When British logistician Keith Oliver coined the term “supply chain” in the 1980s, the world was not connected in a way young people today would find it hard to believe.
PCs weren’t mass-produced yet, and those who owned one were usually teenage coders who spent way too much time in their bedrooms. Of course there was no internet. Most people came closest to connecting virtually with strangers when they had a barred line on their finger-dial analog phone and could hear strange conversations in the ether.
So when Oliver mentioned “supply chains,” people were genuinely amazed, because very little about everyday life suggested the world could be an interconnected place.
Now, 40 years later, Oliver’s definition of how supply works risks becoming a museum piece itself, as the world moves away from the linear connections of the past 40 years towards a network of nodes. constantly evolving interconnected. There’s nothing chain-like about it.
“The challenge is to move from the concept of a linear chain to the dynamic configuration of a network of companies and locations,” explains Maria Rey-Marston, Global Supply Chain Innovation at Accenture.
Rey-Marston might even be in the frame to don Oliver’s crown, as the person responsible for coining the phrase to describe the next 40 years of supply: the demand response network.
“What we see is a network of businesses and delivery points,” says Rey-Marston. “This network includes smart suppliers, factories and transportation companies, as well as smart locations to place products.”
The goal of DRNs, she says, is to meet omnichannel demand that can arise at any time, with any type of request. Omnichannel describes the multiple methods of purchase that are available to consumers, such as online, in a physical store, or over the phone. Most commonly, omnichannel is associated with retail and consumer goods, but Rey-Marston says that’s a misnomer.
“DRNs are needed in many areas outside of retail,” she says. You need it in oil and gas, for example. People in the oil fields and on the rigs need services, so that’s your request right there.
She says the DRNs have been tempered by the heat caused by the pandemic: “There has been so much disruption in both supply and demand, which we haven’t had before in modern times. This has prompted companies to start moving sources of supply closer to consumption points and managing demand at those points to match available inventory.
This, she says, means inventory availability has become a powerful tool, as it is now able to shape demand.
She explains, “There is such a shortage of certain things that having a product available can make people decide to substitute things they never would have replaced in the past because they had both options. , or many options, available.”
It is a profoundly different approach to inventory management in supply chain.
“In a chain,” she says, “the role of inventory is to bridge the gap between lead times and customer service times. If a business’s demand is in central London but they are importing goods from Poland, the role of inventory is to bridge the gap between delivery and consumers expecting to receive their product immediately. “.
Rey-Marston points out that in a DRN, companies need to be disciplined about exploiting market demand signals.
“They need to align more closely and effectively with their sales and marketing functions. Supply can no longer operate in isolation if it is to meet demand. They must connect with network elements capable of supporting demand response. »
So where does all of this leave the two main approaches to inventory management – Just In Time (JIT) and Just In Case (JIC)? How do they fit into the DRN model? Do they fit in at all?
Under JIT, a company manufactures only what it needs, emptying and replenishing inventory as needed. Apple CEO Tim Cook turned Apple into a global beast using the JIT model.
With JIC, companies maintain large inventories to minimize the likelihood of a product being out of stock.
Jörg Schafer, head of global supply chain at EY, believes inventory patterns are driven more by industry than by whether supply is chain- or network-driven.
“In an industry like retail or consumer, where people have immediate demands, either a company has a product or they don’t,” he says. It is simply impossible to have a perfect just-in-time infrastructure.
He adds: “Obviously, to optimize cost structures, you will strive not to have too much inventory in your network. If you’re good at demand forecasting, you can get as close to just-in-time as possible, but it’s not the same thing.
A much better fit for JIT is the automotive sector, Schafer says.
“If you order a car, they give you a date when you’ll get it, and then they organize the supply based on that,” he says. “Parts supply, warehousing, everything. It’s an almost perfect just-in-time industry.
It’s ‘made to order’, rather than ‘just in time’
As for Rey-Marston, she thinks that instead of talking about “just in time” and “just in case”, it’s more meaningful to talk about make-to-stock and make-to-order.
“If I’m a make-to-stock business, I build my own inventory of stuff. But in this model, you have businesses that keep inventory.
Continuing Schafer’s example of the auto industry, she says some automakers hold inventory “because the cost of owning a finished car is much higher than owning components.” Others, however, will not.
“They say, ‘I’m sure I’m selling these cars, so I’d rather not have inventory of anything.’ But both approaches are always made from stock.
Making to order is different, she says.
“Take Tesla,” she says. “Tesla is a make-to-order company. They start collecting pre-orders before they even release a product to the public. They pick up on demand signals. With make-to-order, your component inventory policies should be very different, because you have much more certainty that you will derive income from it.
The language of the offer has changed a lot in 40 years, but so has the nature of the offer itself.