How to Best Understand the Forgotten Supply Driven Supply Chain

An excellent example of a supply driven supply chain is oil production. Oil is often, in the short term, at least, pulled from the ground at a constant rate. Demand does fluctuate, and much of the supply and demand matching is performed through changes in the price.

Demand side supply chains are very much focused on the benefits of supplier collaboration. However, this may not always be the case with supply side supply chains.

“For demand driven supply chains, sharing information among the partners of the chain dampens the bullwhip effect. However, for supply driven chains, secrecy is often necessary. If a supplier is having difficulty selling his entire quantity, customers can use this information to extract further price concessions.”

Examples of supply side supply chains are the following products:

• “Alaskan Crude Oil

• Bananas
• Fresh Cut Flowers
• Fishing Industry
• Copper
• Natural Gas
• Corn
• Airline Seats
• Trucking Backhauls”

What these examples have in common is that the investments into production are fixed for some time. This means that production capacity has been set up in response to a long-term demand forecast. And changes would occur to capacity after a long-term shift in the forecast. In this environment, one cannot merely become a demand driven supply chain. The supply is not only a spigot that can be turned on and turned off. 

These are examples of “locked in production,” some of them adding a perishable quality to them. These examples are not exhaustive. They do not include the examples that I have discussed, which are explained in the previous article that relates to the ability to shape demand and to substitute demand.

Locked in Supply Chain Production

If we take the examples of “locked in production,” while the production is most often considered to be due to the company owning the production assets it can also apply to businesses that outsource production — but which are contractually obligated to purchase a certain quantity of output.

The paper explains the following scenario on organic farming from Horizon Organic (now owned by White Wave Foods).

“Unlike bananas, many other supply driven supply chains do not have vertical structures. Horizon Organic produces certified organic eggs, juice and dairy products, and sells to grocery stores. Horizon is contractually obligated to buy the full production of several 100 organic farms, giving the supply chain a supply driven nature. Horizon operates a “virtual” supply chain where the growing, processing, packaging, and shipping activities are all contracted.”

That is, locked in production occurs in companies that are both vertically integrated and those that are outsourced. Many of those that follow the Lean or flexible approach to supply planning may not like this. They may propose that companies should not sign these contracts.

Managing Contracts

That is a simple way out of dealing with the realities of the supply chain. First, the price paid would be different without signing contracts. If we take an example from the dairy industry, a larger company — like White Wave Foods, is in a much better position to accept the variability of demand than the smaller farms. Signing these long-term contracts adds value to a process. It enables higher production by providing the farms with a guaranteed buyer. The article describes other examples of such agreements:

“Take or pay contracts are common in the electronic contract manufacturing, petroleum, and natural gas industries. If the minimum volume stipulated in the contract is significant, it can become a supply driver for the entire supply chain.”

Understanding Co-Products

Another example of locked in production is co-products. Co-products are associated with process industry manufacturing. They are the necessary output of a manufacturing process which has the original purpose of producing a primary product.

The higher margins of the primary product drive the production of the co-product. The production of the co-product is a dependent production. The following are all co-products of specific manufacturing processes. 

• Sulfuric acid
• Whey protein (one pound of cheese creates 9 pounds to whey protein — once considered a co-product, whey protein has since grown into a primary product itself)
• Carbon dioxide
• Animal feed

However, co-products are extremely common in the process industries.

Commodities or Differentiated Products

Interestingly, this paper proposes that supply driven products are the commodity-like in that they are sold on price. However, my consulting clients show that this is not always the case. Supply-driven products can also be differentiated products.

Conclusion

• This has explained some of the observations of one of the few published works on the topic of supply-driven supply chains.
• These environments do not fit within the traditionally established view of supply chains. Therefore, they are minimized in the literature, and in fact, substantially overlooked.

Many people who use the term “demand side” or “demand driven” often these terms as if they are a universally virtuous concept. Supply chain planning is about matching demand to supply. The degree to which a supply chain must be oriented around constraints is based upon the natural constraints of the overall system.

References

https://www.emeraldinsight.com/doi/abs/10.1108/09574090510634520

I cover concepts like this in the following book.