Retailers and manufacturers: do the words mistrust, inaccuracies and frustration come to mind when you think of your trading partners? You aren’t alone.
All this month, Supply Chain Nation is exploring the retailer-manufacturer disconnect and first spoke with André Martin, considered the father of both Distribution Resource Planning (DRP) and Flowcasting, a new paradigm in supply chain collaboration. In Part I of this series, Martin explained why Flowcasting finally fulfills the promise of collaboration that retailers and manufacturers have been striving for. This Part II continues with a discussion of how Flowcasting can help with demand volatility and manufacturing efficiency.
SCN: One of the biggest challenges for retailers and manufacturers today is the volatility of demand. How does Flowcasting help address this challenge?
Martin: There are two aspects to this—amplification and lag time. Jay Forrester, a professor at MIT, wrote a book in the early ‘60s called Industrial Dynamics. The book was the result of a study he had done to create a supply chain model. He studied a supply chain with many stores, retailer DCs, manufacturer DCs and factories and ran a number of models through it.
Here is what he discovered—the supply chain was naturally linked. If the retail store level, for example, experienced a ten percent increase in sales, the increase in demand would begin to amplify down the supply chain from one node to the next. Because there was inventory at each node, and because these sites were using separate systems that were not talking to each other, the demand began to amplify.
I’ll give you an example. If somebody buys a bottle of shampoo in the store, you’re not going to replenish that bottle. What you are most likely going to do is replenish a case into that store, sometimes even more. Then when the DC needs more product, the DC will replenish a pallet or more. The amplification takes place because of how they economically replenish from one level of the supply chain to the next.
Because there are inventory buffers at each node, there is lag time between the demand signal and when we see we need to make or replenish more. If you’re carrying, for example, three weeks of inventory, but the trigger point is one week, two weeks are going to go by before you reach the reorder point. So there is both an amplification factor and lag time. As a result, demand becomes extremely volatile and lumpy.
If you connect the systems, which is what Flowcasting is built upon, you can see the amplification and you can deal with it. The lag time issue is gone. For example, between Kraft and one of its key customers, if a major shift in demand is taking place at store level today, tomorrow morning the factory responsible for making that product will see the change and its impact. The lag time in passing information is gone.
Forrester discovered that a 10 percent increase in sales in January would amplify and manifest itself as a 40 percent increase on the factory that had to make that product, but they saw it in June, six months later. Of course, back in the sixties we didn’t have the internet and online communication, but to this day I have seen many companies, retailers and manufacturers, who still have lag times of 3 to 5 weeks. With Flowcasting, that disappears, it’s gone. We can see the demand coming and the volatility is still there, but when you can see it coming for weeks, you have time on your side to deal with it. And because of this visibility, you are able to determine if that demand is real or if is just demand that is manifested because you need to replenish safety stock, for example.
SCN: Manufacturers love that Flowcasting helps them schedule production with much greater accuracy. How does this translate into increased profits for them and for retailers?
Martin: I think it’s good to point out that when we walk into a store or go online to buy a product, what we don’t realize is that 75 cents of each dollar is incurred by the manufacturer. That represents the cost or contribution the manufacturer makes to that product. The other 25 percent is what the retailer has added before someone puts it on the shelf. If we really want to impact the way we manage the supply chain and reduce costs, we need to help the manufacturer to do a better job of managing his manufacturing and distribution resources to the oncoming demand. The best way to do that is to give him visibility into the oncoming demand. I used to run manufacturing years ago at Abbott Labs and if someone had asked me what was one thing I would change to have the most impact in manufacturing and be more productive? I would have said without any hesitation, reduce my demand uncertainty. The way you can do that is to give me visibility to oncoming demand, and that is what Flowcasting does.
Flowcasting works on a rolling 52-week planning horizon—it plans out 52 weeks every time it re-plans. If I’m a factory planning guy and I can see demand coming, I can align my production schedules more easily because I don’t have the uncertainty to deal with anymore.
By being more productive, manufacturers can reduce the cost of production, which as I mentioned, is the single largest cost of what we buy in the store. If the retailer has contributed to helping the manufacturer to achieve that through better visibility to demand, hopefully they will sit down and agree on how they will share in the benefits. Ultimately, that is what needs to happen.
Another thing that is important to mention here is that although the manufacturing cost is the single largest cost element, there are other costs up and down the supply chain, which are primarily transportation and warehouse costs, that can be reduced because we can plan better, we can smooth the flow of product better, and as a result, we can become more productive. That will translate to additional transportation and warehouse savings.
I’ll give you an example, let’s say I’m a warehouse manager and I can see how many loads I am going to have to unload into my distribution center in the next 10 days. If I have the capacity to unload 20 trucks per day and I have visibility to what is coming through Flowcasting and I see on day 10 I have 23 loads scheduled to arrive, I know right away that I am going to have a capacity problem. I can then work with the suppliers who are going to be shipping on that date to see if I can move some of those loads to an earlier or later day so that I can smooth out the flow and not have to work overtime. Thus, forward visibility and collaboration will enable me and my trading partners to run supply chain operations more smoothly and cost-effectively.
SCN: Thank you for your insights, André.