Strategies for Synchronizing Demand

The world’s best manufacturing companies have found that through the integration of product development, sales and marketing, including channel forecasting, procurement and production, synchronization results that can strengthen sales, channel and marketing operations. Taking this a step further, it is possible to turn this synchronization into a significant financial and competitive advantage.

Customers experience a major difference in doing business with companies with strategies in place for synchronizing demand. Many studies are available of the top-performing companies which have achieved high levels of performance in this area. Keep in mind that in these companies, it is beyond simply toggling together with adapters and connectors, customer-facing systems and routinely handling transactions wherever an order capture system is, whether that “system” is electronic or manual. Rather, these characteristics mark manufacturers that have synchronized global demand with their production facilities, regardless of where the order is taken or fulfilled.

One study of note is the result of a combined effort by Accenture, INSEAD and Stanford University that included 75 in-depth interviews with senior executives from 60 companies and analysis of more than 600 of the Global 3000 companies Accenture regularly tracks in its research. The study — Connecting with the Bottom Line — is available for download free from Accenture’s Web site.

Creating a Competitive Advantage

Findings from this study provide strong evidence that making demand management a core part of any sourcing, manufacturing and service strategy is critical to creating a lasting competitive advantage. At the heart of the research is quantifying the relationship between supply chain performance and business success — specifically the transparency between global supply chains, manufacturing centers and demand management and response. A major conclusion of the study was that there is a strong correlation between superior supply chain performance and financial success.

Taking this a step further, leading companies have found that the efforts of synchronizing demand, procurement and production can translate to above-average results in Inventory Turns, Days Sales Outstanding, Cost of Goods Sold and Return on Assets.

For instance, the study shows that the highest performing companies that are synchronizing demand and including supply chains as part of their core business strategies are delivering over a 40 percent increase in Inventory Turns compared to peer companies that are not. As for Days Sales Outstanding (DSO) — this is a measure of how long it takes a company to pay their invoice for product(s) delivered — the study showed dramatic gains for manufacturers that have taken the effort to synchronize global demand to their manufacturing capabilities. For companies that have synchronized demand, integrating these efforts with supply chain systems, there is on average a 40 percent reduction in DSO.

This is particularly evident in the automotive sector. DSO reductions from synchronizing demand with internal production have yielded a net decrease for Toyota Motor of a remarkable 110 days. The industry average for automotive manufacturers is 204 days and Toyota has been able to accomplish a reduction to 95 days — an astounding improvement of 116 percent. Nissan’s DSOs are averaging 126 days versus the industry average of 205 days — a reduction of 63 percent. Kevin O’Marah of AMR Research shared these figures during his presentation at AMR’s Spring Conference held last year — and their applicability to companies that synchronize demand globally are clear.

Additional financial metrics that are positively impacted by making the effort to synchronize global demand include Cost of Goods Sold and Return on Assets. The study also showed that there was a significant drop in Cost of Goods Sold due to lowered procurement costs and the elusive goal of making strategic sourcing pay is consistently achieved. These global companies have been able to significantly drop the “maverick” buying by regional manufacturing centers as well. Another major impact of synchronizing demand is a 40 percent or more increase in Return on Assets. Globally, manufacturers are seeing greater utilization of existing plants directly as a result of providing greater transparency to their suppliers and buyers.

Growing Market Caps

Intuitively speaking, it makes sense that companies that can synchronize demand and manage production centers more efficiently will eventually achieve a higher market capitalization than those that don’t. The joint study quantifies just how much faster companies are achieving superior market capitalization rates relative to their competitors. The study shows that manufacturers with strong global demand synchronization generate, over time, a market capitalization rate that is at least twice as high as their competitors’. The study quantified market capitalization Compound Annual Growth Rates (CAGR) for each performance class of company — and the highest achieving global manufacturers were accomplishing between seven to 26 percent CAGR in their market capitalization during the study period.

While the study presents the results of in-depth research into three companies, the most compelling from a demand management perspective is the one of Taiwan Semiconductor Manufacturing Company (TSMC). What made this specific customer case study noteworthy is the extensive, Web-enabled linkages with suppliers (demand forecasts, production requirements, and logistics data are all available on a 24/7 basis) and the fact that customers actively use TSMCs’ design, planning and logistics tools for placing orders for customized semiconductors and components. By taking an aggressive strategy towards synchronizing demand with supply chain dynamics, TSMC has accomplished the following: shortest manufacturing cycle teams from design to final product; highest performance on Return on Assets in its specific area of the semiconductor industry; and highest quantified measures of customer satisfaction as reported from independent surveys.

Becoming Demand-Centered

Researchers from Accenture, INSEAD, and Stanford University who completed the study concluded that there are three approaches that are working for companies looking to complete a transition to being more demand-centered — and as a result, more efficient — at supply chain dynamics.

The first included taking a revolutionary or out-of-the-box approach. Researchers credit Dell not with disintermediation — the compliment the firm so often earns for its direct model — but for championing buyer, supplier and price management integration and transparency to maximize inventory turns and drop DSOs.

The researchers called the second strategy “Later in Life,” which is tantamount to re-inventing the company’s approach to managing demand, fulfillment, logistics and the supply chain — it is the redefining of the business model.

The third approach, called “Focused Transformation,” was chosen specifically due to the corporate-wide transformations both General Electric and Home Depot, a U.S.-based Do-It-Yourself home improvement retailer, have accomplished. Critical to these transformations, the strategies of relying on product configuration and a highly customized approach to tailoring purchases to the needs of customers profitably have been major components of their success. These companies’ focus on streamlining how custom products are defined, sold and produced have yielded significant savings in inventory turns and the costs of managing demand.

Summary

The greater the ability of your company to share demand signals directly between customers and suppliers, the greater the increase in financial and operational excellence. Working on streamlining these connections brings greater transparency throughout your supply chain and over time, better response times from suppliers — making inventory turns faster and, therefore, giving your firm a higher return on assets.

High performing companies, including TSMC, have embraced demand management and have selectively re-defined their order capture, order management and fulfillment processes globally for the highest responsiveness and transparency to customers as possible.