Away with supply chains, hail the era of the demand chains

Supply chains are simple to map out - a manufacturer building a product resides on one end; a customer resides on the other; and a host of players reside in-between these two entities, adding value that ranges from warehousing to logistics, sales, marketing and product support.

These classic supply chains have, however, outlasted their usefulness. As more distributors, wholesalers and resellers in South Africa continue to struggle with the challenges of stock fluctuations, shrinking margins and a lack of differentiation, the smart players are reversing their supply chains.

"The inverted supply chain is not exactly a new concept," says Anton Herbst, managing director of consumables distribution giant, Advanced Channel Technologies (ACT).

"The more mature markets in the world have already been through the stock issues, shrinking margins and lack of differentiation that's prevalent locally, and began experimenting with inverted supply chains a long time ago," he says.

Herbst explains that the market needs to think about supply and demand from a different angle.

"In classical supply chains, the vendor or manufacturer resides at the top of the food chain and the customer at the bottom of the supply chain - it immediately gives one the impression that provision to the end customer is supply-driven and not demand-driven," he says.

"When this model is used, the vendor or manufacturer decides to bring a new product to market and has to 'predict' what volume of the product will successfully sell in the market. They then manufacture based on that prediction.

"Often, though, that 'prediction' may be inaccurate," says Herbst, "and this is where the market starts experiencing peaks and troughs in supply and demand.

"When there's excess supply in the market, the wholesaler and reseller discount heavily creating an artificial demand. When stock levels normalise, the artificial demand created leads to another stock shortage. In response to that shortage, the manufacturer's production hits overdrive.

"Over time, these trends simply compound and land the market in a world of trouble. It's a self-perpetuating problem known as the 'Bullwhip' effect," Herbst says.

"We need demand chains and not supply chains," he quips. "That way, manufacturers can build products based on concrete needs in the market, and not 'predictions' as they have been up until now."

Even though the supply chain has been designed to serve the customer, Herbst says they are a vital part of the equation.

"Since customers are not that comfortable with committing to volumes of stock upfront, gauging demand from the supply chain participant closest to the customer is the next best thing.

"The retailer and reseller have the best view of what their customers need," Herbst opines. "With most of South Africa's suppliers, manufacturers and main tier-one vendors located in Europe, it's almost impossible for them to gauge demand accurately.

"That's the reason why supply chains should be horizontal," Herbst adds: "With product flowing in one direction to the customer, and more importantly; with the information central to the actual demand in the market - from the party closest to the customer (the reseller), flowing in the other direction, back to the manufacturer."

Herbst says in order for this information to be freely volunteered to the reseller and for the reseller to volunteer it to the wholesalers and manufacturers further up the chain, a high-level of trust is required.

Retailers and resellers alike are hesitant to share their sales volume information, since they believe it will betray confidentiality. Yet, this is the only way for distributors to order what sells and not attempt to sell what they've ordered," Herbst explains.

"The solution can only be reached if the channel comes together for the greater good of all those involved. With collaboration between resellers, distributors and vendors present in the market, and the reassurance that confidentiality will be maintained, the South African consumables supply chain can become a finely tuned machine," he says.

"This is why ACT is putting a great deal of effort into building the right partnerships in the market," Herbst adds.

"We understand the only way the market can reach a stage of stability and look forward to sustainability is by taking this route. We urge all related parties to get on board - it is, after all, for the good of all parties involved," says Herbst.

The last bridge to tackle is technology. Herbst cautions that resellers, distributors and manufacturers must bear in mind that technology is the last bridge.

"Only after all of the players have begun volunteering information to each other, should technology enter into the equation - if it's done before trust is fostered in the market and before the information is readily available to all of the players that need it - the technologies and systems implemented to ease this collaboration will be proverbial 'white elephants'.

"And while I'm not in any position to recommend one technology over another, it's imperative that integration challenges are averted through the use of standards and common data languages, such as XML.

"The information shared can only be useful if everyone's systems speak the same 'language', - without this, they may as well be using manual systems," he says.

"Ultimately however, the market does not have to take my word for it.

"A simple look at the more developed economies around the world will reveal this as a best practise. If the industry is able to adopt these tenets before supply chains get out of hand, we may be able to avert some of the catastrophes that some of our international peers have experienced - and judging by the fallout experienced in some international economies, that's an attractive prospect," he concludes.