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Improve Profits with a Customer-Driven Supply Chain

04/12/2016 Emir Hodzic

Manufacturers attempting to optimize investment and profit created the concept of lean manufacturing.

Going beyond the definition of waste as excess or ruined materials, lean manufacturing evaluates process flow and the productivity of people and machinery.

Inventory is replenished “just in time” with base levels restocked as used. Over the past few years, lean manufacturing proponents are taking this discipline further by looking at customer satisfaction as a measure of high performance. This is called creating a customer-driven supply chain or demand-based manufacturing.

In this approach, everything from raw materials to end-user delivery is regarded as part of the supply chain. Demand-based manufacturing aims to eliminate any material, process or production output that doesn’t create value – that is, result in a sale.

Because scheduling is more flexible and stockpiling is avoided, inventory turns are increased, customer service is improved, and lead times and defects are reduced. Improved communication s and efficient delivery systems are largely responsible for making a lot of this possible. Information is gathered at every step and fed back into the system for adjustments in output.

But, like many major business improvements, successful implementation hinges on company commitment and culture. This may require a shift from being operations driven to customer driven, and some employee discomfort might go along with that. Decisions are based on what is best for the customer, not the maintenance of the internal status quo.

The first step is to learn more about your customers. Under this approach, the customer includes the distributors and retailers as well as the end-user.

Similar customers should be grouped together – for example, mega-retailers, independents and direct sales to end-users. Determine each group’s key requirements regarding product and service.

Also look at the sales volume, sales cycle and trends for each group to further define present and future demand. Your supply chain can then be examined in light of these needs to add or eliminate processes or features.

For example, some computer manufacturers initially offered complete customization to each end-user but learned that the majority of customers were happy with standard configurations. In this case, the ordering and manufacturing processes were simplified.

Demand forecasting is the next step, since hiring, materials buying and production scheduling depend on it.

A key feature of the customer-driven supply chain is being nimble and responsive. That presents a challenge in planning, since long-term investments and strategies must be balanced with short-term flexibility.

This is where better customer intelligence will help. Understanding product demand cycles more specifically, de-biasing and quantifying sales forecasts, and using past history while assessing previous forecasting accuracy are all methods to refine your sales projections.

Finally, your processes will need to be aligned with the new production forecast and customer service plan. Perhaps, counterintuitively, standardization increases flexibility.

Processes, materials and products are consistent to a level where variations are quickly planned and executed, a must in the real-time world of customer-driven production.

Again, consider computer manufacturing. The basic shell and contents are the same for the entire run of a model, with a certain segment receiving additional hardware, based on orders. And, in the most efficient supply chains, a just-in-time system with trusted raw material and components suppliers further reduces costs.

Creating a customer-driven supply chain model for your company may not be simple or easy. But it has the potential to improve profitability, make you more competitive and increase customer satisfaction. All are vital issues in a global economy.

For additional information or guidance related to this article, contact Emir Hodzic at ehodzic@vlcpa.com or 800.887.0437.

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