The Consumer-centric Supply Chain

Achieving high performance through dynamic, demand-driven execution

Gary Godfrey, Bill Frey, Sundip Naik and Angela Evers

With the growth of emerging markets and the reality of permanent volatility, meeting consumer demand is becoming ever more challenging. Globalization and regulatory changes further confound the struggle. What can companies do to conquer these issues and challenges? Accenture believes that high performance can be achieved by evolving to a dynamic, demand-driven supply chain.
Product allocation and availability are critical to maintaining revenue flow without incurring unnecessary production, distribution, inventory and marketing costs. With todays shortened product lifecycles, a company may find itself with a great deal of useless inventory if demand forecasts and fulfillment processes are not aligned. Retailers, suppliers and manufacturers must work together to avoid stockouts and excess inventory. Industry figures suggest that retail stockouts run at about 10 percent, jumping to 25 percent during promotions and other sales-boosting efforts. Customer-perceived stockouts cost consumer products manufacturers an estimated $90 billion in sales each year.1 When faced with an empty shelf from an out-of-stock item, about 40 percent of consumers do not buy an alternative product; they buy nothing at all. This means that the retailer loses the sale as well as the manufacturer.2 The challenge of meeting dynamic consumer needs and expectations requires advanced processes and systems across the supply chain.

Improved forecasting: Half of the equation

Depending on size, companies are spending from $5 million to $20 million annually implementing state-of-theart planning and forecasting systems. The goal is data-driven planning and forecasting, with more frequent updates to raise forecast accuracy. Analysts expect companies will spend $3 billion for new licenses and maintenance for these systems in 2012, and that number is forecasted to grow at an average of nine percent annually through 2015.3 However, forecast accuracy is only half of the equation. While forecast numbers and actual orders may align quite favorably, fulfillment may be struggling to keep up. To react as quickly as forecasts are updated, the supply chain needs commensurate investments in tools that enable better responsiveness to more frequent and more accurate forecasts. Without the ability to execute dynamically, a companys leading-edge forecast is rendered useless.

Enabling the supply chain: The other half of the equation

Many companies are often not equipped to execute the downstream supply chain processessuch as order routing, multi-channel inventory allocation, order exceptions, returns and transportation expertly enough to ensure product availability. The result is inventory in the wrong place at the wrong time, causing lost sales, obsolescence and excessive transportation costs. The issues that stand in the way of meeting demand are myriad: Fluctuating supplier lead times pose challenges to many inventory deployment planners who must ensure products arrive at the right time and the right place. Ever-changing business models and customer priorities stand in the way of getting inventory where it is needed. Legacy manufacturing and supply processes do not support the ability to respond quickly to fluctuating consumer demands. A lack of information sharing among departments and fast-changing markets force the organization into a reactive stance. Many companies are focused on cost reduction strategiesoff-shoring, outsourcing, static manufacturing, static processes and othersthat interfere with supply chain agility. Consumer behavior, an external factor, adds to the complications. With more choices arising from more products from more competitors, consumers can be easily swayed to switch loyalties. Companies must think beyond typical customer retention strategies, such as price and exclusivity, and ensure the full product experience meets consumer expectations. This includes guaranteeing service levels and minimizing stockouts across all channels. Gartner analysts cite a number of benefits that come from improved forecasting. When done well, demand forecasting initiatives can increase onshelf availability by 20 percent to 30 percent, improve inventory productivity by three percent to five percent, reduce obsolete inventory by 10 percent to 15 percent, and increase revenue and gross margin by one percent to three percent.4 For a company to achieve the benefits of better forecasting; dynamic, demand driven execution initiatives must complement demand forecasting initiatives. The resulting improvements in production, warehousing and distribution deliver the benefits of more efficient and profitable operations and lower inventory carrying costs.

Dynamic, demand driven execution capabilities

Accenture high-performance business research has identified four distinctive capabilities among leading companies: transparency, responsiveness, collaboration and agility. The supply chain organizations of these leaders take advantage of the demand information they receive from planning and forecasting to shape their own strategies and tactics, becoming demand driven in the process. Fluctuating demand as a result of seasonality, promotions or changing consumer needs poses significant challenges to retailers. A look at how leading retailers successfully allocate inventory across multiple channels, meet fluctuating demands and efficiently process returns reveals how they apply these four key capabilities. Building these four distinctive capabilities into the supply chain and applying them throughout the year can help retailers to deliver costeffectively on demand as predicted by highly accurate forecasts.

Figure 1. Distinctive capabilities of companies with successful dynamic, demand driven execution strategies.

Transparency
From brick-and-mortar stores to catalogues to online sites, shoppers have a variety of channels for making purchases. Many companies have no choice but to fill an order from a given channel from a predetermined fulfillment site. Demand-driven companies, however, can make a fulfillment decision at the time an order is created. They operate with a high degree of transparency. Holistic views of inventory data allow them to determine at the point of sale which distribution center is the most efficient one for filling the order. They also know the costs associated with each fulfillment location. Technology enables this data visibility and the sharing of data among retailers, suppliers and manufacturers. Analytics help to avoid costly errors in execution, and co-located teams and processes boost execution accuracy. Inventory transparency can lead to Reduced fulfillment costs with optimal replenishment plans enabled by earlier and better visibility of demand Improved customer service by reducing stockouts with early warnings of low inventory levels Increased sales by taking advantage of cross-channel selling opportunities through the free flow of information across all channels and units

fulfillment channels. The company displayed stock from both the web warehouse and its stores simultaneously. They also expanded the multi-channel shopping experience by enabling customers to shop online and pick up the item in the store. The updated interactive website led to increased sales overall, faster moving inventory and a lower likelihood of markdowns.5 Enabling network-wide transparency. Del Monte Foods, a large US foods company, has undergone a successful demand-driven supply chain transformation. The company created network-wide transparency into demand signals and inventories to establish pull rather than push processes. Del Montes results and the accompanying servicelevel enhancements for its retail partners have been impressive: order-to-ship lead times dropped by 24 hours for many customers and enabled a 60-hour orderto-delivery cycle time, which enabled the company to help retailers recover working capital through reduction of safety stocks.6

Companies with the tools for greater responsiveness enjoy Reduced order-to-delivery times achieved with advanced data analytics tools, integrated planning and supply chain systems Greater product availability through smart inventory and stocking strategies Higher productivity driven by nontraditional staffing models and a flexible workforce that can be adapted as demand fluctuates

Practical example
Establishing a flexible workforce aligned with demand. The United States Postal Service reached an agreement with the American Postal Workers Union AFL-CIO to set the stage for a more flexible and cost-effective workforce to accommodate Americas changing mailing trends. This deal will include economic provisions to control labor costs and greater workforce flexibility to match the workforce with the workload.7

Responsiveness
Highly responsive retailers have processes that can be easily adapted to align supply with demand. For example, these leading retailers may respond to peak demand with pop-up warehousing or distribution locations. Opened as demand peaks and then closed when no longer needed, these sites provide an ideal solution to balancing costs and asset under-utilization. Having transparent data and knowing how to use that data are critical for becoming more responsive. A responsive company uses data and technology to choose the best option to fill an order and re-allocate orders when stockouts occur. Responsive companies can even redirect in-transit product to the distribution center closest to the demand.

Collaboration
Collaboration is not a new concept, but organizations with dynamic, demand driven execution have found new ways to look at collaboration. These organizations commit to partnerships among suppliers, manufacturers, retailers and thirdparty logistics providers that transform independently owned and operated entities into strategically aligned, cohesive organizations. Relationships built on trust and collaboration throughout the supply chain are required to move from reactive to proactive fulfillment. Information is shared across the greater organization to improve planning and enable rapid reactions to changes in demand. Knowing the lead times throughout the supply chain allows a company to make demand-driven choices with minimal financial impact for themselves and their partners.

Practical examples
Improving inventory visibility and fulfillment channels. After the economic fallout, fashion retailers found it difficult to get consumers to shop again and deployed mass promotions and low cost product lines to encourage customer spending. On the other hand Nordstrom, a US department store chain, decided to focus on the way it handles inventory. Nordstrom altered the online experience by increasing the transparency of its

Successful organizations have implemented teams at strategic partners to facilitate collaboration and the free flow of information. These co-located teams ensure meaningful data is captured, provide insight into decision making and ultimately help deliver on customer expectations. Many leaders integrate the development and introduction of new products into the supply chain through horizontal collaboration, versus more traditional new product development where marketing, R&D and engineering creates the new product and the supply chain merely executes. Product design and packaging can significantly impact picking and transportation efficiency, in turn affecting fulfillment and the ability to meet demand forecasts. Extensive collaboration between a companys fulfillment organization, transportation providers, stores and marketing organizations during the design phase allows for optimal distribution, replenishment and display.

Supply chain alliances can also allow companies to take advantage of shared inventory costs and implement postponement strategies. And, according to Gartner, Successful vendor managed inventory initiatives can deliver two to three percent improvement in on-shelf availability and a 20 percent to 50 percent increase in inventory turns.8 Effective collaboration can result in: Reduced time to market, product obsolescence and inventory levels driven by postponement strategies Improved space utilization by optimizing case and product sizes to meet warehouse, transportation and store requirements Rapid responses to demand shifts by aligning sales, marketing and fulfillment teams through collaboration

Practical examples
Building an integrated planning solution with suppliers. Teradyne, a US-based supplier of precision automatic test equipment, has extended the use of contract manufacturing to complete its production processes. To reduce the lead time on purchase orders, Teradyne worked with its contact manufacturer to put in place an application that integrates data from Teradyne, the contract manufacturer and that companys suppliers. This software provides a multi-enterprise view of inventory data and ready access to production planning data. The result is a drop in order time from ten to 15 weeks down to zero to two weeks.9 Improving supplier collaboration for new technology. Corning, a US manufacturer of specialty glass and ceramic products, and Acer, a global manufacturer of personal computers and notebooks based in Taiwan, have an ongoing collaborative relationship for continually raising product quality

and performance. As a result of their latest work together, Acer is introducing new devices that are more durable and highly portable, helping Acer to increase customer satisfaction and remain competitive in the marketplace.10

Practical example
Building an optimized network. The Home Depot, a US retailer of home improvement and construction products and services, established a network of rapid-deployment distribution centers that apply the concept of geographic postponement. With these facilities, Home Depot postpones deployment of inventory until orders are received, creating the agility the company needs to meet demand for specific items while simultaneously lowering inventory costs. In 2011, Home Depot handled about 65 percent of its goods through centralized distribution, compared to about 25 percent in 2007.12

Agility
Agility allows organizations to handle spikes and troughs in demand, minimizing the bullwhip effect on fulfillment operations.11 Leading retailers have in place the infrastructure, technology and processes that bring agility to the supply chain, giving them the ability to respond to peak season demand with novel solutions such as in-store annexes and pop-up stores. They are putting in place shared services, cloud computing and flexible labor contracts. Alliances with suppliers and manufacturers discussed earlier that focus on packaging and product design help to standardize handling and to design facilities that have the flexibility to serve multiple channels and adapt to changing capacity requirements. To avoid under used assets yet ensure infrastructure capacity when needed, these companies continually evaluate insourcing versus outsourcing to gain the greatest flexibility where and when needed; the traditional low cost intent of outsourcing is not always the right answer. Improving agility can help companies realize Reduced inventory levels by optimizing the supply network to reduce supply variability Increased asset utilization through standardized processes, cloud-based services and overflow capacity usage Increased labor productivity and reduced operating costs from the flexibility gained with common IT platforms and processes across the organization

Beginning the journey

Developing a dynamic, demand driven organization to help lead a company to high performance begins with a thoughtful consideration of the current state of operations and proceeds to the implementation of metric-driven capabilities.

Establish metrics for success.

To achieve and reinforce success, it must be recognizable. Key performance indicators (KPI) for measuring success need to be identified, with the help of key stakeholders and decision makers who can help ensure that these KPIs align with the organizations core strategy. The KPIs must also be measurable, and a means for collecting performance data and tracking results needs to be created.

Assess your current capabilities.

An assessment of current capabilities may reveal that the organization has several foundational components already in place for building a dynamic, demand driven organization. This assessment needs to consider each of the four capabilities in turn: the transparency of enterprise inventory and data in multiple systems; the responsiveness needed to react to emerging trends in the market and among customers; the internal and external relationships needed to foster collaboration and effective decision making; and the agility that comes with the successful execution of mid- and long-term solutions for product lifecycle management, planning and distribution that align with the companys overall strategy.

Implement the roadmap.

Once metrics for success are established and agreed upon, work can begin on implementing the quick wins that will deliver immediate value. Longer term initiatives can then be implemented and progress tracked through KPIs, with routine meetings held to keep executives apprised of the status of related projects. For organizations seeking high performance with dynamic, demanddriven execution, the potential gains are significant: improved customer service, decreased order-to-delivery time, reduced inventory levels and increased revenue and gross margin. The distinctive capabilities of transparency, responsiveness, collaboration and agility are all within the reach of most enterprises on the journey to creating a dynamic supply chain.

Determine opportunities and develop the roadmap.

With a clear understanding of current strengths and areas for improvement, the organization is ready to develop the business case for change. It is probably not realistic to try to tackle all four of the capabilities of dynamic, demand driven organizations at once. After selecting one or two key capabilities to pursue towards high performance, the benefits need to be enumerated, costs of implementation calculated and potential return on investment determined. A risk assessment is also needed to help identify and mitigate potential obstacles to success.

About the Authors

Gary Godfrey is a senior executive in Accenture Supply Chain Management consulting. He has 25 years of supply chain experience in global supply chain transformation, fulfillment strategy and network improvement. His focus areas include retail and consumer goods, but he has also worked across communications, high tech, media and entertainment, and utilities. Mr. Godfrey serves as the Global Lead for Accentures Integrated Planning and Fulfillment group. Based in Atlanta, he can be reached at gary.r.godfrey@accenture.com. Bill Frey is a senior executive in Accentures Global Supply Chain group with over 20 years of experience. His areas of expertise include delivering operational improvements through the implementation of supply chain technology solutions. He has delivered warehouse, transportation, order management, inventory control and asset management solutions to Fortune 500 clients across a variety of industries, with a heavy concentration in the retail and public service industries. Based in Cleveland, he can be reached at william.a.frey@accenture.com.

Sundip Naik is an executive in Accenture Supply Chain Management consulting. He has an extensive background in global supply chain transformational programs focusing on network design, fulfillment strategy, distribution re-engineering and transportation operations. He has worked in the retail, consumer goods, communications and high tech industries. Most recently he has led Accentures North American thought leadership and offerings within the planning, fulfillment and sustainability areas. Based in Atlanta, he can be reached at sundip.s.naik@accenture.com. Angela Evers is an executive in Accenture Supply Chain Management consulting. She has an extensive background in supply chain transformation, transportation strategy and planning operations. Her focus area is the communications and high tech industries, but she has also worked across retail and manufacturing. Most recently, she has led Accentures North American thought leadership and offerings for the integrated planning and fulfillment. Based in Kansas City, she can be reached at angela.c.evers@accenture.com.

References
RIS News and IHL Group. 5th annual RIS store systems study 2008: Retail technology trends. Accessed December 2011 at www.risnews.com. Clark T. Driving at the speed of demand. Consumer Goods Technology. October 1, 2005. 3 Graham C, Eschinger C, et al. Enterprise software markets, worldwide, 2010-2015, 4Q11 update. Gartner, Inc. December 5, 2011. 4 Griswold M, Sterneckert K. Business case for demand planning. Gartner, Inc. March 18, 2011. 5 Clifford S. Nordstrom links online inventory to real world. The New York Times. August 23, 2010. 6 Johnson A. Del Monte improves on-shelf availability and shrinks inventory costs with retailer collaboration through one network. Gartner, Inc. May 7, 2011. 7 Berman J. USPS reaches tentative agreement with American Postal Workers Union. Logistics Management. March 15, 2011. 8 Griswold M. Demand-driven retailers align products and replenishment strategies to improve supply chain performance. Gartner, Inc. May 2, 2011. 9 Cooke JA. Control is instrumental to Teradynes success. Supply Chain Quarterly. October 3, 2008. 10 Corning and Acer continue collaboration with Corning Gorilla Glass 2. The New York Times. January 10, 2012. 11 Lee H, Padmanabhan V, Whang S. The bullwhip effect in supply chains. Sloan Management Review. Spring 1997. 12 Kell J. Supply-chain boosts net at Home Depot. Retrieved from Asia Wall Street. November 16, 2011.
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Accenture is a leading provider of management consulting services worldwide. Drawing on the extensive experience of its 16,000 management consultants globally, Accenture Management Consulting works with companies and governments to achieve high performance by combining broad and deep industry knowledge with functional capabilities to provide services in Strategy, Analytics, Customer Relationship Management, Finance and Enterprise Performance, Operations, Risk Management, Sustainability, and Talent and Organization. Accenture Operations consulting services help clients develop more dynamic, innovative and high performing Supply Chain and service operations capabilities to enable rapid response to changing customer demands and market opportunities.

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