Johannesburg, 22 Jun 2007
Ask any expert to explain supply chains to you and they'll invariably sketch a diagram containing all of the parties involved in supplying a product to an end-customer.
"This sketch will be quite revealing though," says Anton Herbst, managing director of ACT, "since the diagram will most likely be vertical and denote product flowing from a vendor or manufacturer to the end-customer in a 'funnel' environment.
"Here the vendor or manufacturer resides at the top of the food chain and the customer at the bottom of the supply chain. It's a less-than-perfect representation of how things should actually work in the supply chain."
Herbst expounds on the problems of adopting such a vertical model. "Generally, when the vendor or manufacturer decides to bring a new product to market, they predict that a certain volume of the product will be successful in the market and, as such, they manufacture based on that prediction.
"The distributor is then given incentive to sell that product, and launch it into the market, passing the product onto the reseller channel. When the resellers 'under-sell' or cannot keep up with demand in the market (and this often happens), distributors resort to special offers, giving the channel and customers incentive to buy that particular product.
"Both the distributor and the reseller make less margin on that item over time, and the excellent price to the end-user creates unnatural demand," he continues.
"In the meantime, because there is a perceived low-demand (the special wouldn't have been introduced otherwise) the manufacturer halts production. What follows is not difficult to predict," says Herbst.
The distributor begins running low on stock because of the unnatural demand and so orders more stock. "By the time manufacturing catches up, demand in the market has dropped off again. It's a self-perpetuating problem known as the Bullwhip effect," Herbst says.
He says that should the demand exceed supply, the effects can be detrimental to the entire supply chain.
"Today, I believe that the supply chain cannot survive without the input of the customer. In fact, I would honestly say the customer is a vital part of the supply chain, even though it has been designed to serve them," he says.
"If the customer will not commit to a demand prediction, the retailers and resellers should have the next best view of what their customer demands are," Herbst opines.
"This information should be used to gauge demand, thereby creating a demand-driven supply chain, with manufacturers supplying what they are going to sell in the market, as opposed to selling what they have already manufactured."
Herbst says this single change in the supply chain is the only way the market can create sustainability and ensure profitability and success over the long term.
"The one thing you can change in your working capital management policy is your inventory levels," he continues, "since you cannot influence the payment terms you have in place with creditors and debtors - these are pretty much cast in stone.
"By adopting a demand-driven model, the market can influence and optimise its stockholding and create better efficiency, thus eliminating cash flow problems and the 'feast to famine' effect which so often claims resellers and distributors," he concludes.
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