	29.3	9.8%	11.31
5. Wal-Mart Stores	175	8.5%	9.8	10.9%	11.27
6. Toyota Motor	151	5.7%	14.4	16.6%	11.08
7. Johnson & Johnson	110	15.0%	11.7	15.3%	10.93
8. Johnson Controls	151	5.2%	27.4	12.6%	10.70
9. Tesco	42	5.9%	25.7	27.7%	9.43
10. PepsiCo	101	14.1%	19.1	7.4%	9.10
11. Nissan Motor	51	10.8%	11.8	22.1%	9.09
12. Woolworths	14	11.1%	14.3	27.3%	8.80
13. Hewlett-Packard	33	3.4%	12.1	29.1%	8.30
14. 3M	66	13.7%	10.0	11.6%	8.09
15. GlaxoSmithKline	35	18.8%	10.2	11.9%	7.95
16. Posco	23	9.6%	8.6	23.3%	7.85
17. Coca-Cola	58	15.9%	16.8	7.6%	7.69
18. Best Buy	52	8.1%	9.4	17.2%	7.53
19. Intel	52	12.0%	12.0	12.6%	7.47
20. Anheuser-Busch	70	14.1%	24.1	4.3%	7.45
21. The Home Depot	62	12.5%	7.1	10.1%	7.29
22. Lowe's	37	9.9%	6.7	16.4%	7.00
23. L'oreal	24	9.9%	12.8	17.6%	6.98
24. Canon	13	8.7%	7.2	22.0%	6.94
25. Marks & Spencer	18	7.5%	20.9	19.2%	6.89

* AMR opinion: based on panel of experts' forced-rank order against definition of "demand-driven supply network orchestrator"
** ROA: 2003 net profit/2003 total assets
*** Sales/Inventory: 2003 sales/2003 year-end inventory
**** Composite score = [(AMR opinion / 10) x 40%] + [(ROA x 100) x 20%)] + [((sales / inventory) / 5) x 20%] + [(trailing-12-month growth x 100) x 20%]

• « previous
• 1
• 2
• 3